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 June 30, 1998
[ ] 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 June 30, 1998, there were outstanding 5,719,665 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 June 30, 1998
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 1997 and June 30, 1998 4
Consolidated Statement of Shareholders' Equity for
the six months ended June 30, 1998 5
Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 1997 and June 30, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . 9
PART II. OTHER INFORMATION 15
SIGNATURE 17
<TABLE>
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 31, June 30,
1997 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 308 $ 1,815
Accounts receivable, no
allowance for doubtful accounts 27,524 18,079
Materials and supplies, at
average cost 1,225 1,688
Total current assets 29,057 21,582
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities 90,859 96,581
Investment in transmission facilities 1,341 1,342
Natural gas processing facilities 4,626 4,741
Oil and gas properties, using the
full-cost method of accounting 1,344 1,357
Other property and equipment 2,411 2,541
100,581 106,562
ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION (3,029) (4,399)
97,552 102,163
OTHER ASSETS, net of amortization 1,429 2,336
Total assets $ 128,038 $126,081
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 25,779 $ 14,377
Other current liabilities 491 176
Short-term borrowing from bank 700 1,704
Current portion of long-term debt
payable to banks 199 233
Total current liabilities 27,169 16,490
LONG-TERM DEBT PAYABLE TO BANKS 28,923 32,234
OTHER LIABILITIES 190 379
DEFERRED INCOME TAXES 9,613 10,370
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 692 1,265
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value,
25 million shares authorized,
5,681,330 and 5,719,665 shares
issued and outstanding at
December 31, 1997 and June 30, 1998,
respectively (Note 2). 57 57
Paid-in capital 80,695 80,969
Accumulated deficit (19,283) (15,665)
Unearned compensation (18) (18)
Total shareholders' equity 61,451 65,343
Total liabilities and shareholders'
equity $ 128,038 $126,081
The accompanying notes are an integral part of these consolidated financial
statements.<PAGE>
</TABLE>
<TABLE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Sale of natural gas and
transportation fees $ 10,149 $ 45,977 $ 20,731 $ 109,153
Transportation revenue 1,381 2,325 2,216 5,301
Natural gas processing
revenue 1,056 1,007 2,527 2,106
Oil and gas revenues 75 236 152 324
Total operating revenues 12,661 49,545 25,626 116,884
OPERATING EXPENSES:
Cost of natural gas and
transportation charges 9,827 44,226 19,882 104,402
Natural gas processing costs 858 742 1,829 1,465
Production of oil and gas 17 18 28 29
Depreciation, depletion and
amortization 314 695 569 1,388
General and administrative 581 1,313 955 2,916
Total operating expenses 11,597 46,994 23,263 110,200
Operating income 1,064 2,551 2,363 6,684
NON-OPERATING ITEMS:
Interest expense (401) (637) (497) (1,236)
Minority interest in
consolidated subsidiaries (55) (40) (115) (42)
Other income (expense), net 15 95 4 127
INCOME BEFORE INCOME TAXES 623 1,969 1,755 5,533
PROVISION FOR INCOME TAXES - (241) - (1,044)
NET INCOME $ 623 $ 1,728 $ 1,755 $ 4,489
EARNINGS PER COMMON SHARE:
BASIC $ .23 $ .30 $ .64 $ .79
DILUTED $ .22 $ .29 $ .63 $ .76
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 2,749,998 5,702,226 2,749,998 5,691,836
DILUTED 2,826,312 5,902,935 2,801,888 5,891,581
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<PAGE>
MIDCOAST ENERGY RESOURCES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
ACCUMULATED TOTAL
COMPREHENSIVE COMMON PAID-IN ACCUMULATED UNEARNED SHAREHOLDERS'
INCOME STOCK CAPITAL DEFICIT COMPENSATION EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996.............. $ - $ 25 $ 26,942 $ (13,284) $ (90) $ 13,593
Shares issued or vested under various
stock-based compensation arrangements. - - - - 72 72
Sale of 2,315,000 shares of common
stock................................. - 23 34,030 - - 34,053
Common stock and warrants issued in
conjunction with the Midla Acquisition - 4 9,167 - - 9,171
10% stock dividend (516,330 shares)..... - 5 10,556 (10,565) - (4)
Net income ............................. - - - 5,764 - 5,764
Other comprehensive income, net of tax . - - - - - -
Common stock dividends, $.29 per share . - - - (1,198) - (1,198)
BALANCE, December 31, 1997 ............ . $ - $ 57 $ 80,695 $ (19,283) $ (18) $ 61,451
Net income ............................. - - - 4,489 - 4,489
Warrants exercised...................... - - 274 - - 274
Other comprehensive income, net of tax . - - - - - -
Common stock dividends, $.15 per share . - - - (871) - (871)
BALANCE, June 30, 1998 (Unaudited)..... $ - $ 57 $ 80,969 $ (15,665) $ (18) $ 65,343
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 623 $ 1,728 $ 1,755 $ 4,489
Adjustments to arrive
at net cash provided
(used) in operating
activities-
Depreciation,
depletion and
amortization 314 695 569 1,388
Increase in deferred
tax liability 9 757 9 757
Minority interest in
consolidated
subsidiaries 55 40 115 42
Other 164 79 161 71
Changes in working
capital accounts-
(Increase) Decrease
in accounts receivable (5,136) 9,962 (1,265) 10,539
Increase in other
current assets (552) (626) (552) (463)
Increase (Decrease)
in accounts payable
and accrued liabilities 2,855 (7,743) 488 (12,388)
Net cash provided (used)
by operating activities (1,668) 4,892 1,280 4,435
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions (37,495) (3,425) (39,715) (3,425)
Capital expenditures (95) (1,398) (143) (3,020)
Other (344) (625) (640) (754)
Net cash used in
investing activities (37,934) (5,448) (40,498) (7,199)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Bank debt borrowings 37,565 6,506 39,675 18,739
Bank debt repayments (543) (4,674) (905) (14,447)
Contributions from
(distributions to)
joint venture partners (170) 880 (228) 850
Dividends on common stock (200) (458) (400) (871)
Net cash provided by
financing activities 36,652 2,254 38,142 4,271
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (2,950) 1,698 (1,076) 1,507
CASH AND CASH EQUIVALENTS,
beginning of period 3,042 117 1,168 308
CASH AND CASH EQUIVALENTS,
end of period $ 92 $ 1,815 $ 92 $ 1,815
CASH PAID FOR INTEREST $ 81 $ 571 $ 210 $ 1,413
CASH PAID FOR INCOME
TAXES $ 1 $ 36 $ 53 $ 137
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-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 1997 so that the presentation of the
information is consistent with reporting for the Consolidated Financial
Statements in 1998. 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-K for the year ended December 31, 1997.
2. CAPITAL STOCK
At the May 15, 1998, Annual Shareholder meeting, the Board of Directors
resolution to amend the Articles of Incorporation to increase the number of
authorized shares of common stock, par value $.01 per share from Ten Million
(10,000,000) to Twenty-Five Million (25,000,000) shares and to authorize Five
Million (5,000,000) shares of preferred stock, par value $.01 per share was
approved.
3. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
Certain executive officers of the Company have entered into employment
contracts which, through amendments, provide for employment terms of varying
lengths the longest of which expires in April 2001. These agreements may be
terminated by mutual consent or at the option of the Company for cause, death
or disability. In the event termination is due to death, disability or
defined changes in the ownership of the Company, the full amount of
compensation remaining to be paid during the term of the agreement will be
paid to the employee or their estate, after discounting at 12% to reflect the
current value of unpaid amounts.
MIT CONTINGENCY
As part of the Company's May 1997 acquisition of a 288 mile interstate
transmission system pipeline ("the MIT System") and two end-user pipelines in
northern Alabama ("the TRIGAS Systems"), collectively ("the MIT Acquisition"),
the Company has agreed to pay additional contingent annual payments, which
will be treated as deferred purchase price adjustments, not to exceed
$250,000 per year. The amount each year is dependent upon revenues received
by the Company from certain gas transportation contracts. The contingency is
due over an eight-year period commencing April 1, 1998, and payable at the
end of each anniversary date. The Company is obligated to pay the lesser of
50% of the gross revenues received under these contracts or $250,000.
MIDLA CONTINGENCY
In October 1997, the Company acquired a 386 mile interstate transmission
pipeline (the "MLGC System"), one intrastate (the "MLGT System"), two
end-user pipelines and two offshore gathering pipelines, located in Louisiana
(collectively the "Midla Acquisition"), from Republic Gas Partners, LLC.
("Republic"). In conjunction with the acquisition, the Company agreed that
if a specific contract with a third party was executed prior to October 2,
1999, which included specific provisions regarding price and throughputs,
Midcoast would be obligated to issue 110,000 warrants to Republic to acquire
Midcoast common stock at an exercise price of $19.77 per share. In addition,
concurrent with initial expenditures on the project, the Company would incur
a $1.2 million cash obligation to Republic. At June 30, 1998, none of the
provisions of this contingency have been met.
4. ACQUISITIONS
CREOLE SYSTEM
On June 30, 1998, Mid Louisiana Gas Transmission Company ("MLGT"), a wholly
owned subsidiary of the Company purchased Creole Gas Pipeline Corporation
("Creole") from El Paso Energy Corporation. Under the agreement, Midcoast
acquired all the issued and outstanding common stock of Creole for
$2.9 million. Creole owns and operates a 44-mile pipeline system near
New Orleans, Louisiana. The system, which has a capacity of 115,000 Mcf/day and
an average throughput of 50,000 Mcf/day, serves several large industrial
customers.
PORT HUDSON AND TEXANA SYSTEMS
In April, two of the Company's wholly owned subsidiaries purchased the Port
Hudson system in Louisiana and in a separate transaction, acquired a 50%
ownership in Texana Pipeline Company ("Texana"), a joint venture which owns
the Texana pipeline in south Texas. The total purchase price for both systems
was $725,000.
The Port Hudson system was purchased by MLGT from Amoco Production Company.
The system consists of approximately four miles of 12" pipeline near Port
Hudson, Louisiana. MLGT acquired the system as part of its development of a
high pressure pipeline to service new customers in and around the Port Hudson
and Baton Rouge areas.
The 50% interest in Texana was acquired from El Paso Energy Marketing Company.
The Texana gathering pipeline system consists of 46 miles of primarily 6" to
8" pipeline which extends through Aransas, San Patricio and Refugio counties
in south Texas. The pipeline presently gathers natural gas from 12 producers
with a system throughput of approximately 6 Mmcf/day.
5. SUBSEQUENT EVENTS
ANADARKO ACQUISITION
On July 30, 1998, the Company announced that it had entered into a definitive
agreement to purchase the Anadarko pipeline system from El Paso Field Services
Company, a business unit of El Paso Energy Corporation, for cash
consideration of $35 million.
Under the agreement, Midcoast will acquire ownership and operation of the
Anadarko gathering system located in Beckham and Roger Mills counties,
Oklahoma and Hemphill, Roberts and Wheeler counties, Texas. The system is
comprised of over 696 miles of primarily 16" and 20" pipeline with an average
throughput of 151 Mmcf/day and a total capacity of 345 Mmcf/day. The system
gathers gas from approximately 250 wells and includes a 40 Mmcf/day natural
gas processing facility, 11 compressor stations with a total of over 14,000
horsepower and interconnections with eight major interstate and intrastate
pipeline systems.
Midcoast plans to finance the acquisition utilizing its bank credit facility.
Closing is anticipated during the third quarter and is subject to review by
the Department of Justice and the Federal Trade Commission under the
Hart-Scott-Rodino Act.
KOCH ACQUISITION
In July 1998, the Company, through its wholly owned subsidiaries, MLGC and
MLGT purchased two pipeline systems from Koch Gateway Pipeline Company, for
cash consideration of $2.6 million. The pipeline systems, which comprise
approximately 10 miles of 6" to 12" pipeline near Baton Rouge, Louisiana, are
being acquired as a part of Midcoast's development of a high pressure
pipeline to enhance service to new and existing customers in and around the
Baton Rogue area. The expansion will help meet the demand resulting from
new contracts executed by Midcoast's subsidiaries to provide a combined
65 Mmcf/day of new marketing services and 20 Mmcf/day of new transportation
services to an industrial facility near Port Hudson, Louisiana and a new
cogeneration facility near Baton Rogue.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company has grown significantly as a result of the construction and
acquisition of new pipeline facilities. Since January of 1997, the Company
acquired 14 pipelines for an aggregate acquisition cost of over $74.3 million.
The Company believes the historical results of operations do not fully
reflect the operating efficiencies and improvements that are expected to be
achieved by integrating the acquired pipeline systems. As the Company
pursues its growth strategy in the future, its financial position and results
of operations may fluctuate significantly from period to period.
The Company's results of operations are determined primarily by the volumes
of gas transported, purchased and sold through its pipeline systems or
processed at its processing facility. Most of the Company's operating costs
do not vary directly with volume on existing systems, thus, increases or
decreases in transportation volumes on existing systems generally have a
direct effect on net income. Also, the addition of new pipeline systems
typically results in a larger percentage of revenues being added to operating
income as fixed overhead components are allocated over more systems. The
Company derives its revenues from three primary sources: (i) transportation
fees from pipeline systems owned by the Company, (ii) the processing and
treating of natural gas and (iii) the marketing of natural gas.
Transportation fees are received by the Company for transporting gas owned
by other parties through the Company's pipeline systems. Typically, the
Company incurs very little incremental operating or administrative overhead
cost to transport gas through its pipeline systems, thereby recognizing a
substantial portion of incremental transportation revenues as operating income.
The Company's natural gas processing revenues are realized from the
extraction and sale of natural gas liquids ("NGLs") as well as the sale
of the residual natural gas. Once extracted, the NGLs are further fractionated
in the Company's facilities into products such as ethane, propane, butanes,
natural gasoline and condensate, then sold to various wholesalers along with
raw sulfur from the Company's sulfur recovery plant. Typically, the Company
enters into agreements with natural gas producers wherein the Company and
the Producer share in the revenue generated from the sale of NGLs extracted
at the Company's facilities. The Company's processing operations can be
adversely affected by declines in NGL and natural gas prices, declines in
gas throughput or increases in shrinkage or fuel costs.
The Company's gas marketing revenues are realized through the purchase and
resale of natural gas to the Company's customers. Generally, gas marketing
activities will generate higher revenues and correspondingly higher expenses
than revenues and expenses associated with transportation activities, given
the same volumes of gas. This relationship exists because, unlike revenues
derived from transportation activities, gas marketing revenues and associated
expenses include the full commodity price of the natural gas acquired.
The operating income the Company recognizes from its gas marketing efforts
is the difference between the price at which the gas was purchased and the
price at which it was resold to the Company's customers. The Company's
strategy is to focus its marketing activities on Company owned pipelines.
The Company's marketing activities have historically varied greatly in
response to market fluctuations.
The Company has had quarter-to-quarter fluctuations in its financial results
in the past due to the fact that the Company's natural gas sales and pipeline
throughputs can be affected by changes in demand for natural gas primarily
because of the weather. Although, historically, quarter-to-quarter
fluctuations resulting from weather variations have not been significant,
the acquisitions of the Magnolia System, the MIT System and the MLGC System
have increased the impact that weather conditions have on the Company's
financial results. In particular, demand on the Magnolia System, MIT System
and MLGC System fluctuate due to weather variations because of the large
municipal and other seasonal customers which are served by the respective
systems. As a result, historically the winter months have generated more
income than summer months on these systems. There can be no assurances that
the Company's efforts to minimize such effects will have any impact on future
quarter-to-quarter flucations due to changes in demand resulting from
variations in weather conditions. Furthermore, future results could differ
materially from historical results due to a number of factors including but
not limited to interruption or cancellation of existing contracts, the impact
of competive products and services, pricing of and demand for such products
and services and the presence of competitors with greater financial resources.
The Company has also from time to time derived significant income by
capitalizing on opportunities in the industry to sell its pipeline systems on
favorable terms as the Company receives offers for such systems which are
suited to another company's pipeline network. Although no substantial
divestitures are currently under consideration, the Company will from time to
time solicit bids for selected properties which are no longer suited to its
business strategy.
RESULTS OF OPERATIONS
The following tables present certain data for major operating units of
Midcoast for the three and six month periods ended June 30, 1997 and June 30,
1998. A discussion follows which explains significant factors that have
affected Midcoast's operating results during these periods. Gross margin for
each of the units is defined as the revenues of the unit less related direct
costs and expenses of the unit. As previously discussed, the Company
provides natural gas marketing services to its customers. For analysis
purposes, the Company accounts for the marketing services by recording the
marketing activity on the operating unit where it occurs. Therefore, the
gross margin for each of the major operating units include a transportation
and marketing component.
<TABLE>
TRANSMISSION PIPELINES
(In thousands, except gross margin per MMBtu)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Transporation Fees $ 610 $ 1,302 $ 979 $ 3,299
Marketing 4,700 24,415 9,699 63,729
TOTAL OPERATING REVENUES: 5,310 25,717 10,678 67,028
OPERATING EXPENSES:
Cost of Natural Gas and
Transportation Charges 4,405 22,421 9,203 58,296
Operating Expenses 194 1,030 306 2,202
TOTAL OPERATING EXPENSES 4,599 23,451 9,509 60,498
GROSS MARGIN $ 711 $ 2,266 $ 1,169 $ 6,530
VOLUME (in Mmbtu)
Transportation 3,709 10,579 7,557 25,731
Marketing 1,819 10,518 3,586 26,866
TOTAL VOLUME 5,528 21,097 11,143 52,597
GROSS MARGIN per Mmbtu $ .13 $ .11 $ .10 $ .12
</TABLE>
The Company's entrance into the regulated interstate pipeline business began
with the acquisition of the MIT System (June 1997) and the MLGC System (November
1997) which significantly enhanced the Company's transmission pipeline
operations in 1998. Significant increases in revenues, sales volumes and
gross margin are attributable to full quarter and year-to-date operations of
the MIT and MLGC Systems. In the three and six month periods ended June 30,
1998, revenues increased 384% and 528%, respectively on corresponding volume
increases of 282% and 372%. For the same periods, gross margins increased by
219% and 459% to $1,169,000 and $6,530,000 from $711,000 and $2,266,000.
The gross margin per Mmbtu was affected by the inclusion of the MIT System and
the MLGC System during the 1998 periods. These systems are subject to
seasonal margin variations. The MIT System has a lower summer (April-
October) tariff rate than its winter (November-March) tariff rate. The MLGC
System allows customers to reduce their demand capacity during the summer
months. These factors resulted in lowering revenues in the second quarter of
1998 as compared to the first quarter of 1998.
The Company has succeeded in increasing contracted transportation volumes on
both the MIT System and MLGC System since completing the acquisitions.
Through the completion of two successful open seasons, contracted demand on
the MIT System has increased by 28% for the winter of 1998 which includes new
long term transportation agreements with the cities of Huntsville and Decatur,
Alabama. Construction of new pipeline facilities on the MIT System is planned
to accommodate the incremental volumes generated by the new transportation
contracts and is awaiting FERC approval. Contracted demand on the MLGC System
has increased due to the execution of a new 20 Mmcf/day gas transportation
contract to service a new cogeneration facility near Baton Rouge.
Transportation services under the new contract will commence upon the
completion of related construction of new facilities expected in the fourth
quarter of 1998.
<TABLE>
END-USER PIPELINES
(In thousands, except gross margin per MMBtu)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
End-User Transportation Fees $ 602 $ 795 $ 880 $1,559
Marketing 4,307 20,427 8,281 43,197
TOTAL OPERATING REVENUES: 4,909 21,222 9,161 44,756
OPERATING EXPENSES:
Cost of Natural Gas and
Transportation Charges 4,203 19,852 7,837 42,048
Operating Expenses 49 48 88 93
TOTAL OPERATING EXPENSES: 4,252 19,900 7,925 42,141
GROSS MARGIN $ 657 $ 1,322 $1,236 $ 2,615
VOLUME (in Mmbtu)
Transportation 1,879 4,555 3,824 9,438
Marketing 1,891 9,060 3,266 19,296
TOTAL VOLUME 3,770 13,615 7,090 28,734
GROSS MARGIN per Mmbtu $ .17 $ .10 $ .17 $ .09
</TABLE>
The Company's end-user operating unit experienced increases in sales
volumes for the three and six month periods ended June 30, 1998, primarily
due to the full quarter and year-to-date operations of the acquisitions of
the TRIGAS Systems (June 1997) and MLGT System (November 1997). As a result,
in the three and six month periods ended June 30, 1998, revenues increased
330% and 389%, and gross margin increased 81% and 112%, respectively.
The Company's gross margin per Mmbtu declined for the three and six month
periods ended June 30, 1998. The decrease is attributable to an increase in
marketing activities which are characterized by lower margins and higher
volumes.
Since Midcoast's ownership of the MLGT System, new marketing services
contracts have been executed to provide 25 Mmcf/day of new marketing
services beginning January 1, 1998 to an industrial facility near Port
Hudson, Louisiana, and an additional 40 Mmcf/day of natural gas marketing
services to a new cogeneration facility near Baton Rouge by the end of 1998.
The Company is currently constructing a new high pressure end-user pipeline
system to service the new contracts. The new pipeline will allow the Company
to compete for potential new customers along the industrial corridor of the
Mississippi River requiring natural gas at pressures previously not available
through the MLGT System.
<TABLE>
<PAGE>
GATHERING PIPELINES AND NATURAL GAS PROCESSING
(In thousands, except gross margin per Mmbtu)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gathering Transportation Fees $ 169 $ 228 $ 357 $ 443
Processing Revenue 1,056 1,007 2,527 2,106
Marketing 1,142 1,135 2,751 2,227
TOTAL OPERATING REVENUES: 2,367 2,370 5,635 4,776
OPERATING EXPENSES:
Cost of Natural Gas and
Transportation Charges 941 760 2,275 1,537
Processing Costs 500 417 1,226 861
Operating Expenses 393 440 776 830
TOTAL OPERATING EXPENSES: 1,834 1,617 4,277 3,228
GROSS MARGIN $ 533 $ 753 $ 1,358 $ 1,548
VOLUME (in Mmbtu)
Gathering 2,993 5,531 6,306 11,397
Processing 461 510 955 1,021
Marketing 555 996 1,150 1,997
TOTAL VOLUME 4,009 7,037 8,411 14,415
GROSS MARGIN per Mmbtu $ .13 $ .11 $ .16 $ .11
</TABLE>
The gathering pipelines and natural gas processing operating unit reflected
mixed results for the three and six month periods ended June 30, 1998 as
compared to the equivalent periods in 1997. Although margins per Mmbtu
declined for the gathering, processing and marketing units, overall gross
margin improved due to increased volumes gathered, processed and marketed
during these periods.
Gathering volumes increased 85% and 81% for the three and six month periods
ended June 30, 1998, respectively. These volumetric increases are primarily
the result of the offshore gathering systems acquired in the Midla Acquisition
and increased throughputs on the Company's gathering line investment in Alaska.
Processing volumes increased 11% and 7% for the three and six month periods
ended June 30, 1998, respectively. The volume increase, however, was
mitigated by weaker NGL pricing and therefore, the gross margins for 1998
were comparable to the corresponding periods in 1997. The future
profitability of the Harmony Plant will be affected by changes in commodity
pricing of NGL and natural gas, production curtailments, shut-in wells and
also the natural declines in the deliverability of the reservoirs
connected and dedicated to Midcoast's processing plant.
Marketing volumes increased 79% and 74%, for the three and six month periods
ended June 30, 1998, respectively. These volumetric increases are primarily
the result of the Texana Acquisition. The Texana system accounted for 55%
and 54% of the total marketing volumes for the three and six month periods
ended June 30, 1998, respectively.
The overall decline in gross margin per Mmbtu in 1998 is primarily
attributable to significant volumes gathered by offshore pipelines acquired in
the Midla Acquisition and significant volumes marketed on the Texana System.
These systems receive a low rate on a per Mmbtu basis and were not included
in the 1997 periods.
OTHER INCOME, COSTS AND EXPENSES
In the three and six month period ended June 30, 1998, the Company received
revenues of $236,000 and $324,000, respectively from its oil and gas
properties as compared to $75,000 and $152,000 over the same periods in
1997. The increase is primarily attributable to a one-time settlement
received by the Company on its Vealmoor Field properties. Also, certain
of Midcoast's oil and gas properties in the Sun Field have been approved
for changes in well spacing and tertiary recovery by depressurization.
The Company believes that these factors may contribute to increased volumes
and revenues for its oil and gas properties.
In the three and six month period ended June 30, 1998, the Company's
depreciation, depletion and amortization increased to $695,000 and
$1,388,000, respectively from $314,000 and $569,000 when compared to 1997.
The increase is primarily due to increased depreciation on assets acquired
in the MIT and Midla Acquisitions. Collectively, these new acquisitions
accounted for 106% and 99% of the increases of $381,000 and $819,000.
In the three and six month period ended June 30, 1998, the Company's
general and administrative expenses increased to $1,313,000 and $2,916,000,
respectively from $581,000 and $955,000 in 1997. The increase is primarily
due to increased costs associated with the management of the assets acquired
in the MIT and Midla Acquisitions. Collectively, these new acquisitions
accounted for 102% and 144% of the increase of $732,000 and $1,961,000.
In addition, the increase can be attributed to the Company's expansion of its
infrastructure to allow for continued growth.
Interest expense for the three and six months ended June 30, 1998
increased to $637,000 and $1,236,000, respectively from $401,000 and
$497,000 in 1997. The Company was servicing an average of $31.6 and $31.1
million in debt for the three and six months ended June 30, 1998 as compared
to $19.1 and $12.0 million in debt for the three and six months ended
June 30, 1997. The increased debt load in 1998 is primarily associated with
the Company's October 31, 1997 acquisition of Republic. The additional expense
related to increased debt levels was mitigated by a reduction in the
Company's weighted average interest rate. The Company's weighted average
interest rate was 8.07% and 7.96% for the three month and six-month period
ended June 30, 1998 as compared to 8.40% and 8.31% for the three month and
six-month period ended June 30, 1997.
The Company recognized net income for the three and six month period ended
June 30, 1998 of $1.8 million and $4.5 million, respectively, as compared
to $.6 million and $1.8 million for the equivalent period in 1997. Basic
earnings per share ("EPS") for the three and six month period ended June 30,
1998 increased 30% and 23%, respectively from $.23 and $.64 in 1997 to $.30
and $.79 in 1998. The Company achieved the increased EPS despite the dilutive
effects of issuing additional shares in the July 1997 common stock offering.
The significant improvement in EPS is primarily attributable to the positive
impact of accretive acquisitions consummated during 1997.
INCOME TAXES
As of December 31, 1997, the Company had net operating loss ("NOL")
carryforwards of approximately $17.0 million, expiring in various amounts
from 1998 through 2012. These NOLs were generated by the Company's
predecessor and Republic. 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 (currently estimated at
approximately $4.9 million) on the use of such carryforwards due to a change
in share holder control under the Internal Revenue Code triggered by the
Company's July 1997 common stock offering and the change of ownership created
by the acquisition of Republic. The Company believes, however, that the
limitation will not materially impact the Company's ability to utilize the
NOL carryforwards prior to their expiration. Depending on profitability, the
limitation could result in the Company's income tax expense to increase as
compared to previous years where no such limitation existed.
CAPITAL RESOURCES AND LIQUIDITY
The Company had historically funded its capital requirements through cash
flow from operations and borrowings from affiliates and various commercial
lenders. However, the capital resources of the Company were significantly
improved with the equity infusion derived from its initial and secondary
common stock offerings in August 1996 and July 1997, respectively. The net
proceeds of the Company's combined stock offerings contributed approximately
$42.1 million and significantly improved the Company's financial flexibility.
This increased flexibilty has allowed the Company to pursue acquisition and
expansion opportunities utilizing lower cost conventional bank debt financing.
At June 30, 1998, the Company's long-term debt to total capitalization ratio
was 33%.
Based on a re-evaluation of the cash flows generated from recent
acquisitions, Bank One increased the borrowing availability under the
Company's bank financing agreements (the "Credit Agreements"). On
October 31, 1997, the Credit Agreements were amended to increase the
Company's borrowing availability from $46.5 million to $80.0 million,
eliminate principal reduction requirements, lower the interest rate on
borrowings, and extend the maturity of the facility one year to August 22,
2000.
When borrowings under the 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 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 availablity. The Credit Agreements are secured by all
accounts receivable, contracts, the pledge of the stock of MIT, MLGC and 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. Midcoast was in compliance
with such financial covenants at June 30, 1998.
For the six months ended June 30, 1998, the Company generated cash flow from
operating activities of approximately $6.7 million before changes in working
capital accounts and had approximately $46.2 million available to the Company
under its Credit Agreements. At June 30, 1998, the Company had committed to
making approximately $9.5 million in capital expenditures for the remainder
of 1998. The Company believes that its Credit Agreement and funds provided
by operations will be sufficient for it to meet its operating cash needs for
the foreseeable future, and its projected capital expenditures of
approximately $9.5 million. If funds under the Credit Agreements are not
available to fund acquisition and construction projects the Company would
seek to obtain such financing from the sale of equity securities or other
debt financing. There can be no assurances that any such financing will be
available on terms acceptable to the Company. Should sufficient capital not
be available, the Company will not be able to implement its growth strategy.
RISK MANAGEMENT
According to guidelines provided by the Board, the Company enters into
exchange-traded commodity futures, options and swap contracts to reduce the
exposure to market fluctuations in price and transportation costs of energy
commodities and is not to engage in speculative trading. Approvals are
required from senior management prior to the execution of any financial
derivative. The Financial derivatives have pricing terms indexed to both the
New York Mercantile Exchange and Kansas City Board of Trade. The Company's
market exposures arise from inventory balances and fixed price purchase and
sale commitments. The Company uses the exchange-traded commodities to manage
and hedge price risk related to these market exposures.
Gas futures involve the buying and selling of natural gas at a fixed price.
Over-the-counter swap agreements require the Company to receive or make
payments based on the difference between a specificed price and the actual
price of natural gas. The Company uses futures and swaps to manage margins on
offsetting fixed-price purchase or sales commitments for physical quantities
of natural gas. Options held to hedge risk provide the right, but not the
obligation, to buy or sell energy commodities at a fixed price. The Company
utilizes options to manage margins and to limit overall price risk exposure.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
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 statements
include, without limitation, statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- 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 belives
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 1. Legal Proceedings
In June 1998, $732,910 was received by Pan Grande, of which Midcoast owns a
50% interest, from Lone Star Gas Company ("Lone Star"). This receipt
favorably concluded a dispute on a receivable balance with Lone Star on sales
which occurred in the first quarter of 1998.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 15, 1998.
Shareholders of record at the close of business on April 3, 1998 were
entitled to vote. The shareholders voted on nominations to elect six
Directors to the Board of Directors, a proposal to amend the 1996 Incentive
Stock Plan by increasing the number of shares of common stock that could be
issued under the incentive plan, and a proposal to amend the Company's
Articles of Incorporation to increase the authorized number of shares of the
Company's common stock from 10 million shares to 25 million shares and to
authorize 5 million shares of preferred stock. For additional information
concerning the Annual Meeting of Shareholders please see the Company's proxy
statement dated April 15, 1998.
<TABLE>
The Shareholders elected each of the six directors nominated for the board of
directors as follows:
<CAPTION>
<S> <C> <C> <C> <C>
Directors Votes For Votes Against Abstaining Broker No-Votes
Dan C. Tutcher 5,283,580 8,920 - -
I.J. Berthelot, II 5,284,002 8,490 - -
Richard N. Richards 5,284,002 8,490 - -
Ted Collins, Jr. 5,284,002 8,490 - -
Jerry J. Langdon 5,284,002 8,490 - -
Bruce M. Withers 5,284,002 8,490 - -
The shareholders approved the proposal to amend to the 1996 Incentive Stock
Plan as follows:
Votes For Votes Against Abstaining Broker No-Votes
Incentive Stock Plan 3,023,234 1,287,334 15,237 1,356,075
The shareholders approved the proposal to amend the Articles of Incorporation
as follows:
Votes For Votes Against Abstaining Broker No-Votes
Articles of Incorporation 2,915,592 1,389,847 20,396 1,356,045
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
EXHIBITS DESCRIPTION OF EXHIBITS
3.4 Certificate of Amendment of Articles of Incorporation of Midcoast Energy
Resources, Inc. dated May 15, 1998.
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: August 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,815,754
<SECURITIES> 0
<RECEIVABLES> 18,078,676
<ALLOWANCES> 0
<INVENTORY> 1,688,118
<CURRENT-ASSETS> 21,582,548
<PP&E> 106,561,587
<DEPRECIATION> 4,399,321
<TOTAL-ASSETS> 126,080,888
<CURRENT-LIABILITIES> 16,488,576
<BONDS> 0
0
0
<COMMON> 57,197
<OTHER-SE> 65,287,478
<TOTAL-LIABILITY-AND-EQUITY> 126,080,888
<SALES> 116,884,099
<TOTAL-REVENUES> 116,884,099
<CGS> 105,895,490
<TOTAL-COSTS> 110,200,005
<OTHER-EXPENSES> (84,650)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,235,792
<INCOME-PRETAX> 5,532,952
<INCOME-TAX> (1,043,487)
<INCOME-CONTINUING> 4,489,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,489,465
<EPS-PRIMARY> .79
<EPS-DILUTED> .76
</TABLE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MIDCOAST ENERGY RESOURCES, INC.
Midcoast Energy Resources, Inc., a Nevada corporation (the Company), does
hereby certify:
ARTICLE ONE
That the resolutions, which set forth the proposed amendments to the
Companys Articles of Incorporation, as amended, declared the amendments
advisable and in the best interest of the Company and called for the
approval and adoption of the amendments by the Company's stockholders, was
discussed and duly adopted by all the members of the Company's Board of
Directors at a meeting of the Board of Directors held on February 16, 1998.
The resolutions setting forth the proposed amendments to the Articles set
forth below: (i) increase the authorized number of shares of common stock, par
value $.01 pershare of the Company from Ten Million shares to Twenty-Five
Million shares and (ii) authorize Five Million shares of preferred stock, par
value $.001 per share. The resolutions are as follows:
NOW, THEREFORE, BE IT RESOLVED, that the Articles of Incorporation of the
Company be amended by deleting the text of the Fourth Article in its entirety
and replacing it with the following:
The authorized capital of this Corporation shall consist of (i) Twenty-Five
Million (25,000,000) shares of common stock, par value $.01 per share
(Common Stock) and (ii) Five Million (5,000,000) shares of preferred stock,
par value $.001 per share (Preferred Stock).
The designations and the powers, preferences, rights, qualifications,
limitations, and restrictions of the Common Stock and Preferred Stock are as
follows:
1. Provisions Relating to the Common Stock
(a) Each share of Common Stock of the Corporation shall have identical rights
and privileges in every aspect. The holders of shares of Common Stock shall
be entitled to vote upon all matters submitted to a vote of the stockholders
of the Corporation and shall be entitled to one vote for each share of Common
Stock held.
(b) Subject to the prior rights and preferences, if any, applicable to shares
of any Preferred Stock or any series thereof, the holders of shares of the
Common Stock shall be entitled to receive such dividends (payable in cash,
stock, or otherwise) as may be declared thereon by the board of directors at
any time from time to time out of any funds of the Corporation legally
available therefor.
(c) Subject to the prior rights and preferences, if any, applicable to shares
of any Preferred Stock or any series thereof, in the event of any voluntary
or involuntary liquidation, dissolution, or winding-up of the Corporation,
the holders of shares of the Common Stock shall be entitled to receive all of
the remaining assets of the Corporation available for distribution to its
stockholders, ratably in proportion to the number of shares of Common Stock
held by them. A liquidation, dissolution, or winding-up of the Corporation,
as such terms are used in this paragraph (c), shall not be deemed to be
occasioned by or to include any consolidation or merger of the Corporation
with or into any other corporation or corporations or other entity or a sale,
lease, exchange,or conveyance of all or a part of the assets of the
Corporation.
2. Provisions Relating to the Preferred Stock
(a) Preferred Stock. The Preferred Stock may be divided into and issued from
time to time in one or more series as may be fixed and determined by the
board of directors. The relative rights and preferences of the Preferred
Stock of each series shall be such as shall be stated in any resolution or
resolutions adopted by the board of directors setting forth the designation
of the series and fixing and determining the relative rights and preferences
thereof (a Directors Resolution). The board of director is hereby authorized
to fix and determine the powers, designations, preferences, and relative,
participating, optional or other rights, including, without limitation,
voting powers, full or limited, preferential rights to receive dividends or
assets upon liquidation, rights of conversion or exchange into Common Stock,
Preferred Stock of any series or other securities, any right of the
Corporation to exchange or convert shares into Common Stock, Preferred Stock
of any series or other securities, or redemption provision or sinking fund
provisions, as between the Preferred Stock or any series thereof and the
Common Stock, and the qualifications, limitations or restrictions thereof, if
any, all as shall be stated in a Directors Resolution, and the shares of
Preferred Stock or any series thereof may have full or limited voting powers, or
or be without voting powers, all as shall be stated in a Directors Resolution.
Except where otherwise set forth in the Directors Resolution providing for the
issuance of any series of Preferred Stock, the number of shares comprising
such series may be increased or decreased (but not below the number of shares
then outstanding) from time to time by like action of the board of directors.
The shares of Preferred Stock of any one series shall be identical with the
other shares in the same series in all respects except as to the dates from
and after which dividends thereon shall cumulate, if cumulative.
(b) Reacquired Shares of Preferred Stock. Shares of any series of any
Preferred Stock that have been redeemed (whether through the operation of a
sinking fund or otherwise), purchased by the Corporation, or which, if
convertible or exchangeable, have been converted into, or exchanged for,
shares of stock of any other class or classes or any evidences of
indebtedness shall have the status of authorized and unissued shares of
Preferred Stock and may be reissued as a part of the series of which they
were originally a part or may be reclassified and reissued as part of a new
series of Preferred Stock or as part of any other series of Preferred Stock,
all subject to the conditions or restrictions on issuance set forth in the
Directors Resolution providing for the issuance of any series of Preferred
Stock and to any filing required by law.
(c) Increase in Authorized Preferred Stock. The number of authorized shares
of Preferred Stock may be increased or decreased by the affirmative vote of
the holders of a majority of the stock of the Corporation entitled to vote
without the separate vote of holders of Preferred Stock as a class.
3. General
(a) Subject to the foregoing provisions of these Articles of Incorporation,
the Corporation may issue shares of its Common Stock from time to time for
such consideration (not less than the par value thereof) as may be fixed by
the board of directors of the Corporation, which is expressly authorized to
fix the same in its absolute and uncontrolled discretion subject to the
foregoing conditions. Shares so issued for which the consideration shall
have been paid or delivered to the Corporation shall be deemed fully paid
stock and shall not be liable to any further call or assessment thereon, and the
holders of such shares shall not be liable for any further payments in
respect of such shares.
(b) The Corporation shall have authority to create and issue rights and
options entitling their holders to purchase shares of the Corporations
capital stock of any class or series or other securities of the Corporation,
and such rights and options shall be evidenced by instrument(s) approved by
the board of directors of the Corporation. The board of directors of the
Corporation shall be empowered to set the exercise price, duration, times for
exercise, and other terms of such options or rights; provided, however, that
the consideration to be received for any shares of capital stock subject
thereto shall not be less than the par value thereof.
(c) No stockholder of this Corporation shall have, by reason of his holding
shares of any class of stock of the Corporation, any preemptive or
preferential rights to purchase or subscribe for any other shares (including
treasury shares) of any class of this Corporation now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible
into or carrying options or warrants to purchase shares of any class, whether
or not the issuance of any such shares, or such notes, debentures, bonds, or
other securities would adversely affect the dividend or voting rights of such
stockholder.
(d) Cumulative voting by any stockholder is hereby expressly denied.
and that the amendments are hereby approved, ratified and confirmed; and the
Proper Officers of the Company are hereby severally authorized and directed
to solicit the stockholders for the purpose of securing the approval of the
amendments to the Company?s Articles of Incorporation; and
RESOLVED, FURTHER, that the Proper Officers of the Company are hereby
severally authorized and directed to execute, verify and file a Certificate
of Amendment, amending the Articles of Incorporation to increase the number
of authorized shares of Common Stock from Ten Million (10,000,000) to
Twenty-Five Million (25,000,000) and to authorize Five Million (5,000,000)
shares of Preferred Stock, with the Secretary of State of Nevada upon
obtaining the requisite stockholder approval.
ARTICLE TWO
That thereafter, pursuant to a duly adopted resolution of the Board of
Directors, the Company submitted the amendments to the Companys stockholders
at the annual stockholders meeting and the holders holding shares entitling
them to exercise at least a majority of the voting power voted in favor of
the foregoing amendments.
IN WITNESS WHEREOF, the undersigned, being the duly elected officers of the
Corporation, hereby declare and certify that the facts herein stated are true
and accordingly execute this instrument as of this 15th day of May, 1998.
/s/ Dan C. Tutcher
Dan C. Tutcher,
President
/s/ Duane S. Herbst
Duane S. Herbst,
Secretary
THE STATE OF TEXAS
COUNTY OF HARRIS
Before me, the undersigned authority, on this day personally appeared Dan C.
Tutcher, President of Midcoast Energy Resources, Inc., a Nevada corporation,
known to me to be the person whose name is subscribed to the foregoing
instrument and acknowledged to me that he executed the same for the purposes
and consideration therein expressed, in the capacity stated, and as the act
and deed of said Corporation.
Given under my hand and seal of office this 13th day of May, 1998.
/s/ Donna J. Haddock
Notary Public, the State of Texas
THE STATE OF TEXAS
COUNTY OF NUECES
Before me, the undersigned authority, on this day personally appeared Duane
S. Herbst, Secretary of Midcoast Energy Resources, Inc., a Nevada
corporation, known to me to be the person whose name is subscribed to the
foregoing instrument and acknowledged to me that he executed the same for the
purposes and consideration therein expressed, in the capacity stated, and as
the act and deed of said Corporation.
Given under my hand and seal of office this 13th day of May, 1998.
/s/ Barbara Jordan
Notary Public, the State of Texas
