<PAGE>
UNITED STATES
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: November 9, 1999
MIDCOAST ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Texas 0-8898 76-0378638
- ----------------------------------- ----------------------------------- -----------------------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
1100 Louisiana Street, 29th Floor, Houston, Texas 77002
- -------------------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 650-8900
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
Item 7. Financial Statements & Exhibit
Financial Statements
<TABLE>
<CAPTION>
Page No.
----------
<S> <C>
Kansas Pipeline Company
Report of Independent Auditors 3
Combined Balance Sheets as of September 30, 1999 (Unaudited),
December 31, 1998 and December 31, 1997 4
Combined Statements of Income for the nine months ended
September 30, 1999 (Unaudited) and 1998 (Unaudited),
and for the years ended December 31, 1998, 1997 and 1996 6
Combined Statements of Capitalization for the nine months
then ended September 30, 1999 (Unaudited) and for the
years then ended December 31, 1998, 1997 and 1996 7
Combined Statements of Cash Flows for the nine months ended
September 30, 1999 (Unaudited) and 1998 (Unaudited), and
for the years ended December 31, 1998, 1997 and 1996 8
Notes to Combined Financial Statements 9
Midcoast Energy Resources, Inc.
Basis of Presentation of Unaudited Pro Forma Combined
Financial Statements 22
Unaudited Pro Forma Combined Balance Sheet as of
September 30, 1999 23
Unaudited Pro Forma Combined Statements of Operations
for the nine months ended September 30, 1999 and for
the year ended December 31, 1998 24
Notes to Unaudited Pro Forma Combined Financial Statements 26
</TABLE>
2
<PAGE>
Report of Independent Auditors
The Partners
Kansas Pipeline Company
We have audited the accompanying combined balance sheets as of December 31, 1998
and 1997, of the partnerships listed in Note 1, and the related combined
statements of income, capitalization, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the partnerships' 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 combined financial position of the partnerships
listed in Note 1 at December 31, 1998 and 1997, and the combined results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Kansas City, Missouri
March 15, 1999
3
<PAGE>
KANSAS PIPELINE COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------------
1999 1998 1997
--------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Utility plant:
Gas plant in service $ 91,046,163 $ 89,859,271 $ 88,458,574
Construction work-in-process 1,381,596 1,409,450 423,042
------------ ------------ ------------
92,427,759 91,268,721 88,881,616
Less accumulated depreciation (29,789,426) (27,531,853) (24,661,725)
------------ ------------ ------------
Total utility plant 62,638,333 63,736,868 64,219,891
Other assets:
Transaction costs, net of accumulated amortization of $3,936,671 in 1999,
$3,565,178 in 1998, and $3,062,532 in 1997 4,945,833 5,322,818 5,825,464
Certification costs, net of accumulated amortization of $388,861 in 1999,
$360,913 in 1998, and $323,650 in 1997 82,746 110,694 147,957
Filing costs, net of accumulated amortization of $1,930,939 in 1999,
$1,794,733 in 1998, and $1,509,073 in 1997 2,089,512 1,068,523 844,441
Regulatory assets, net of accumulated amortization of $1,307,388 in 1999,
$763,018 in 1998, and $559,548 in 1997 5,667,347 6,242,271 6,379,674
Other property, plant and equipment, net of accumulated depreciation of
$90,579 in 1999, $85,550 in 1998, and $77,453 in 1997 711,016 715,190 21,287
------------ ------------ ------------
Total other assets 13,496,454 13,459,496 13,218,823
Current assets:
Cash and restricted cash (NOTE 4) 14,164,563 13,808,145 12,411,969
Accounts receivable:
Customer, net of allowance of $0 in 1999, $794,533 in 1998 and $283,926
in 1997 5,237,042 4,848,800 7,073,149
Affiliates 559,418 1,577,220 118,695
Other 561,301 691,176 393,471
Other current assets 477,069 1,966,966 598,005
------------ ------------ ------------
Total current assets 20,999,393 22,892,307 20,595,289
------------ ------------ ------------
Total assets $ 97,134,180 $100,088,671 $ 98,034,003
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
KANSAS PIPELINE COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------------
1999 1998 1997
--------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
CAPITALIZATION & LIABILITIES
- ----------------------------
Capitalization:
Partner's capital (NOTE 3) $ 19,634,783 $ 22,509,753 $ 13,036,392
Long-term debt (NOTE 4) 58,126,673 60,306,598 64,370,335
------------ ------------ ------------
Total capitalization 77,761,456 82,816,351 77,406,727
General partners' interest in Partnerships 156,809 148,689 133,116
Restricted pipeline royalties (NOTE 6) 3,090,011 2,741,482 2,276,501
Current liabilities:
Accounts payable:
Trade 2,569,568 2,714,880 5,620,798
Affiliates 59,538 87,686 509,570
Provision for refund (NOTE 1) - - 451,620
Accrued property taxes 1,265,783 735,918 991,469
Other accrued liabilities 1,971,406 779,928 945,602
Current maturities of long-term debt (NOTE 4) 4,259,609 4,063,737 3,698,600
Revolving credit borrowings (NOTE 4) 6,000,000 6,000,000 6,000,000
------------ ------------ ------------
Total current liabilities 16,125,904 14,382,149 18,217,659
------------ ------------ ------------
Total capitalization and liabilities $ 97,134,180 $100,088,671 $ 98,034,003
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
KANSAS PIPELINE COMPANY
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------------------- -------------------------------------------------
1999 1998 1998 1997 1996
-------------- ------------ ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues (NOTE 6):
Natural gas sales $ 8,946,678 $22,926,539 $26,939,011 $ 80,438,246 $ 95,921,552
Transmission 23,097,244 18,862,933 27,207,461 11,722,388 4,863,050
----------- ----------- ----------- ------------ ------------
Total operating revenues 32,043,922 41,789,472 54,146,472 92,160,634 100,784,602
Operating expenses (NOTE 6):
Natural gas purchases and
transmission costs 8,618,240 19,759,800 22,174,004 61,811,026 74,096,896
Other operating and
maintenance expenses 10,927,193 8,248,160 10,814,709 13,225,799 13,822,259
Taxes other than income
taxes 1,109,875 1,343,058 1,478,470 1,989,372 2,290,325
Depreciation 1,597,774 1,664,865 2,225,136 2,152,595 2,117,280
Amortization 1,925,099 1,443,537 2,018,343 2,709,674 2,110,227
----------- ----------- ----------- ------------ ------------
Total operating expenses 24,178,181 32,459,420 38,710,662 81,888,466 94,436,987
----------- ----------- ----------- ------------ ------------
Operating income 7,865,741 9,330,052 15,435,810 10,272,168 6,347,615
Other income (expense):
Interest income 642,097 706,718 942,417 1,525,455 645,415
Interest expense (4,941,082) (5,244,933) (6,953,182) (7,304,742) (8,355,564)
Gain on disposal of assets 26,094 63,389 64,984 10,420 14,084
Adjustments required by
regulatory orders (NOTE 2) - - - (9,182,135) (2,594,984)
Other (NOTE 10) 23,751 (1,066) (1,095) 3,316,804 29,624,054
----------- ----------- ----------- ------------ ------------
Total other income (expense) (4,249,140) (4,475,892) (5,946,876) (11,634,198) 19,333,005
----------- ----------- ----------- ------------ ------------
Income (loss) before general
partner's interest 3,616,601 4,854,160 9,488,934 (1,362,030) 25,680,620
General partner's interest
in income of Partnerships (8,120) (9,382) (15,573) (4,422) (19,399)
----------- ----------- ----------- ------------ ------------
Net income (loss) $ 3,608,481 $ 4,844,778 $ 9,473,361 $ (1,366,452) $ 25,661,221
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
KANSAS PIPELINE COMPANY
COMBINED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
Partners' Long-Term
Capital Debt Total
------------ ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 3,606,025 $ 81,435,205 $ 85,041,230
Net income 25,661,221 - 25,661,221
Net change in long-term debt - (13,366,270) (13,366,270)
------------ ------------ ------------
Balance at December 31, 1996 29,267,246 68,068,935 97,336,181
Net income (loss) (1,366,452) - (1,366,452)
Withdrawal by partner (14,864,402) - (14,864,402)
Net change in long-term debt - (3,698,600) (3,698,600)
------------ ------------ ------------
Balance at December 31, 1997 13,036,392 64,370,335 77,406,727
Net income 9,473,361 - 9,473,361
Net change in long-term debt - (4,063,737) (4,063,737)
------------ ------------ ------------
Balance at December 31, 1998 22,509,753 60,306,598 82,816,351
Net income (unaudited) 3,608,481 - 3,608,481
Withdrawal by partner (unaudited) (6,483,451) - (6,483,451)
Net change in long-term debt (unaudited) - (2,179,925) (2,179,925)
------------ ------------ ------------
Balance at September 30, 1999 (unaudited) $ 19,634,783 $ 58,126,673 $ 77,761,456
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
KANSAS PIPELINE COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------------------- -------------------------------------------------
1999 1998 1998 1997 1996
------------ ----------- ------------ ------------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,608,481 $ 4,844,778 $ 9,473,361 $(1,366,452) $ 25,661,221
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization 3,522,873 3,108,412 4,243,479 4,862,269 4,227,507
Provision for doubtful
accounts 359,006 261,558 510,607 245,733 (89,116)
General partner's
interest in income of
Partnerships 8,120 9,382 15,573 4,422 19,399
Adjustments required by
regulatory orders - - - 9,182,135 1,500,000
Gain on disposal of
assets (NOTE 10) (26,094) (63,389) (64,984) (10,420) (29,514,084)
Restricted pipeline
royalty payables 348,529 322,938 464,981 421,798 381,409
Changes in other assets
and liabilities:
Accounts receivable:
Customer and other (617,373) 3,137,590 1,416,037 11,493,051 (8,081,894)
Affiliates 1,017,802 - (1,458,525) (91,279) (12,914)
Accounts payable:
Trade (145,311) (2,500,027) (2,905,918) (10,962,415) 8,367,137
Affiliates (28,148) (432,749) (421,884) (120,612) 427,112
Provision for refund - (451,620) (451,620) (6,095,128) 4,622,557
Accrued property taxes 529,865 351,291 (255,551) (57,903) (60,810)
Other current assets
and liabilities, net 2,587,910 1,000,991 (1,609,399) (4,828,955) 2,214,818
----------- ----------- ----------- ------------ -----------
Net cash provided by
operating activities 11,165,660 9,589,155 8,956,157 2,676,244 9,662,342
INVESTING ACTIVITIES
Additions to utility plant (1,244,853) (2,094,646) (2,675,149) (5,285,936) (7,962,733)
Payments of filing costs (1,126,640) (110,707) (509,742) (226,162) (267,207)
Additions to regulatory
assets - (63,380) (66,067) (266,685) (387,972)
Additions to other property,
plant and equipment (855) (702,000) (702,000) (3,483) (1,954)
Proceeds from sale of assets
(NOTE 10) 30,610 81,546 91,577 15,161 36,344,832
----------- ----------- ----------- ------------ -----------
Net cash provided by (used
in) investing activities (2,341,738) (2,889,187) (3,861,381) (5,767,105) 27,724,966
FINANCING ACTIVITIES
Increase in revolving credit
facilities - - - 6,000,000 -
Payments on long-term debt (1,984,053) (1,805,781) (3,698,600) (13,366,270) (3,492,693)
Withdrawals by partners (6,483,451) - - (14,864,402) -
----------- ----------- ----------- ------------ -----------
Net cash used in financing
activities (8,467,504) (1,805,781) (3,698,600) (22,230,672) (3,492,693)
----------- ----------- ----------- ------------ -----------
Net increase (decrease) in
cash 356,418 4,894,187 1,396,176 (25,321,533) 33,894,615
Cash at beginning of period 13,808,145 12,411,969 12,411,969 37,733,502 3,838,887
----------- ----------- ----------- ------------ -----------
Cash at end of period $14,164,563 $17,306,156 $13,808,145 $ 12,411,969 $37,733,502
=========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
KANSAS PIPELINE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
AND
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 WITH REPORT OF INDEPENDENT AUDITORS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, SIGNIFICANT TRANSACTIONS AND BASIS OF PRESENTATION
In November 1999, Midcoast Energy Resources, Inc. (MRS), a public company
primarily engaged in transportation, gathering, processing and marketing of
natural gas and other petroleum products, acquired the partnership interests in
the predecessor Kansas Pipeline Company (KPC1), Riverside Pipeline Company, LP
(RPCLP), Mid-Kansas Partnership (MKP) and MarGasCo Partnership (MarGasCo). Under
the terms of the agreement, MRS paid cash consideration which included repayment
of existing senior secured notes and other indebtedness and a prepayment penalty
in connection with the early retirement of debt. The businesses acquired by MRS
are hereinafter referred to as the new Kansas Pipeline Company (KPC). The
accompanying KPC combined financial statements include the accounts of KPC1,
MKP, RPCLP and MarGasCo and the expenses, debt and corresponding debt assets and
liabilities relating to the acquired businesses allocated from their former
parent, Syenergy Pipeline Company, L.P. (Syenergy).
Syenergy was formed as a limited partnership which holds ownership interests in
the following partnerships: RPCLP, KPC1, (formerly known as Riverside Pipeline
Partnership), MKP and MarGasCo , collectively referred to as the Partnerships.
Syenergy is wholly owned by Bishop Pipeline Company (Bishop) and a subsidiary of
Bishop.
The Partnerships own and operate interstate natural gas pipelines in the states
of Oklahoma, Kansas and Missouri and acquire natural gas from independent
producers for resale.
Syenergy and Bishop own a 99.9% and a 0.1% general partnership interest in the
Partnerships, respectively.
In 1998, pursuant to a Federal Energy Regulatory Commission (FERC) order,
Syenergy completed a restructuring which resulted in combining into KPC1 the
former businesses of KansOk Partnership (KOP), Kansas Pipeline Partnership
(KPP), Riverside Pipeline Partnership (RPP) and Riverside Pipeline Company, L.P.
(RPCLP). In addition, on December 31, 1998, Kansas Pipeline Operating Company
(KPOC) was also merged into KPC1. These restructurings have been accounted for
as a combination of entities under common control in a manner similar to a
pooling-of-interests with the assets and liabilities recorded at historical
costs.
KPC1 and certain major customers have contracts permitting KPC1 to charge the
maximum rate authorized by the applicable regulatory agency for transportation
of gas through KPC1's pipelines. Additionally, effective May 11, 1998, the price
of natural gas transportation services to certain major customers of KPC1 became
regulated by the FERC. As KPC1's transmission rates and operations are
regulated, KPC1 is subject to the requirements of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." This accounting requires that certain costs and revenues be
recorded in a manner to reflect the economic effects of rate regulation.
9
<PAGE>
All significant interpartnership balances and transactions have been eliminated.
UNAUDITED INTERIM INFORMATION
The accompanying unaudited combined financial information has been prepared by
KPC in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission. The unaudited information furnished reflects all
adjustments, all of which were of a normal recurring nature, which are, in the
opinion of KPC, necessary for a fair presentation of the results for the
interim periods presented. Operating results for the nine-month period ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999.
REVENUE RECOGNITION
The Partnerships recognize revenues from the transportation and sale of natural
gas as services are rendered or as product is delivered to customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at 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. During 1998,
a $923,030 trade liability was written off into income, due to a change in
facts, which did not exist at December 31, 1997.
RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the presentation of amounts in the 1998 financial statements.
These reclassifications had no effect on results of operations in either year.
UTILITY PLANT
Utility plant is stated at cost. For constructed assets, these costs include
contracted services, materials and indirect charges for engineering, supervision
and general and administrative costs. Utility plant includes allowance for funds
used during construction (AFUDC). No AFUDC was capitalized for the nine months
ended September 30, 1999 or 1998. For the years ended 1998, 1997, and 1996, the
amount of AFUDC capitalized was $0, $225,052, and $0, respectively. Depreciation
is provided on the straight-line method over the useful lives of the assets
ranging from three to 43 years.
10
<PAGE>
Expenditures for maintenance and repairs are charged to operations as incurred.
Expenditures for renewals and betterments which materially extend the useful
lives of assets or increase their productivity are capitalized.
TRANSACTION COSTS
Transaction costs include loan fees and legal expenses associated with the
formation of Syenergy and the Partnerships and replacement of a term note with
the Senior Secured Notes in 1992. The transaction costs are being amortized on a
straight-line method over 16 to 18 years.
CERTIFICATION COSTS
Certification costs include costs incurred by the Partnerships in connection
with the filing of applications for orders and certificates authorizing the
transportation, purchase and resale of natural gas. Such costs are being
amortized on a straight-line basis over 10 years.
FILING COSTS
Filing costs include costs incurred by the Partnerships in connection with the
filing of applications for orders for changes in existing rates and/or rate
design. Costs of $2,361,786, $2,353,513 and $2,235,336 are being amortized on a
straight-line basis over three to five years as of September 30, 1999 and
December 31, 1998 and 1997, respectively. Additional costs of $1,658,665,
$509,743 and $118,178 as of September 30, 1999 and December 31, 1998 and 1997,
respectively, were to be amortized over the period(s) stated in final rate case
orders to be issued by the governing regulatory agency in future periods.
REGULATORY ASSETS
Regulatory assets include certain prior year costs that were approved for future
rate recovery in commission orders received from the Kansas Corporation
Commission (KCC) during 1995. The rate order provided that $11.4 million of
certain prior year costs (Market Entry costs) would be recovered from future
rates and, accordingly, should be amortized on a straight-line basis over 30
years. The unamortized balance of this regulatory asset was written off in 1997
(see Note 2). The rate orders specified that $6.1 million of costs classified
as accounts receivable at December 31, 1994 would be recovered from future rates
and such amount was reclassified as regulatory assets and is being amortized on
a straight-line basis over 30 years. The remaining net regulatory asset balances
primarily relate to costs incurred to obtain approval from the KCC for certain
contracts entered into by KPP. These costs are being amortized on a straight-
line basis over 5 years beginning in 1999.
11
<PAGE>
NATURAL GAS FUTURES CONTRACTS
MarGasCo utilizes natural gas futures contracts to hedge its financial exposure,
pursuant to fixed-price sales commitments, resulting from fluctuations in the
price of natural gas. Gains and losses are recognized concurrent with the
recognition of the economic impact of the underlying exposures using the
deferral method of accounting. Under the deferral method, gains and losses
resulting from changes in value of hedge contracts are deferred in other
liabilities and assets and recognized as a component of the cost of natural gas
purchases when the anticipated purchase occurs.
INCOME TAXES
The accompanying financial statements do not include a provision for income tax.
Since the predecessor entities which comprise KPC are not subject to tax, the
partners include their proportionate share of taxable income or loss in their
income tax returns.
CASH
For the purpose of the statements of cash flows, KPC considers cash to include
currency on hand (including restricted cash) and demand deposits with banks or
other financial institutions.
NATURAL GAS SALES
Prior to FERC regulation, certain Partnerships recorded natural gas sales to
major customers under long-term contracts based on an estimated average price
for natural gas purchases throughout the term of the contract period.
Differences between authorized prices based on the actual cost of natural gas
and the estimated average price charged are settled either contractually or
through regulatorily authorized Purchased Gas Adjustments.
PROVISION FOR REFUND
Provision for refund at December 31, 1996 included an estimate for possible
refund of amounts previously collected from customers relating to KOP's pending
rate case (see Regulatory Asset above) before the FERC in which KOP was seeking
increased rates and deferred revenues of $3.6 million related to the KPP rate
proceeding described in Note 9. In 1997, a portion of this provision was
refunded pursuant to the Global Settlement. As of December 31, 1997, the
provision for refund balance represents an estimate of additional amounts
previously collected by KOP which is expected to be refunded to its customers.
The amount of provision for refund at December 31, 1997 was paid to customers in
1998.
12
<PAGE>
2. REGULATORY ADJUSTMENTS
In July 1997, KPP entered into a Global Settlement with Western Resources, Inc.
and the KCC regarding a number of issues under review before the KCC, the FERC,
the Kansas Court of Appeals and the Missouri Public Service Commission (MPSC).
The Global Settlement, entered into while under the jurisdiction of the KCC,
established transportation rates for Western Resources, Inc., recognized the
elimination of Market Entry costs from current rates, authorized the recovery of
certain transition and contract reformation costs, and provided for the
unbundling and transfer of supply functions to Western Resources, Inc. This
settlement arose from proceedings initiated by the KCC in a review of KPP's
services to Western Resources, Inc. during a period when KPP was under the
jurisdiction of the KCC. As a result of the Global Settlement, the remaining
unamortized Market Entry costs of $9.2 million were written off in 1997. The
adjustment to reflect the write-off of these costs is reflected in the 1997
combined statement of income as an adjustment required by regulatory orders.
On June 11, 1996, RPCLP and MKP entered into a Stipulation and Agreement with
the MPSC regarding gas sold to Missouri customers for the period from July 1,
1992 through June 30, 1996. Under the Stipulation and Agreement, MKP paid
$1,350,000 in 1996 and an additional $1,500,000 in 1997 to Missouri Gas Energy
(MGE). The refund, which has been determined by the Partnerships and its
affiliates to relate to overearnings of KOP, is being paid by MKP to MGE and
reimbursed by and charged to KOP. The portion of the refund related to prior
years, $2,594,984, is reflected in the 1996 combined statement of income as an
adjustment required by regulatory orders.
3. PARTNERS' CAPITAL
In connection with the formation of Syenergy, significant debt was obtained to
finance the purchase of the Partners' interests. As the historical cost basis of
certain assets acquired was not revalued, the transactions to effect the
formation of Syenergy resulted in an initial partners' deficit of $10,100,695.
Upon formation of Syenergy, Bishop, as the sole general partner, and Bishop Gas
Transmission Company, Chase Manhattan Capital Corporation and EON-Syenergy DRII
Company, as the limited partners, had sharing percentages and ownership
interests of 55.625%, 10.8477%, 30.2949% and 3.2324%, respectively.
In 1997, Bishop Pipeline Company purchased the limited partnership interests in
Syenergy previously owned by Chase Manhattan Capital Corporation and EON-
Syenergy DRII Company. As a result, Bishop Pipeline Company had a sharing
percentage of 55.625% related to its general partnership interest and 33.5273%
related to its limited partnership interests as of December 31, 1998 and 1997.
The Syenergy Partnership Agreement (the Partnership Agreement) required that the
capital accounts for each partner be maintained in accordance with tax
regulations.
13
<PAGE>
Income, loss and distributions were to be allocated in accordance with the
sharing percentages of the partners with the exception of certain Syenergy
transaction costs for which the amortization was allocated solely to the limited
partners. In addition, the Partnership Agreement provided that no limited
partner could be allocated losses for any year to the extent that such
allocation would create or increase the deficit in the limited partner's tax
basis capital account. Because the tax basis capital accounts of limited
partners at the date of partnership formation exceeded those determined in
accordance with GAAP by approximately $18 million, income, loss and
distributions for financial reporting purposes were allocated based on sharing
percentages unless the capital deficit of the limited partners for financial
reporting purposes exceeded approximately $18 million.
As discussed in Note 1, in November 1999, MRS purchased the partnership
interests in KPC1, MKP and MarGasCo and in conjunction with this transaction the
senior secured notes and other indebtedness were retired.
4. BORROWINGS
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Senior Secured Notes $62,386,282 $64,370,335 $68,068,935
Less current portion (4,259,609) (4,063,737) (3,698,600)
----------------------------------------------------------
$58,126,673 $60,306,598 $64,370,335
==========================================================
</TABLE>
The 9.64% Senior Secured Notes were issued on June 22, 1992. Principal and
interest on the Senior Secured Notes is due semiannually on each June 30 and
December 30 until the principal is paid in full. The Senior Secured Notes mature
on December 30, 2008. These borrowings are collateralized by substantially all
the assets of Syenergy and the Partnerships. The Senior Secured Notes contain
various restrictive covenants which include requirements for the maintenance of
specific financial ratios and certain other provisions limiting the incurrence
of additional debt, payment of distributions and capital expenditures. Syenergy
is required to maintain specified cash reserves in order to permit the payment
of distributions. The specified cash reserve balance was $10,000,000 as of
September 30, 1999 and as of December 31, 1998 and 1997, respectively.
14
<PAGE>
As of December 31, 1998, long-term debt maturities during each of the next five
years were as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------- ---------
<S> <C>
1999 $4,063,737
2000 4,464,923
2001 4,905,715
2002 5,390,023
2003 5,922,143
</TABLE>
REVOLVING CREDIT BORROWINGS
In 1997 and 1996, Syenergy and MarGasCo had available credit facilities from a
primary lending bank totaling $7,500,000 and $15,000,000 for the issuance of
letters of credit, respectively. During 1998, management reevaluated its credit
needs and chose to reduce the MarGasCo credit facility to $7,500,000 from
$15,000,000. Another reevaluation of credit needs was conducted in 1999. As a
result, the Syenergy credit facility was increased from $7,500,000 to
$10,000,000 while the MarGasCo credit facility was reduced from $7,500,000 to
$5,000,000. These facilities require payment of a commitment fee at an annual
rate of 1/2% of the unused portion and 1.6% of the amount of letters of credit
outstanding. As of September 30, 1999, these facilities were set to expire on
December 31, 2001. The Syenergy credit facility allows Syenergy to choose
between various interest rate options. At September 30, 1999, the interest rate
options available were (i) the base rate, as defined, plus a borrowing margin of
1% or (ii) the Eurodollar rate plus a borrowing margin of 2%. The amount drawn
against the Syenergy credit facility at September 30, 1999 and December 31, 1998
and 1997 was $6,000,000. Letters of credit totaling $1,350,000, $480,000 and
$1,638,000 were issued against the available balance of the MarGasCo credit
facility at September 30, 1999 and December 31, 1998 and 1997, respectively.
These letters of credit were issued to support obligations under gas purchase
contracts entered into by MarGasCo.
Syenergy paid $2,204,490 and $2,262,073 in interest relating to the 9.64% Senior
Secured Notes and revolving credit facilities during the nine months ended
September 30, 1999 and 1998, respectively. Syenergy paid $7,042,207, $7,236,117
and $8,157,174 in interest relating to the 9.64% Senior Secured Notes and
revolving credit facilities during the years ended December 31, 1998, 1997 and
1996, respectively.
5. MAJOR CUSTOMERS
Operating revenues consist of sales of natural gas to industrial users, sales
for resale and transportation revenues relating to customers in the states of
Kansas, Missouri, Colorado and Oklahoma. Two customers have outstanding accounts
receivable balances of $2,035,657 and $1,256,380 at September 30, 1999 and
comprise approximately 44% and
15
<PAGE>
27% of total operating revenues for the nine months ended September 30, 1999,
respectively. These two customers had outstanding accounts receivable balances
of $2,021,199 and $2,020,862 at December 31, 1998 and comprised approximately
35% and 41% of total 1998 operating revenues, respectively. (See also Note 6).
6. CONTRACT COMMITMENTS
REVENUE COMMITMENTS
The Partnerships had long-term sales contracts through October 2009 with two
major customers in which the Partnerships had committed to make available for
sale up to 105,666 Mcf of natural gas per day. However, the respective gas
supply functions were assigned to those customers on August 1, 1997 and June 1,
1998, and as a result, the Partnerships (excluding MarGasCo) no longer purchase
and resell natural gas. The elimination of these supply services has had no and
is not expected to have any material impact on the Partnerships' gross margin.
The Partnerships have long-term transportation contracts through October 2009
with two major customers in which the Partnerships have committed to transport
up to 149,457 Mcf of natural gas (which includes the 105,666 Mcf mentioned in
the preceding paragraph) per day based on rates authorized by the FERC. Certain
sales and transportation contracts totaling 62,568 MMBtus per day have been
extended on a transportation-only basis through October 2014. In addition,
transportation contracts totaling 13,757 MMBtus per day extend to March and
September 2017.
PURCHASE COMMITMENTS
The Partnerships have an agreement (the Agreement) to lease capacity of 90,000
MMBtus per day in an Oklahoma intrastate pipeline system for the purpose of
providing intrastate gas transportation services. Monthly rental payments are
based on the actual volume of MMBtus transported through the leased pipeline, as
defined, subject to minimum monthly payments. The minimum monthly payments are
derived from minimum yearly lease obligations stipulated in the Agreement.
Beginning November 1, 1998, the minimum yearly lease obligation for the
subsequent 12-month period was $1,524,000. For the 12-month periods ended
October 31, 1998 and 1997, the minimum yearly lease obligation was $1,320,000.
The Agreement is effective until October 31, 2009. The Partnerships incurred
expenses under the Agreement of $1,147,733 and $1,024,741 for the nine months
ended September 30, 1999 and 1998, respectively. The Partnerships incurred
expenses under the Agreement of $1,461,741, $1,748,893, and $2,237,526 for the
years ended December 31, 1998, 1997, and 1996, respectively.
OTHER COMMITMENTS
Pursuant to a contractual agreement, Syenergy is obligated to pay a royalty to
certain affiliated parties based on 1.5% of total transportation revenues plus
the gross margin on
16
<PAGE>
gas sales. Accrued royalties of $3,090,011, $2,741,482 and $2,276,501 at
September 30, 1999 and December 31, 1998 and 1997, respectively, have been
recorded. The timing of such royalty payments is restricted by the terms of a
Syenergy credit agreement.
7. RETIREMENT PLAN
KPC1 has a retirement plan that qualifies as a 401(k) plan as defined by the
Internal Revenue Code and covers all eligible pipeline employees. Employees may
make voluntary contributions of pretax wages up to 22% of their annual salary as
of December 31, 1998. KPC1 may match up to 50% of the first 6% of employee
contributions. For the nine months ended September 30, 1999 and 1998, KPC1
incurred $50,258 and $42,438, respectively, of employer matching contribution
expense. For the years ended December 31, 1998, 1997, and 1996, KPC1 incurred
$56,212, $66,582, and $63,057, respectively, of employer matching contribution
expense.
8. OPERATING LEASES
For the nine months ended September 30, 1999 and 1998, Syenergy paid $494,808
and $435,382, respectively, in rental expense for buildings and miscellaneous
operating equipment. Syenergy paid $583,724, $442,440, and $388,052 in rental
expense for buildings and miscellaneous operating equipment during 1998, 1997,
and 1996, respectively.
Aggregate future minimum lease payments under noncancelable operating leases
(excluding the Oklahoma intrastate pipeline system lease discussed in Note 6) at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------- ----------
<S> <C>
1999 $ 530,633
2000 437,032
2001 106,367
2002 94,824
2003 92,412
Thereafter 1,327,500
</TABLE>
9. CONTINGENCIES
REGULATORY CONTINGENCIES
KPP received a regulatory order from the KCC in December 1996 requiring a write-
off of certain deferred costs, a refund of revenues received as a result of the
inclusion of these costs in the rate base and a refund of revenues received from
direct bills related to these deferred costs. Upon appeal, the Kansas Court of
Appeals granted a stay of the order in March 1997, which required, among other
things, that the Partnerships deposit, under bond, the amount of $7.2 million
related to amounts previously collected from customers
17
<PAGE>
for potential future refunds if ultimately required. As of December 31, 1996,
the Parnerships had deferred costs of approximately $11.4 million that would be
written off and deferred revenues of approximately $3.6 million that could be
required to be refunded, if these items were ultimately disallowed.
Pursuant to the terms of a July 1997 Global Settlement, KPP refunded $7.7
million to one of its customers in September 1997, and KPP wrote off remaining
unamortized Market Entry costs of $9.2 million. In addition, KPP received a
payment of $7.5 million representing compensation for transition and contract
reformation costs under the settlement agreement.
In October 1997, the FERC entered an Order which asserted its jurisdiction over
KPC1, set final rates associated with KOP proceedings then pending, established
initial rates for the jurisdictional pipeline entities, and required the
unbundling and assignment of gas supply services. The Syenergy pipeline entities
filed a motion for reconsideration in November 1997, based on rate, service,
unbundling and other matters contained in the FERC Order. The FERC granted KOP's
request in December 1997 and stayed all issues, except its findings with regard
to KOP rates, which it made final at that time.
In February 1998, KPC1 filed a motion acceding to FERC jurisdiction and
requesting interim relief. In April 1998, the FERC issued an Order which lifted
its stay on the October 1997 Order, granted KPC1's motion acceding to FERC
jurisdiction and requesting interim relief, and instructed KPC1 to file a
Natural Gas Act Section 4 rate case within 16 months of the effective date of
the FERC's assertion of jurisdiction. The Natural Gas Act Section 4 rate case
was filed by KPC1 on August 27, 1999.
Also in 1998, the KCC issued an order dismissing consideration of the sale in
prior years of contracts (see Note 10) to a third party.
As part of an annual Actual Cost Adjustment review by the MPSC of charges paid
by one of the Partnerships' customers to its suppliers, the MPSC staff has
recommended a disallowance of approximately $4.5 million paid by this customer
to the Partnerships for gas supply between July 1996 and June 1997. Both the
customer and the Partnerships vigorously oppose this recommendation on the
grounds that a previous settlement with the MPSC precludes it from disallowing
these charges. In addition, the Partnerships have filed motions to dismiss due
to MPSC's lack of jurisdiction and failure to provide sufficient evidence. These
motions are now under appeal, and the MPSC is precluded from taking further
action until further court order. While management believes the MPSC staff
recommendation is without merit and materially overstated, any potential
disallowance, which would be charged to income when any resulting refund became
probable, by the MPSC would be mitigated by an extension in the term of the
customer contract as provided for in the contract.
The Partnerships cannot predict the outcome of the current pending or any future
FERC, KCC, MPSC or any other regulatory actions (including the above mentioned
18
<PAGE>
proceedings) now or in the future. Future additional adjustments to the
Partnerships' net assets to reflect the economic effects of future rate
regulations are possible.
BILLING DISPUTES
As of September 30, 1999, the Partnerships have billing disputes with customers
totaling approximately $870,000. As of December 31, 1998, the Partnerships had
billing disputes with customers totaling approximately $1,430,000. Management
believes they will collect all of the disputed receivables.
10. SALES OF CONTRACTS
On November 26, 1996, the Partnerships sold certain gas contracts providing for
future gas deliveries to KN Interstate Gas Transmission Co. (KN) for $29,500,000
which resulted in a gain for the same amount. The sale was negotiated on a
bundled basis by Syenergy. The proceeds were allocated to the Partnerships
based on the net present value of estimated future cash flows related to the
contracts sold and were included in other income. KN also agreed to reimburse
KPOC and KPP for certain costs incurred to date related to the contracts.
11. AFFILIATED NONRECURRING REIMBURSEMENTS
In 1997, a consulting firm completed a review of the transfer pricing and cost
allocation methodologies between Syenergy and Bishop which had commenced in the
prior year. Of the $2.9 million of originally identified costs incurred by
Bishop on behalf of Syenergy, the consulting firm concluded that $1.4 million of
those costs should be allocated to Syenergy and reimbursed to Bishop of which
$0.8 million was included in other operating and maintenance expense in 1997 and
$0.6 million was recorded in 1996. An officer of Bishop owns an interest in the
consulting firm. The above review was substantially complete prior to the
officer joining Bishop.
In another matter, Bishop reimbursed the Partnerships in 1999 approximately
$1,370,000 of legal costs related to litigation previously filed by Syenergy,
Bishop and certain other affiliates.
12. FINANCIAL INSTRUMENTS AND FAIR VALUES
The Partnerships estimate the fair value of their financial instruments using
available market information and appropriate valuation methodologies. As a
result, the following estimates do not necessarily represent the values the
Partnerships could realize in a current market exchange. Although management is
not aware of any factors that would affect the estimated fair values at December
31, 1998, those amounts have not been comprehensively revalued for purposes of
these financial statements since that date. Therefore, estimates of fair value
at December 31, 1998 may differ significantly from the
19
<PAGE>
amounts presented below. The carrying amounts and estimated fair values of the
Partnerships' financial instruments at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------------------------------
<S> <C> <C>
Financial assets:
Cash $13,808,145 $13,808,145
Financial liabilities:
Senior Secured Notes $64,370,335 $70,523,643
</TABLE>
At December 31, 1998, the carrying values of the Partnerships' cash approximates
fair value. The estimated fair value of the Senior Secured Notes were based on
the present value of estimated future cash flows using a discount rate based on
the risks involved.
MarGasCo utilizes natural gas futures contracts to hedge its financial exposure,
pursuant to fixed-price sales commitments, resulting from fluctuations in the
price of natural gas. At September 30, 1999, MarGasCo had 148 futures contracts
for the purchase of 1,480,000 MMBtus of natural gas. At December 31, 1998,
MarGasCo had 150 futures contracts for the purchase of 1,500,000 MMBtus of
natural gas. The natural gas futures contracts outstanding as of September 30,
1999 expire at various dates through November 2000 while the natural gas futures
contracts outstanding as of December 31, 1998 expire at various dates through
April 2000. At September 30, 1999, MarGasCo had deferred gains on its natural
gas futures contracts of $528,540. At December 31, 1998, MarGasCo had deferred
losses on its natural gas futures contracts of $443,860.
At December 31, 1997, MarGasCo had no outstanding natural gas futures contracts
and had not purchased or sold any natural gas futures contracts during the
previous year.
13. YEAR 2000 ISSUE - UNAUDITED
The year 2000 issue affects the Partnerships' installed computer systems,
software applications and other business and operating systems that have time-
sensitive programs that may not properly reflect or recognize the year 2000.
Because many computers and computer applications define dates by the last two
digits of the year, "00" may not be properly identified as the year 2000. This
error could result in miscalculations or system failures. The year 2000 issue
may also affect the systems and applications of the Partnerships' customers,
vendors or affiliates.
The Partnerships have developed a plan to identify and address the year 2000
issue. They have completed an inventory and year 2000 assessment of their
principal computer systems, software applications and other business and
operating systems. At September
20
<PAGE>
30, 1999, the Partnerships are substantially complete on the remediation phase
of their information technology exposures and expect to complete software
replacement by the end of 1999. Programs are being replaced with packaged
software which is year 2000 compliant; thus, no further compliance testing has
been performed. The Partnerships are substantially complete with the remediation
phase of their operating equipment. Testing and implementation of affected
equipment was completed by July 30, 1999. The Partnerships are using both
internal and external sources to identify, correct or reprogram and to test
their systems for year 2000 compliance. The Partnerships are also contacting
others with whom they conduct business to receive the proper warranties and
assurances that those third parties are, or will be, year 2000 compliant.
The Partnerships have incurred between $5,000 and $10,000 to achieve year 2000
compliance. If compliance is not achieved in a timely manner by the
Partnerships, their affiliates or any significant third party, the year 2000
issue could have a material adverse effect on the Partnerships' operations.
However, the Partnerships are focusing on and addressing all aspects of their
operations that may be affected by the year 2000 issue. The Partnerships have
contingency plans for certain critical applications which involve, among other
actions, manual workarounds and adjusting staffing strategies to mitigate to the
extent possible the effects of any year 2000 noncompliance.
14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. This Statement was effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. Initial
application of this Statement should be as of the beginning of an entity's
fiscal quarter; on that date, SFAS No. 133 will require KPC to record all
derivatives on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of other
shareholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. The impact of SFAS 133 on KPC's
financial statements will depend on a variety of factors, including future
interpretative guidance from the FASB, the extent of KPC's hedging activities,
the types of hedging instruments used and the effectiveness of such instruments.
However, KPC does not believe the effect of adopting SFAS 133 will be material
to its financial position.
The FASB issued SFAS No. 137, "Accounting for Derivative and Hedging Activities
- - Deferral of the Effective Date of SFAS No. 133". SFAS No. 137 defers the
effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. KPC has elected to defer the application of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000
in order to have more time to study and understand this statement.
15. SUBSEQUENT EVENT (UNAUDITED)
As part of the acquisition described in Note 1, KPC is a party to an agreement
with Management Resources Group, LLC pursuant to which the parties will
cooperate with each other on projects in the vicinity of the KPC system and
Management Resources will receive monthly contingent payments in the amount of
50% of KPC's gross revenue in excess of certain agreed to monthly and yearly
amounts. KPC has the option to terminate this Agreement by paying Management
Resources approximately $10.8 million in cash or publicly traded securities on
or before January 31, 2000, in which case the Agreement shall be null and void,
or by paying $50 million in cash after such date, after which such agreement
will be canceled.
21
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
BASIS OF PRESENTATION OF
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined statements of operations of Midcoast
Energy Resources, Inc. ("Company") for the nine months ended September 30, 1999
and the year ended December 31, 1998 and the unaudited pro forma combined
balance sheet of the Company as of September 30, 1999 ("unaudited pro forma
combined financial statements") give effect to the acquisition of the Kansas
Pipeline Company ("KPC") under the purchase method of accounting along with the
associated bank debt financing.
The unaudited pro forma combined financial statements are based upon the
historical financial statements of the Company and the historical combined
financial statements of KPC. The unaudited pro forma combined balance sheet as
of September 30, 1999 includes the purchase accounting entries made for KPC and
was prepared assuming that the acquisition was consummated as of September 30,
1999. The unaudited pro forma combined statements of operations for the nine
months ended September 30, 1999 and the year ended December 31, 1998 are
presented as if the KPC acquisition occurred on January 1, 1998. Because of the
seasonal nature of the operations of KPC, 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 combined
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 KPC. Accordingly, the
purchase accounting adjustments for KPC reflected in the pro forma financial
statements 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
combined financial statements presented herein. The unaudited pro forma
combined financial statements do not purport to represent what the Company's
financial position or results of operations actually would have been had the KPC
acquisition occurred on the dates indicated or to project the Company's
financial position or results of operations for any future date or period.
22
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- -------------------------------------
COMBINED
COMPANY KPC ADJUSTMENTS OPERATIONS
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 1,468 $14,165 $(14,165)(a) $ 1,468
Accounts receivable, net of allowance of
$104 and $0, respectively 48,597 6,357 - 54,954
Materials and supplies and other 1,425 477 - 1,902
-------- ------- -------- --------
Total current assets 51,490 20,999 (14,165) 58,324
-------- ------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Natural gas transmission facilities 192,041 92,427 119,986 (a) 404,454
Investment in transmission facilities 1,358 - - 1,358
Natural gas processing facilities 11,115 - - 11,115
Oil and gas properties, using full-cost
method of accounting 1,383 - - 1,383
Other property and equipment 6,329 - - 6,329
-------- ------- -------- --------
212,226 92,427 119,986 424,639
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION (10,578) (29,789) - (40,367)
-------- ------- -------- --------
201,648 62,638 119,986 384,272
OTHER ASSETS, net of amortization 1,946 13,497 1,204 (a) 16,647
-------- ------- -------- --------
TOTAL ASSETS $255,084 $97,134 $107,025 $459,243
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 39,434 $ 3,895 $ - $ 43,329
Current portion of long-term debt
payable to banks 176 4,260 (4,260)(c) 176
Short-term borrowing from banks 10,243 6,000 (6,000)(c) 10,243
Other current liabilities 27 1,971 10,750 (d) 12,748
-------- ------- -------- --------
Total current liabilities 49,880 16,126 490 66,496
-------- ------- -------- --------
LONG TERM DEBT PAYABLE TO BANKS 63,395 58,127 126,326 (c) 247,848
OTHER LIABILITIES 2,078 3,090 - 5,168
DEFERRED INCOME TAXES 11,029 - - 11,029
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 520 157 (157)(h) 520
COMMITMENTS AND CONTINGENCIES - - - -
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share;
authorized 31,250,000 shares; issued
10,721,980 shares 107 - - 107
Paid in capital 135,544 16,159 (16,159)(b) 135,544
Accumulated (deficit) earnings (5,094) 3,475 (3,475)(b) (5,094)
Less: Cost of 161,156 treasury shares (2,375) - - (2,375)
-------- ------- -------- --------
Total shareholders' equity 128,182 19,634 (19,634) 128,182
-------- ------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $255,084 $97,134 $107,025 $459,243
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma combined financial statements.
23
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ------------------------
COMBINED
COMPANY KPC ADJUSTMENTS OPERATIONS
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenue $ 267,365 $32,044 $ - $ 299,409
Operating Expenses
Costs of Natural Gas and Transportation Charges 233,782 8,618 - 242,400
Natural Gas Processing Costs 8,924 - - 8,924
Other Operating, Maintenance and G&A Expense 5,936 10,927 (1,466)(e) 15,397
Taxes Other than Income Taxes - 1,110 - 1,110
Depreciation and Amortization 4,793 3,523 1,907 (f) 10,223
---------- ------- ------- -----------
Total Operating Expense 253,435 24,178 441 278,054
---------- ------- ------- -----------
Operating Income 13,930 7,866 (441) 21,355
Interest Expense, Net (3,651) (4,299) (6,278)(g) (14,228)
Minority Interest (28) (8) 8 (h) (28)
Other Income (Expense) (115) 50 - (65)
---------- ------- ------- -----------
Income before Tax 10,136 3,609 (6,711) 7,034
Federal and State Income Tax 1,547 - (1,241)(i) 306
---------- ------- ------- -----------
Net Income $ 8,589 $ 3,609 $(5,470) $ 6,728
========== ======= ======= ===========
Earnings Per Share
Basic $ 1.00 $ 0.78
========== ===========
Diluted $ 0.98 $ 0.76
========== ===========
Weighted Average Number of Shares Outstanding
Basic 8,585,037 8,585,037
========== ===========
Diluted 8,804,258 8,804,258
========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
24
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- ---------------------------
COMBINED
COMPANY KPC ADJUSTMENTS OPERATIONS
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenue $ 234,069 $54,146 $ - $ 288,215
Operating Expenses
Costs of Natural Gas and Transportation Charges 206,950 22,174 - 229,124
Natural Gas Processing Costs 4,052 - - 4,052
Other Operating, Maintenance and G&A Expense 6,317 10,815 (1,955)(e) 15,177
Taxes Other than Income Taxes - 1,478 - 1,478
Depreciation and Amortization 3,197 4,243 2,543 (f) 9,983
---------- ------- -------- ----------
Total Operating Expense 220,516 38,710 588 259,814
---------- ------- -------- ----------
Operating Income 13,553 15,436 (588) 28,401
Interest Expense, Net (3,247) (6,011) (8,006)(g) (17,264)
Minority Interest (58) (16) 16 (h) (58)
Other Income (Expense) 174 64 - 238
---------- ------- -------- ----------
Income before Tax 10,422 9,473 (8,578) 11,317
Federal and State Income Tax 1,309 - 358 (i) 1,667
---------- ------- -------- ----------
Net Income $ 9,113 $ 9,473 $ (8,936) $ 9,650
========== ======= ======== ==========
Earnings Per Share
Basic $1.29 $ 1.36
========== ==========
Diluted $1.25 $ 1.32
========== ==========
Weighted Average Number of Shares Outstanding
Basic 7,074,372 7,074,372
========== ==========
Diluted 7,298,345 7,298,345
========== ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
25
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(In thousands)
(a) Reflects the preliminary allocation of the total purchase price in excess
of the net assets acquired to estimated fair value of property, plant and
equipment utilizing the purchase method of accounting for the transaction
as of September 30, 1999.
The excess purchase price is calculated as follows:
Cash paid to KPC $112,695
Accrued interest on senior notes and other indebtedness 2,167
Debt issuance costs 1,204
--------
Total cash cost $116,066
Plus: accrual of termination fee 10,750
Less: net assets of KPC (net of $14,165 related to
cash not acquired) (5,626)
--------
Excess of purchase price over net assets acquired $121,190
Excess purchase price is allocated as follows:
Property, plant and equipment $119,986
Debt issuance costs 1,204
--------
$121,190
(b) Represents the elimination of the paid in capital and accumulated earnings
of KPC.
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(c) Reflects incremental borrowings totaling $126,326 calculated as follows:
Cash cost (as discussed in (a) above) $116,066
Refinancing of short term borrowings from banks 6,000
Refinancing of current portion of long term debt 4,260
--------
Total $126,326
At closing, the Company repaid the senior secured notes of KPC and incurred
a prepayment penalty of $8,747 which will be reflected as an extraordinary
charge in the fourth quarter of 1999.
(d) Reflects current liability related to termination fee on the Project
Development and MRG Interests Agreement negotiated in connection with the
acquisition of KPC.
(e) To reduce general and administrative expenses for the costs related to
certain senior management involuntarily terminated in connection with the
transaction. The Company's management has made explicit determinations of
salary, benefit and other cost reductions resulting from these
terminations. Such reductions will have a continuing impact on expenses in
future periods. None of the identified terminations or cost reductions
will reduce revenues or efficiency of operations.
(f) Represents additional depreciation and amortization expense based on (1)
the depreciation expense calculated on a straight-line basis related to the
allocation of the excess purchase price to the depreciable assets of KPC
using a remaining useful life of 43 years and (2) the deferred financing
costs associated with the new credit agreement amortized over a five year
period offset by depreciation expense related to leasehold improvements and
furniture which were not acquired in the transaction.
(g) Reflects incremental interest expense on new debt associated with the
acquisition at a rate of the current three-month LIBOR plus the applicable
margin being charged to the Company (8.11%).
(h) Represents the elimination of the General Partner's Interest.
(i) Represents the tax expense incurred on KPC's income plus the tax effect of
the pro forma adjustments computed using a 40% statutory rate (34% federal
plus 6% state).
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Exhibit
23.1 Consent of Independent Auditors 28
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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: December 2, 1999 By: /s/ Richard A. Robert
-------------------------------------
Treasurer
Principal Financial Officer
Principal Accounting Officer
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the capiton "Experts" in the
Prospectus Supplement relating to the Registration Statement (Form S-3
No. 333-70371) and related Prospectus of Midcoast Energy Resources, Inc.
(Midcoast) for the registration of 2,000,000 shares of its common stock and to
the incorporation by reference therein of our report dated March 15, 1999, with
respect to the combined financial statements of Kansas Pipeline Company (as
defined therein) included in Midcoast's Current Report on Form 8-K/A dated
December 3, 1999, filed with the Securities and Exchange Commission .
/s/ Ernst & Young LLP
Kansas City, Missouri
November 30, 1999
