SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Event Reported: 10/31/97
MIDCOAST ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 0-8898 76-0378638
(State or other Commission (I.R.S. Employer
jurisdiction of File Number Identification No.)
incorporation)
Suite 2950, 1100 Louisiana Street, Houston, Texas 77002
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713/650-8900
MIDCOAST ENERGY RESOURCES, INC., and Subsidiaries
<PAGE>
Item 7. Financial Statements
Page No.
-----------
Republic Gas Partners, L.L.C.
Independent Auditor's Report 3
Consolidated Balance Sheet - September 30, 1997 and
December 31, 1996 4
Consolidate Statement of Operations - Nine months Ended September 30,
1997 and Year Ended December 31, 1996 5
Consolidated Statements of Members' Deficit - Nine months Ended
September 30, 1997 and Year Ended December 31, 1996 6
Consolidated Statements of Cash Flows -Nine months Ended
September 30, 1997 and Year Ended December 31, 1996 7
Notes to Consolidated Financial Statements. 8
Midcoast Energy Resources, Inc.
Unaudited Pro Forma Statement of Operations for the
nine months ended September 30, 1997 and for the year
ended December 31,1996. 18
Unaudited Pro Forma Balance Sheet as of September 30, 1997. 20
Notes to Unaudited Pro Forma Financial Information 21
2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To Republic Gas Partners, L.L.C.:
We have audited the accompanying balance sheets of Republic Gas Partners, L.L.C.
(a Delaware limited liability company), and subsidiaries as of September 30,
1997 and December 31, 1996, and the related consolidated statements of
operations, members' deficit and cash flows for the nine months ended September
30, 1997 and year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Republic Gas Partners, L.L.C.,
and subsidiaries as of September 30, 1997 and December 31, 1996, and the results
of their operations and their cash flows for the nine months ended September 30,
1997 and year ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations. Additionally, the Company was in
violation of certain of its debt covenants. As discussed in Note 11 to the
consolidated financial statements, the Company was sold to Midcoast Energy
Resources, Inc. subsequent to September 30, 1997. As part of this transaction,
the debt due Union Bank was assumed by the acquiror.
HEIN + ASSOCIATES LLP
Houston, Texas
January 7, 1998
3
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 953 $ 5,050
Trade accounts receivable, net of allowance for
doubtful accounts of $474 and $159 at
September 30, 1997 and December 31, 1996,
respectively ................................ 6,049 31,615
Transportation and exchange gas receivable .... 309 1,064
State income tax receivable ................... 436 --
Gas in storage ................................ -- 666
Materials and supplies inventories ............ 322 329
Prepaid expenses .............................. 106 119
Other current assets .......................... 79 43
-------- --------
Total current assets .................... 8,254 38,886
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,977 and $659 at September 30,
1997 and December 31, 1996, respectively ....... 16,268 15,842
OTHER ASSETS ..................................... 250 279
-------- --------
Total assets ............................ $ 24,772 $ 55,007
======== ========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Notes payable ................................. $ 19,120 $ 20,000
Accounts payable .............................. 5,722 35,170
Transportation and exchange gas payable ....... 383 99
Other current liabilities ..................... 1,438 964
-------- --------
Total current liabilities ................ 26,663 56,233
COMMITMENTS AND CONTINGENCIES (Note 9)
MEMBERS' DEFICIT ................................. (1,891) (1,226)
-------- --------
Total liabilities and members' deficit ... $ 24,772 $ 55,007
======== ========
4
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
REVENUES:
Natural gas sales ......................... $ 126,169 $ 152,188
Transportation and other .................. 1,008 863
---------
Total revenues ....................... 127,177 153,051
OPERATING COSTS AND EXPENSES:
Cost of sales ............................. 123,499 145,996
Operation and maintenance ................. 2,555 3,877
General and administrative ................ 1,885 1,918
Provision for bad debts ................... 315 159
Depreciation and amortization ............. 619 844
Taxes other than income taxes ............. 494 629
--------- ---------
Total operating costs and expenses ... 129,367 153,423
--------- ---------
Operating Loss ......................... (2,190) (372)
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense .................... (1,351) (1,366)
Interest income ..................... 141 78
--------- ---------
Total other income (expense) ......... (1,210) (1,288)
--------- ---------
Loss Before Income taxes ............... (3,400) (1,660)
INCOME TAX RECOVERY (EXPENSE) .......... 85 (213)
--------- ---------
NET LOSS ............................... $ (3,315) $ (1,873)
========= =========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF MEMBERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1997
AND YEAR ENDED DECEMBER 31, 1996
(In Thousands)
Balance, January 1, 1996 ........................................ $ --
Adjustment for inclusion of net income of predecessor business (1,353)
for the first quarter of 1996
Member contributions (March 1, 1996) ......................... 2,000
Net loss ..................................................... (1,873)
Balance, December 31, 1996 ................................... (1,226)
Member contributions ......................................... 2,650
Net loss ..................................................... (3,315)
BALANCE, September 30, 1997 .................................. $(1,891)
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $ (3,315) $ (1,873)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Adjustment to reflect first quarter net income
of predecessor business ....................... -- (1,353)
Depreciation and amortization ................... 619 659
Provision for uncollectible accounts receivable . 315 159
Changes in operating assets and liabilities:
Trade accounts receivable ..................... 24,241 (19,538)
Transportation and exchange gas
receivable/payable, net ..................... 1,039 (1,160)
State income tax receivable ................... (436) --
Inventories, including gas in storage ......... 673 (591)
Prepaid expenses .............................. 13 (76)
Accounts payable .............................. (29,448) 25,737
Other, net .................................... 467 433
-------- --------
Net cash provided by (used in)
operating activities ....................... (5,832) 2,397
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in MidLa Companies, net of
cash acquired of $1,941 ........................... -- (19,228)
Capital expenditures ................................ (35) (119)
-------- --------
Net cash used in investing activities ......... (35) (19,347)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) long-term debt borrowings (880) 20,000
Member contributions ................................ 2,650 2,000
-------- --------
Net cash provided by financing activities ..... 1,770 22,000
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT ... (4,097) 5,050
CASH AND CASH EQUIVALENTS, beginning of period ......... 5,050 --
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............... $ 953 $ 5,050
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ......................................... $ 1,351 $ 1,358
======== ========
Income taxes ..................................... $ 310 $ 360
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FINANCIAL CONDITION:
Republic Gas Partners, L.L.C. (the Company), was formed on March 1, 1996,
for the purpose of acquiring certain natural gas pipeline facilities and
other energy-related operations. The Company's initial ownership members
included Cortez Natural Gas Company (49.5 percent), Costilla Energy, L.L.C.
(40.5 percent), Republic Gas Corporation (5.0 percent) and Riverbend Gas
Company (5.0 percent). Effective February 13, 1997, Cortez Natural Gas
Company purchased the 40.5 percent interest held by Costilla Energy, L.L.C.
Pursuant to the Stock Purchase Agreement dated as of March 4, 1996, between
Coho Energy, Inc. (Coho), and Interstate Natural Gas Company (Interstate),
as Sellers, and the Company, as Purchaser, as amended (the Agreement), the
Company purchased all of the outstanding common stock of Mid Louisiana Gas
Company (MidLa Gas), a Federal Energy Regulatory Commission (FERC)
regulated interstate pipeline, Mid Louisiana Marketing Company and Mid
Louisiana Gas Transmission Company (collectively referred to as the MidLa
Companies). The results of operations for the MidLa Companies have been
reflected in the accompanying consolidated financial statements from the
date of acquisition (April 3, 1996). See Note 3, "Acquisition of the MidLa
Companies," for further information.
As indicated in the accompanying consolidated statement of operations, the
Company incurred a net loss of approximately $6.4 million for the period
from inception (March 1, 1996) through September 30, 1997. Additionally,
during this same period, and as of September 30, 1997 the Company was in
violation of certain of its debt covenants under its existing long-term
debt agreement with Union Bank, a division of Union Bank of California,
N.A. (collectively, Union Bank), as discussed in Note 4, "Debt." As
discussed in Note 11, the Company was sold to Midcoast Energy Resources,
Inc. As part of this transaction, the amounts outstanding to Union Bank
under the note agreement discussed in Note 4 were assumed by the acquiror.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. The principal subsidiaries of the Company include the MidLa
Companies and MidLa Energy Services Company (MidLa Energy) (which was
formed in September 1996 to provide marketing services for the consolidated
group). All significant intercompany accounts and transactions have been
eliminated.
8
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
BASIS OF PRESENTATION: The MidLa Companies represented substantially all of
the Company's operating activities during 1996 and 1997 and substantially
all of the Company's operating revenues and expense arose from these
companies. Accordingly, for presentation purposes, the Company has included
the results of operations of the MidLa Companies for the three months ended
March 31, 1996 in the accompanying statement of operations, along with a
corresponding adjustment to the members' deficit.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment primarily
consists of gas transmission lines and related facilities and are stated at
original cost. The cost of additions to property, plant and equipment
includes direct labor and material, allocable overheads and, in the case of
natural gas pipeline plant, an allowance for the estimated cost of funds
used during construction ("AFUDC"). Such provisions for AFUDC are not
reflected separately in the accompanying combined statements of operations
as the amounts are not material. Maintenance and repairs, including the
cost of renewals of minor items of property, are charged principally to
expense as incurred. Replacements of property (exclusive of minor items of
property) are charged to the appropriate property accounts. Upon retirement
of a natural gas pipeline plant asset, its cost is charged to accumulate
depreciation together with the cost of removal, less salvage value.
Depreciation on pipeline plant is calculated using the composite rate
method which approximated an average depreciation rate of 1.5 to 6.7
percent. Depreciation on other facilities and equipment is calculated on a
straight-line basis over the useful lives of the assets which range from
three to five years.
INVENTORIES: Inventories of natural gas in storage are recorded at the
weighted average cost of gas incurred during the month of injection.
Natural gas in storage is periodically assessed for realizability using
market prices at period-end. Materials and supplies inventories are valued
at the lower of average cost or market.
INCOME TAXES: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases
of assets and liabilities using enacted tax rates and laws in effect in the
years in which the differences are expected to reverse.
9
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
TRANSPORTATION AND EXCHANGE GAS IMBALANCES: In the course of providing
transportation and exchange services to customers, natural gas pipelines
may receive different quantities of gas from shippers than the quantities
delivered on behalf of those shippers. These transactions result in
transportation and exchange gas imbalance receivables and payables which
are settled through cash-out procedures specified in each tariff or
recovered or repaid through the receipt or delivery of gas in the future.
Such imbalances are recorded as current assets or current liabilities on
the balance sheet using the posted index prices of the applicable
FERC-approved tariffs, which approximate market rates.
HEDGING ACTIVITIES: Certain of the Company's subsidiaries will periodically
enter into commodity derivative contracts to hedge the price risk
associated with its fixed price natural gas sales and purchase contracts.
Gains or losses on such hedges are deferred and recognized in operating
revenues when the underlying hedged transactions occur.
CASH AND CASH EQUIVALENTS: The Company maintains deposits with banks which
exceed the Federal Deposit Insurance Corporation (FDIC) insured limit and
has a money market account included in its cash balances which is not FDIC
insured. Management believes the risk of loss in connection with these
accounts is minimal. The Company considers all highly liquid short-term
investments with original maturities of three months or less to be cash
equivalents.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, if any, as
of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board
(FASB) issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which is effective for
fiscal years beginning after December 15, 1995. SFAS No. 121 specifies
certain events and circumstances which indicate the cost of an asset or
assets may be impaired, the method by which the evaluation should be
performed, and the method by which writedowns, if any, of the asset or
assets are to be determined and recognized. The adoption of this
pronouncement in 1996 did not have a material impact on the Company's
financial condition or operating results.
10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
The FASB issued SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,
effective for fiscal years beginning after December 31, 1995. This
statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies
who choose not to adopt the new rules, the statement requires disclosures
as to what earnings per share would have been if the new rules had been
adopted. The Company did not grant stock options or any other form of
stock-based compensation during any of the periods included in the
accompanying financial statements.
The FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME and SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that displays
with the same prominence as other financial statements. SFAS No. 131
supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. SFAS No. 131 establishes standards on the way that public
companies report financial information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures.
Results of operations and financial position, however, will be unaffected
by implementation of these standards.
11
<PAGE>
3. ACQUISITION OF THE MIDLA COMPANIES:
On April 3, 1996, the Company acquired all of the outstanding common stock
of the MidLa Companies for approximately $21.2 million. The acquisition was
accounted for using the purchase method of accounting. As such, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The
Company financed the acquisition with $20 million in bank debt with the
remaining balance being funded through the $2 million in member
contributions.
4. DEBT:
NOTE AGREEMENT: In April 1996, the Company obtained a seven-year, $20
million loan (the Note) from Union Bank. As previously discussed, the
proceeds from the Note were used to finance the acquisition of the common
stock of the MidLa Companies. The Note was secured by the common stock of
the MidLa Companies and their related physical assets.
The Note was comprised of two tranches. The original principal balance of
Tranche A was $17.6 million and accrued interest at the Eurodollar rate
plus 2.5 percent. Tranche B had an original principal balance of $2.4
million and accrued interest at the Eurodollar rate plus 4 percent. The
Eurodollar rate was 5.8 percent at September 30, 1997. Effective April 4,
1996, the Company entered into two separate interest rate swap agreements
to lock in the interest rates on $13.2 million of the Tranche A balance and
the entire Tranche B balance at 8.99 percent and 10.745 percent,
respectively. The terms of such swaps extend through the life of the Note.
The following is a summary of scheduled maturities of the amounts
outstanding under this note agreement at September 30, 1997:
YEARS ENDING SEPTEMBER 30,
--------------------------
1998 $2,200
1999 1,760
2000 1,760
2001 1,760
2002 1,760
Thereafter 9,880
-------
$19,120
=======
12
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT: (continued)
DEBT COVENANTS: The Company was subject to certain financial covenants as
defined in its debt agreement with Union Bank. Among other restrictions,
such covenants include maintaining a minimum current ratio of 1.0 to 1.0,
maintaining an interest charge coverage ratio of 1.5 to 1.0, limiting
general and administrative (G&A) expenses to $400,000 per quarter and
maintaining a minimum consolidated tangible net worth of $2,000,000.
Beginning March 31, 1997, the interest charge coverage ratio requirement
increased to 2.0 to 1.0. Additionally, beginning March 31, 1997, the
Company was required to maintain a debt to total capitalization ratio of
.85 to 1.0 and a debt service coverage ratio of 1.4 to 1.0.
At June 30, 1996, the Company was in noncompliance with the covenant which
limits its general and administrative expenses as well as a nonfinancial
covenant which requires the Company to maintain all bank accounts with
Union Bank. Effective November 15, 1996, the Company obtained a "Consent
and Waiver" from Union Bank which waived the G&A restriction for the
quarter ended June 30, 1996, and consented to a single bank account held by
MidLa Gas. As a condition precedent to Union Bank issuing the " Consent and
Waiver," effective November 15, 1996, the Company's equity members entered
into the "Second Contingent Equity Support Agreement" which committed the
members to make G&A contributions (limited to $1,000,000 in the aggregate)
to the Company in order to satisfy the G&A restriction discussed above.
Additionally, related to the above-mentioned agreements, effective November
15, 1996, the Note was amended by "Amendment No. 1" to increase the
Company's G&A limit from $400,000 per quarter to $600,000 for the quarter
ended September 30, 1996, and $650,000 for each of the quarters ending
December 31, 1996, and March 31, 1997
As a result of further negotiations with Union Bank, the Note was amended
by "Amendment No. 2" which became effective March 6, 1997. "Amendment No.
2" waived the Company's noncompliance with such financial covenants through
March 31, 1998. In connection with entering into "Amendment No. 2," the
Company's equity members also jointly and severally committed to make the
principal and interest payments on the Note through September 30, 1997, and
amended the "Second Contingent Equity Support Agreement" discussed above to
extend through March 31, 1998. As of September 30, 1997, the Company was in
noncompliance with certain of its debt covenants, as amended. As a result,
the Note has been classified as a current liability in the accompanying
consolidated balance sheets.
5. INCOME TAXES:
No federal income tax provision or benefit has been recorded for the period
from inception
13
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(March 1, 1996) through September 30, 1997. The income tax provision
(recovery) included in the accompanying consolidated statement of
operations is entirely attributable to state income taxes.
The Company has net operating loss (NOL) carryforwards for federal income
tax reporting purposes of approximately $7.7 million expiring in various
amounts through 2008. The tax effect of significant temporary differences
representing deferred tax assets and liabilities at September 30, 1997 and
December 31, 1996 are as follows (in thousands):
1996 1997
---- ----
Net operating carryforwards ........... $ 1,075 $ 2,600
Accrued expenses ...................... 180 180
Provision for doubtful accounts ....... 114 161
Financial basis of assets in excess
of tax basis ........................ (261) (915)
Valuation allowance ................... (1,108) (2,026)
------- -------
Net deferred tax assets and liabilities $ -- $ --
======= =======
The valuation allowance increased $918,000 in 1997 because of the increase
in operating loss carryforwards.
6. RATE AND REGULATORY MATTERS:
GENERAL RATE ISSUES: On September 1, 1995, MidLa Gas filed in Docket No.
CP95-730 an application pursuant to ss.7(b) of the Natural Gas Act for
permission and approval to abandon (a) the storage services it receives at
and from the Hester Storage Field (Hester) and appurtenant facilities owned
by Transcontinental Gas Pipe Line Corporation (Transco), (b) a related
transportation and exchange service with Transco, (c) certain services then
provided by MidLa Gas to the extent that such services relied on the
availability of the storage services at and from Hester, as well as related
transportation and exchange services, and (d) the firm and interruptible
storage services it provided to customers under its Rate Schedules FSS and
ISS and its small merchant service provided under Rate Schedule SMS. As a
part of this filing, MidLa Gas also stated that it would file a Section 4
Rate application to reflect the changes to the services it provided and to
also reflect the reduction in costs that would occur as a result of the
requested abandonments. An abandonment order granting the requested
permission and approval was issued on December 26, 1996, with an effective
date of September 1, 1996. MidLa Gas filed a Section 4 application
(RP96-291-000) on June 28, 1996, to reflect the changes to its services and
the corresponding rates that would occur as a result of the abandonment
being granted. On November 13, 1996, MidLa Gas and the other parties
participating in this proceeding filed an unopposed settlement agreement
14
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with the FERC resolving all of the issues present in this proceeding. On
March 28, 1997, the FERC issued an order approving the settlement as filed
with an effective date of September 1, 1996.
OTHER: The Company is subject to state and federal regulation normally
incident to the transmission of natural gas, including, but not limited to,
rates, facilities construction and environmental matters. Management of the
Company is not aware of any events of noncompliance with respect any such
regulation, the effects of which would have a material adverse effect on
its financial position or results of operations.
7. FINANCIAL INSTRUMENTS:
The Company periodically enters into financial instruments to reduce its
exposure to natural gas price fluctuations. The Company does not enter into
financial instruments for speculative trading purposes. The types of
financial instruments typically utilized by the Company include natural gas
futures and option contracts traded on the New York Mercantile Exchange and
options traded in the over-the-counter financial markets. At September 30,
1997 and December 31, 1996, the Company had open natural gas futures and
option contracts with an absolute notional contract quantity of
approximately 0.5 and 0.4 billion cubic feet, respectively.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments pursuant to
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.
CURRENT ASSETS AND LIABILITIES: The carrying amounts of the Company's
current assets and liabilities approximate fair value due to the short-term
nature of these instruments.
OPEN FUTURES AND OPTION CONTRACTS: The fair value of the Company's open
futures and option contracts was estimated based on quoted market prices
for such contracts. Such amount, net of premiums paid and received, was
immaterial as of September 30, 1997 and December 31, 1996.
LONG-TERM DEBT: The fair value of the Company's long-term debt was assumed
to approximate fair value due to the floating interest rates associated
with such debt.
15
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST RATE SWAPS: The fair value of the Company's interest rate swaps,
as discussed in Note 4, was determined based on the amount the Company
would have to pay to close out of such positions in a loss position based
on then-current interest rates. Such amount totaled approximately $112,000
at September 30, 1997.
8. EMPLOYEE BENEFIT PLANS:
The Company provides a defined contribution 401(k) plan referred to as the
Republic Gas Partners 401(k) Plan. The 401(k) plan became effective May 1,
1996, and is available to all full-time employees. The Company made no
contributions during 1997 or 1996.
The Company sponsors other plans for the benefit of its employees. These
plans include health and dental care, life insurance, accidental death and
dismemberment, short-term disability and long-term disability.
9. COMMITMENTS AND CONTINGENCIES:
LEASES: The Company had leases and commitments for an underground gas
storage facility and for transportation in effect through September 1,
1996. The monthly rental cost for the storage facility was approximately
$142,000, and the monthly transportation commitment was approximately
$138,000. Additionally, the Company had a lease obligation for a related
compression facility which was in effect at September 30, 1997 and December
31, 1996. The associated monthly compression cost was approximately
$33,000.
Future lease rentals for leases with a noncancelable term of more than one
year (excluding storage-related leases) amounted to $88,900, all of which
is to be paid during the year ending September 30, 1998.
LEGAL: The Company and its subsidiaries are involved in various legal
actions arising in the ordinary course of business. While it is not
feasible to predict the ultimate outcome of these actions, management
believes that the resolution of these matters will not have a material
adverse effect, either individually or in the aggregate, on the Company's
financial position or results of operations.
16
<PAGE>
REPUBLIC GAS PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. MAJOR CUSTOMERS:
During the nine months ended September 30, 1997, the Company had sales to
two customers which exceeded 10 percent of natural gas sales. Total sales
to these customers during 1997 were approximately $30 million or 24 percent
of total natural gas sales. Individually, these customers amounted for 13
percent and 11 percent of natural gas sales, respectively. Three customers
accounted for approximately 41 percent of trade accounts receivable at
September 30, 1997.
During the year ended December 31, 1996, the Company and its subsidiaries
had sales to three customers which exceeded 10 percent of natural gas
sales. Total sales to these customers during 1996 were approximately $65
million or 43 percent of total natural gas sales. Individually, these
customers accounted for 17 percent, 13 percent and 12 percent of natural
gas sales, respectively. One customer accounted for 14 percent of trade
accounts receivable at December 31, 1996.
The Company and its subsidiaries have a concentration of customers in a
limited geographical area. The impact of this concentration is spread over
a broad makeup of customers, each of which is impacted by different
factors. The Company's credit risk is limited to the face value of a
customer's receivable. The Company generally does not require collateral on
these accounts.
11. SUBSEQUENT EVENT:
On October 2, 1997, the Company entered into an "Agreement and Plan of
Merger" (the "Agreement") with Midcoast Energy Resources, Inc. ("Midcoast")
to be acquired by Midcoast. The Company closed on the agreement effective
October 31, 1997. Upon the closing of this transaction, Republic Gas
Partners, L.L.C. was dissolved and its subsidiaries became subsidiaries of
Midcoast. The amounts outstanding to Union Bank under the note agreement
discussed in Note 4 were assumed by the acquiror.
17
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------- ---------------------------------------------------
REPUBLIC GAS HARMONY ALATENN REPUBLIC GAS
ALATENN PARTNERS, ACQUISITION ACQUISITION ACQUISITION COMBINED
COMPANY SUBSIDIARIES L.L.C. ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS OPERATIONS
-------- --------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Sale of natural gas and
transportation fees ............. $ 26,496 $ 113,429 $ 153,051 $ -- $ -- $ 3,282(g) $ 296,258
Natural gas processing revenue .... 2,460 -- -- 3,562(a) -- 6,022
Other revenue ..................... 459 -- -- -- -- 459
-------- --------- --------- ------- ------- ------- ---------
Total operating revenues .... 29,415 113,429 153,051 3,562 0 3,282 302,739
-------- --------- --------- ------- ------- ------- ---------
OPERATING EXPENSES:
Cost of natural gas and
transportation fees ............. 23,170 102,157 149,873 -- -- 275,200
Natural gas processing costs ...... 1,443 -- -- 2,908(a) -- 4,351
Depreciation, depletion and
amortization .................... 818 584 629 71(b) 126 (b) 2,228
General and administrative ........ 1,223 3,961 2,077 -- (1,552)(c) (291)(c) 5,418
Other expenses .................... 188 -- 844 -- -- 1,032
-------- --------- --------- ------- ------- ------- ---------
Total operating expenses .... 26,842 106,702 153,423 2,979 (1,426) (291) 288,229
-------- --------- --------- ------- ------- ------- ---------
Operating income ............ 2,573 6,727 (372) 583 1,426 3,573 14,510
-------- --------- --------- ------- ------- ------- ---------
NON-OPERATING ITEMS:
Interest expense, net ............. (413) (1) (1,288) (258)(d) (772)(e) (257)(d) (2,989)
Minority interest in
consolidated subsidiaries ....... (198) -- -- -- -- (198)
Other income (expense), net ....... (48) 549 -- -- -- 501
-------- --------- --------- ------- ------- ------- ---------
INCOME BEFORE INCOME TAXES .......... 1,914 7,275 (1,660) 325 654 3,316 11,824
PROVISION FOR INCOME TAXES .......... -- (2,642) (213) (20)(f) (666)(f) (1)(f) (3,542)
-------- --------- --------- ------- ------- ------- ---------
Net income .................. 1,914 4,633 (1,873) 305 (12) 3,315 8,282
5% CUMULATIVE PREFERRED
STOCK DIVIDENDS ................... (23) -- -- -- -- -- (23)
-------- --------- --------- ------- ------- ------- ---------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS ............... $ 1,891 $ 4,633 $ (1,873) $ 305 $ (12) $ 3,315 $ 8,259
======== ========= ========= ======= ======= ======= =========
NET INCOME PER SHARE ................ $ 1.00 $ 1.95
======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ......... 1,886 2,000 350 4,236
======== ======= ======= =========
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
18
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(In Thousands)
<TABLE>
<CAPTION>
ALATENN REPUBLIC GAS
REPUBLIC GAS ACQUISITION ACQUISITION COMBINED
COMPANY PARTNERS, L.L.C. ADJUSTMENTS ADJUSTMENTS OPERATIONS
-------- ---------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Sale of natural gas and transportation fees ............ $ 46,202 $ 127,177 $ 42,950(h) $ 1,228(g) $ 217,557
Natural gas processing revenue ......................... 3,735 -- -- 3,735
Other revenue .......................................... 212 -- -- 212
-------- --------- -------- ------- ---------
Total operating revenues ......................... 50,149 127,177 42,950 1,228 221,504
-------- --------- -------- ------- ---------
OPERATING EXPENSES:
Cost of natural gas and transportation fees ............ 40,749 126,054 38,575(h) 205,378
Natural gas processing costs ........................... 2,789 -- -- 2,789
Depreciation, depletion and amortization ............... 983 619 335(b) 1,937
General and administrative ............................. 1,477 2,200 916(h) (256)(c) 4,337
Other expenses ......................................... 39 494 50(h) 583
-------- --------- -------- ------- ---------
Total operating expenses ......................... 46,037 129,367 39,876 (256) 215,024
-------- --------- -------- ------- ---------
Operating income ................................. 4,112 (2,190) 3,074 1,484 6,480
NON-OPERATING ITEMS:
Interest expense, net .................................. (680) (1,210) 36 (d) (1,854)
Minority interest in consolidated subsidiaries ......... (170) -- -- (170)
Other income (expense), net ............................ (39) -- 38(h) -- (1)
-------- --------- -------- ------- ---------
INCOME BEFORE INCOME TAXES ............................... 3,223 (3,400) 3,112 1,520 4,455
PROVISION FOR INCOME TAXES ............................... (285) 85 (721)(f) (15)(f) (936)
-------- --------- -------- ------- ---------
Net income ...................................... 2,938 (3,315) 2,391 1,505 3,519
5% CUMULATIVE PREFERRED
STOCK DIVIDENDS ........................................ -- -- -- -- 0
-------- --------- -------- ------- ---------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS .................................... $ 2,938 $ (3,315) $ 2,391 $ 1,505 $ 3,519
======== ========= ======== ======= =========
NET INCOME PER SHARE ..................................... $ 0.90 $ 0.73
======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .............................. 3,272 1,228 350 4,850
======== ======== ======= =========
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
19
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(In Thousands)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------- ----------------------------
REPUBLIC GAS REPUBLIC GAS COMBINED
ASSETS COMPANY PARTNERS, L.L.C. PARTNERS, L.L.C. OPERATIONS
-------- ---------------- ---------------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 45 $ 953 $ 998
Accounts receivable .......................................... 10,156 6,794 16,950
Other current assets ......................................... 557 507 1,064
-------- -------- -------- ---------
Total current assets .................................. 10,758 8,254 0 19,012
-------- -------- -------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities .......................... 49,924 18,245 13,281 (j) 81,450
Natural gas processing facilities ............................ 3,949 3,949
Other property, plant and equipment .......................... 3,661 3,661
-------- -------- -------- ---------
57,534 18,245 13,281 89,060
ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION ............................................. (2,440) (1,977) (4,417)
-------- -------- -------- ---------
55,093 16,268 13,281 84,642
OTHER ASSETS, net of amortization .............................. 1,057 250 1,307
-------- -------- -------- ---------
Total assets .......................................... $ 66,908 $ 24,772 $ 13,281 $ 104,961
======== ======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ..................... $ 8,603 $ 7,743 $ 16,146
Current portion of deferred income ........................... 83 83
Current portion of long-term debt payable to banks ........... 197 19,120 (16,940)(i) 2,377
-------- -------- -------- ---------
Total current liabilities ............................. 8,882 26,663 (16,940) 18,605
-------- -------- -------- ---------
LONG-TERM DEBT PAYABLE TO BANKS ................................ 7,193 19,619 (i) 26,812
OTHER DEFERRED LIABILITIES AND CREDITS ......................... 289 289
MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES .................................... 680 680
SHAREHOLDERS' EQUITY:
Common stock ................................................. 49 4 (j) 53
Paid-in capital .............................................. 60,979 4,650 4,057 (j) 69,686
Retained earnings (deficit) .................................. (11,132) (6,541) 6,541 (j) (11,132)
Unearned compensation ........................................ (31) (31)
-------- -------- -------- ---------
Total shareholders' equity ............................ 49,864 (1,891) 10,602 58,575
-------- -------- -------- ---------
Total liabilities and shareholders' equity ............ $ 66,908 $ 24,772 $ 13,281 $ 104,961
======== ======== ======== =========
</TABLE>
20
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND AS OF SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The following unaudited pro forma consolidated statements of operations of the
Company for the year ended December 31, 1996 and the nine months ended September
30, 1997 and the unaudited pro forma consolidated balance sheet of the Company
as of September 30, 1997 (the "Unaudited Pro Forma Consolidated Financial
Statements") give effect to (i) the Republic Acquisition under the purchase
method of accounting, (ii) the Harmony Acquisition under the purchase method of
accounting and (iii) the AlaTenn Acquisition under the purchase method of
accounting along with the associated financing, for the acquisitions. The
financing methods included additional bank debt and the issuance and sale of
2,000,000 shares of the Company's common stock. Proceeds from the sale of common
stock were used to reduce the Acquisition debt incurred in the AlaTenn
Acquisition ("AlaTenn-Offering").
The unaudited pro forma consolidated balance sheet as of September 30, 1997
includes the historical purchase accounting entries made for the Harmony and
AlaTenn Acquisitions and was prepared assuming that the Republic Acquisition was
consummated as of September 30, 1997.
The unaudited Pro Forma Consolidated Financial Statements are based upon the
historical consolidated and combined financial statements of the Company and the
Republic subsidiaries. The unaudited pro forma consolidated balance sheet is
presented assuming the Republic Acquisition occurred on September 30, 1997. No
pro forma balance sheet adjustments are required for the AlaTenn or Harmony
Acquisition because these acquisitions occurred prior to September 30, 1997 and
the effects are already reflected in the Company's historical balance sheet. The
unaudited pro forma consolidated statement of operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997 are presented as
if the Harmony, AlaTenn-Offering and Republic Acquisitions occurred at the
beginning of each period presented. Because of the seasonal nature of the
21
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AlaTenn and Republic Subsidiaries' operations, among other factors, the results
of the interim periods presented are not necessarily indicative of the results
to be expected of an entire year.
The pro forma adjustments and the resulting Unaudited Pro Forma Consolidated
Financial Statements have been prepared based upon available information and
certain assumptions and estimates deemed appropriate by the Company. A final
determination of required purchase accounting adjustments and the allocation of
the purchase price to the assets acquired and liabilities assumed based on their
respective fair values, has not yet been made for the Republic Acquisition.
Accordingly, the purchase accounting adjustments for the Republic Acquisition
reflected in the pro forma information are preliminary and have been made solely
for purposes of developing such information. The Company's management believes
that the pro forma adjustments and underlying assumptions and estimates
reasonably present the significant effects of the transactions reflected thereby
and that any subsequent changes in the underlying assumptions and estimates will
not materially affect the Unaudited Pro Forma Consolidated Financial Statements
presented herein. The Unaudited Pro Forma Consolidated Financial Statements do
not purport to represent what the Company's financial position or results of
operations actually would have been had the Republic Acquisition, Harmony
Acquisition or AlaTenn-Offering occurred on the dates indicated or to project
the Company's financial position or results of operations for any future date or
period. Furthermore, the Unaudited Pro Forma Consolidated Financial Statements
do not reflect changes that may occur as the result of post-combination
activities and other matters (except as described in note 2). The results of
operations of the Harmony and AlaTenn Acquisitions have been included within the
Company's actual results of operations since the acquisition in October 1996 and
June 1997, respectively.
22
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. PRO FORMA ADJUSTMENTS - STATEMENT OF OPERATIONS
The pro forma adjustments to the unaudited pro forma consolidated statements of
operations reflect the following:
(a) Harmony System - The adjustments represent the revenues and direct
operating expenses of the Harmony Acquisition for the period prior to
August 1996.
(b) Depreciation - The adjustment reflects the pro forma depreciation
expense based on the allocation of the purchase price to the depreciable
assets of the Harmony System and the AlaTenn Subsidiaries and the
continued use of historical depreciation methods for all assets. General
and Administrative
(c) Expenses -The adjustment reflects a reduction in parent company
allocations and the replacement of acquired management with Midcoast
management.
(d) Interest Expense - The adjustment reflects interest computed using 7.43%
(the Company's current effective interest rate).
(e) Interest Expense - The adjustment reflects the combined effect of
interest computed on debt used to finance the AlaTenn acquisition
(including related financing costs) less an adjustment associated with
using proceeds of the Offering to reduce the debt. The interest rate
used is computed using 7.43% (the Company's current effective interest
rate).
(f) Income Taxes - The acquisition adjustment for income taxes represents
the tax effect of the foregoing acquisition pro forma adjustments
computed at a 39% statutory income tax rate which reflects both federal
and state tax rates, as well as the utilization of Midcoast's NOL
carryforward.
(g) Republic Acquisition - The adjustment represents additional revenues
that would have been realized based on renegotiated contracts with
existing customers.
23
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(h) AlaTenn System - The adjustments include the results of operations of
the AlaTenn Acquisition for the five-month period prior to Midcoast's
ownership. In addition, adjustments of parent company allocations and
replacement of acquired management with Midcoast management have been
included
3. PRO FORMA ADJUSTMENTS - BALANCE SHEET
(i) Bank Debt - The adjustment represents additional borrowings under the
Company's existing credit facilities associated with the purchase of the
Republic Acquisition.
(j) Common Stock and Additional Paid in Capital - The adjustment reflects
the issuance of 350,000 shares of Midcoast's common Stock and 125,000
warrants at a price of $21.75 per share. The value of Midcoast common
stock upon consummation was $24.06.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
MIDCOAST ENERGY RESOURCES, INC.
Date: January 12, 1997 By: /s/ Richard A. Robert
Treasurer
Principal Financial Officer
Principal Accounting Officer
25
