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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _______
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, American Stock Exchange
Par Value $.01 Per Share
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2)has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT.
Aggregate market value of the voting stock (which consists soley of shares
of common stock) held by non-affiliates of the registrant as of March 15, 1999,
computed by reference to the closing sale price of the registrant's common stock
on the American Stock Exchange on such date: $92,662,757.
Common Stock, par value $.01 per share. Shares outstanding on March 15,
1999 was 7,149,513.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: Portions of Midcoast Energy Resouces, Inc. definitive Proxy
Statement for the 1999 Annual Meeting of Shareholders, to be filed not later
than 120 days after the end of the fiscal year covered by this report, are
incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.....................................................3
ITEM 2. PROPERTIES..................................................14
ITEM 3. LEGAL PROCEEDINGS...........................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.................................14
ITEM 6. SELECTED FINANCIAL DATA.....................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................16
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....25
ITEM 8. FINANCIAL STATEMENTS........................................27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........51
ITEM 11. EXECUTIVE COMPENSATION......................................51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.....................................51
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PART I
ITEM 1. BUSINESS.
GENERAL
Midcoast Energy Resources, Inc., its subsidiaries and affiliated companies
(referred to collectively as the "Company" or "Midcoast") is primarily engaged
in the transportation, gathering, processing and marketing of natural gas and
other petroleum products. As of December 31, 1998, the Company owns and operates
two interstate transmission pipeline systems, one intrastate transmission
system, 20 end-user systems and 28 gathering systems representing over 2,300
miles of pipeline with an aggregate daily throughput capacity of over 1.9
billion cubic feet ("Bcf") of gas per day. The Company's principal business
consists of providing transportation services through its pipelines to both
end-users and natural gas producers, providing natural gas marketing services to
these customers and processing natural gas. In connection with these services,
the Company acquires and constructs pipelines to meet these customers needs. The
Company's principal assets are located in the Gulf Coast area.
Midcoast was incorporated as a Nevada corporation in 1992. Midcoast leases
its principal executive offices at 1100 Louisiana, Suite 2950, Houston, Texas
77002, and its telephone number is (713) 650-8900. Midcoast also owns or leases
other regional offices in Alabama, Louisiana, Mississippi and Texas.
BUSINESS GROWTH STRATEGY
The Company's principal business strategy is to increase its earnings and
cash flow by focusing on accretive acquisitions, improving the profitability of
existing systems and pursuing new pipeline, processing and treating construction
opportunities. The Company implements its strategy through the following steps:
ACCRETIVE ACQUISITIONS:
The Company seeks to acquire natural gas or crude oil transmission,
end-user, gathering and processing systems which offer the opportunity for
operational synergies, cost savings and the potential for increased utilization
or expansion of the system. In doing so, the Company focuses on systems in its
core geographic areas of operation where it believes such additional systems
will enhance the overall profitability of Midcoast. The Company will also pursue
acquisition opportunities in other areas that are located in proximity to
geographic areas where demand for natural gas is growing, or where drilling
activity is expected to increase.
IMPROVING PROFITABILITY OF EXISTING SYSTEMS:
After a system is acquired or constructed, the Company begins an
aggressive marketing effort to fully utilize the system's capacity. As part of
this process, the Company focuses on providing quality service to its existing
customers while seeking out new customers. Many of the Company's existing
pipeline and processing systems were designed with excess throughput capacity
that provide the Company with opportunities to increase throughput with little
incremental capital cost and to provide higher-margin "swing" sales during
periods of increased gas demand. The Company focuses on marketing its system
capacity directly to end-users to supply their natural gas needs and to
producers to provide a means to collect and aggregate their oil and gas
production for sale. In addition, the Company strives to realize cost savings
through the elimination of duplicative efforts achieved through the
implementation of efficiency targeted projects.
CONSTRUCTION OPPORTUNITIES:
Finally, the Company seeks opportunities for the construction of new
pipeline facilities to meet new or increased demand for pipeline transportation
services. These can include new end-user pipelines and the construction of
gathering pipelines and/or processing facilities in areas of new production.
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SIGNIFICANT ACQUISITIONS AND CONSTRUCTION
Since the first quarter of 1996, the Company has acquired ownership of or
interests in 39 pipelines including four natural gas processing plants for an
aggregate cost of over $141 million. The following is a summary of the Company's
significant acquisition and construction activities.
THE MIT ACQUISITION
Consistent with the Company's business strategy, in May 1997, Midcoast
acquired the pipeline and energy services operations of Atrion Corporation for
cash consideration of $38.2 million and up to $2 million in contingent deferred
payments (the "MIT Acquisition"). These operations include (i) a 295 mile
interstate transmission pipeline located in northern Alabama, Mississippi and
southern Tennessee which transports natural gas to industrial and municipal
customers (the "MIT System"), (ii) a 38 mile and a one mile pipeline in northern
Alabama which primarily serve two large industrial customers (the "Champion
System" and "Monsanto System," respectively and (iii) a natural gas marketing
company which was subsequently merged into Midcoast Marketing Inc. ("MMI").
THE MIDLA ACQUISITION
In October 1997, the Company completed its merger of Republic Gas Partners
L.L.C. ("Republic"), which owned Mid Louisiana Gas Company ("MLGC"), Mid
Louisiana Gas Transmission Company ("MLGT") and Mid Louisiana Marketing Company
that was subsequently merged into MMI. Consideration for the acquisition
included $3.2 million in cash, the assumption of approximately $19.1 million in
bank indebtedness, 481,247 shares of Midcoast common stock, par value $.01 per
share ("Common Stock"), and warrants to acquire 171,880 shares of Common Stock
(the "Midla Acquisition"). The assets acquired included (i) a 405 mile
interstate gas pipeline which runs from the Monroe gas field in northern
Louisiana, southward through Mississippi to Baton Rouge, Louisiana ("MIDLA
System"), (ii) three end-user gas pipelines with a collective length of 40.0
miles and (iii) two offshore lateral gas gathering pipelines with a collective
length of 8.6 miles. These pipelines serve a number of large industrial and
municipal customers.
As a result of agreements to provide a new source of high-pressure natural
gas for customers in and around the Port Hudson and Baton Rouge area, the
Company has acquired several pipeline systems and is constructing additional
contiguous pipelines to build the needed infrastructure to meet this demand (the
"Baton Rogue Expansion"). The Company has estimated the total cost of the
project to be approximately $10.0 million. At December 31, 1998, $6.3 million
has been incurred in purchase and construction costs. The remaining expenditures
are expected to be incurred no later than the second quarter of 1999.
ANADARKO ACQUISITION
In September 1998, Midcoast Gas Services, Inc. ("MGSI"), a wholly owned
subsidiary of Midcoast, purchased the Anadarko gas gathering system from El Paso
Field Services Company, a business unit of El Paso Energy Corporation. The
pipeline system was purchased for cash consideration of $35 million ("Anadarko
Acquisition").
Under the agreement, MGSI acquired ownership and operation of the Anadarko
gas gathering system located in Beckham and Roger Mills counties, Oklahoma and
Hemphill, Roberts and Wheeler counties, Texas effective August 1, 1998. The
system is comprised of over 696 miles of pipeline with an average throughput of
157 Mmcf/day and a total capacity of 345 Mmcf/day ("Anadarko System"). The
system gathers gas from approximately 250 wells and includes a 40 Mmcf/day
natural gas processing facility ("Hobart Plant"), 11 compressor stations with a
total of over 14,000 horsepower and interconnections with eight major interstate
and intrastate pipeline systems.
The Company expanded the Anadarko System in December 1998 with the
acquisition of the Mendota system from Seagull Energy Corporation for $3.75
million. The Mendota system, which was interconnected with the Anadarko System,
included two processing facilities and 35 miles of gathering pipeline.
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1999 ACTIVITY
During 1999, the Company has completed several acquisitions totaling $32.3
million. These acquisitions include the purchase of a majority interest in
SeaCrest Company LLC, the Tinsley crude oil gathering system, the acquisition of
Dufour Petroleum Inc. and Flare, LLC. and the Calmar natural gas gathering
system and treating plant. For additional information, see Note 17 - Subsequent
Events in the Notes to the Consolidated Financial Statements.
SEGMENTS
Beginning in 1998, the Company segregated its business activities into
three segments: Transmission Pipelines, End-user Pipelines, and Gathering
Pipelines and Natural Gas Processing. These segments are analyzed independently
by management and derive revenue from different sources. For financial
information related to each segment, see Results of Operations, in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as Note 14 Segment Data, in the Notes to the Consolidated
Financial Statements. Set forth below is a description of the principal business
activities conducted by each of the segments:
TRANSMISSION PIPELINES
The Company's transmission pipelines primarily receive and deliver natural
gas to and from other pipelines, and secondarily sometimes involve end-user or
gathering functions. Transportation fees are received by the Company for
transporting gas owned by other parties through the Company's pipeline systems.
The Company seeks to further expand its activities in this area through the
acquisition or construction of natural gas transmission pipelines in its core
geographic areas of operation where operational synergies and market
opportunities exist or in new geographic regions where there is increasing
demand for gas by municipal and industrial users. As of December 31, 1998, the
Company owns two interstate and one intrastate transmission pipelines.
END-USER PIPELINES
The Company also contracts with industrial end-users, municipalities or
electrical generating facilities to provide natural gas and natural gas
transportation services to their facilities through interconnect gas pipelines
constructed or acquired by the Company. These pipelines provide a direct supply
of natural gas to new industrial facilities or to existing facilities as an
alternative to the local distribution company. The Company intends to continue
to pursue direct sales to these end-users who have the flexibility to negotiate
their gas purchase and transportation contracts as a result of industry
deregulation. Frequently, the Company is able to offer its end-user customers
rates lower than the customer's current energy supplier. The Company's contracts
with end-user customers typically provide for the payment of a transportation
fee by the customer based on the volume of natural gas transported through the
Company's pipeline. As of December 31, 1998, the Company owns 20 end-user
transmission pipelines.
GATHERING PIPELINES AND NATURAL GAS PROCESSING
The Company's gathering systems typically consist of a network of
pipelines which collect natural gas or crude oil from points near producing
wells and transport it to larger pipelines for further transmission. Gathering
systems may include meters, separators, dehydration facilities and other
treating equipment owned by the Company or others. The Company derives revenues
from gathering systems by transporting natural gas or crude oil owned by others
through its pipelines for a transportation fee, by purchasing natural gas and
utilizing its pipelines to transport the natural gas to a customer in another
location where the natural gas is resold or, in certain instances, by purchasing
natural gas and arranging for the delivery and resale of an equivalent quantity
of natural gas to a customer not directly served by the Company's pipelines.
Transactions with customers not directly served by the Company's pipelines are
typically accomplished by entering into agreements whereby the Company exchanges
natural gas in its pipelines for natural gas in the pipelines of other
transmission companies. The Company intends to pursue the acquisition or
construction of additional gas gathering systems in or near its core geographic
operating areas and where drilling activity is expected to provide opportunities
for the expansion of gathering or processing facilities. As of December 31,
1998, the Company currently owns an interest in and operates 28 gathering
systems.
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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. These revenues occur under processing contracts with
producers of natural gas utilizing both a "percentage of proceeds" and
"keep-whole" basis. The contracts based on percentage of proceeds provide that
the Company receives a percentage of the NGLs and residual gas revenues as a fee
for processing the producer's gas. The keep-whole contracts require that the
Company reimburse the producers for the british thermal unit ("Btu") energy
equivalent of the NGLs and fuel removed from the natural gas as a result of
processing and the Company retains all revenues from the sale of the NGLs. 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. The Company's processing margins can be adversely affected by
declines in NGLs prices, declines in gas throughput, or increases in shrinkage
or fuel costs, and in the case of "keep whole" contracts, margins can be
affected by rising natural gas prices. As of December 31, 1998, the Company
owned four processing plants with a capacity of 90 Mmbtu/day.
GAS MARKETING SERVICES ON SEGMENTS
In addition, the Company provides natural gas marketing services to its
customers within each of the three segments. The Company's gas marketing
activities have been focused on the Company's systems with a strategic focus to
provide quality and consistent service to customers connected to the Company's
pipeline network. The Company's marketing activities include providing natural
gas supply and sales services to some of its end-user customers by purchasing
the natural gas supply from other marketers or pipeline affiliates and reselling
the natural gas to the end-user. The Company also purchases natural gas directly
from well operators on many of the Company's gathering systems and resells the
natural gas to other marketers or pipeline affiliates. Many of the contracts
pertaining to the Company's gas marketing activities are month-to-month spot
market transactions with numerous gas suppliers or producers in the industry.
The Company also offers other gas services to some of its customers including
management of capacity release and gas balancing.
Typically, the Company purchases natural gas at a price determined by
prevailing market conditions. Simultaneous with the purchase of natural gas by
the Company, the Company generally resells natural gas at a higher price under a
sales contract which is comparable in its terms to the purchase contract,
including any price escalation provisions. In most instances, natural gas
marketing is characterized by small margins since there are numerous companies
of greatly varying size and financial capacity who compete with the Company in
the marketing of natural gas. The profitability of the natural gas marketing
operations of the Company depends in large part on the ability of the Company's
management to assess and respond to changing market conditions in negotiating
these natural gas purchase and sale agreements. As a consequence of the increase
in competition in the industry and volatility of natural gas prices there has
been a reluctance of end-users to enter into long-term purchase contracts.
Moreover, consumers have shown an increased willingness to switch fuels between
gas and alternate fuels in response to relative price fluctuations in the
market. The inability of management to respond appropriately in changing market
conditions could have a negative effect on the Company's profitability.
Accordingly, historical operating income associated with this revenue stream has
varied depending on market conditions. The Company's gas marketing activities,
which utilize third party pipelines, also exposes the Company to economic risk
resulting from imbalances or nominated volume discrepancies which can result
either in penalties having a negative impact on earnings or a transaction gain,
depending on how and when imbalances are corrected. The Company believes the
marketing of natural gas is an important complement to its transportation
services.
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MAJOR CUSTOMERS
The Company's principal customers are industrial end-users,
municipalities, resellers and producers of natural gas. The Company typically
enters into one to five year transportation agreements, which may also include
provisions regarding guaranteed minimum volumes and price reductions after the
customer meets certain transportation commitments. The Company also enters into
marketing agreements with many of its customers related to gas supply and other
services. For its Federal Energy Regulatory Commission ("FERC") regulated
entities, the Company enters into firm and interruptible transportation
contracts using the tariff rates approved by FERC. In certain situations, the
Company has offered discounts from its tariffs in response to specific market
conditions.
For 1998, there were no customers that represented in excess of 10% of the
Company's gross margin. For 1997, Champion International Corporation
("Champion") and Entergy Gulf States, Inc. ("Entergy") each contributed in
excess of 10% of the Company's gross margin on a pro forma basis. Gross margin
is defined as revenues less related direct costs and expenses. The agreement
with Champion, which expires in 2004, provides for 26 Mmcf/day of firm
transportation and a rate reduction of 41% in the event that Champion meets a
minimum transportation volume, which is expected to occur in 2000 based on
Champion's current usage. The agreements with Entergy expire in 2000 and 1999
for marketing and transportation services, respectively. The marketing agreement
provides for volumes which range from 15,000 Mmbtu's to 110,000 Mmbtu's/day. The
transportation agreement provides for volumes which range from 25,000 Mmbtu's to
100,000 Mmbtu's/day. Both agreements include annual evergreen language after the
expiration of the primary term.
COMPETITION
The Transmission Pipeline, End-user Pipeline and Gathering Pipeline and
Natural Gas Processing segments are highly competitive. In marketing natural
gas, the Company has numerous competitors, including marketing affiliates of
interstate pipelines, major integrated oil companies, and local and national
natural gas gatherers, brokers and marketers of widely varying sizes, financial
resources and experience. Many of these competitors, particularly those
affiliated with major integrated oil and interstate and intrastate pipeline
companies, have financial resources substantially greater than those available
to the Company. Local utilities and distributors of natural gas are, in some
cases, engaged directly, and through affiliates, in marketing activities that
compete with the Company. Some of the Company's contracts are month-to-month
arrangements and as such, these agreements are affected by competitive factors
at the time of the sale.
The Company competes against other companies for supplies of natural gas
and for customers. Competition for natural gas supplies is primarily based on
efficiency, reliability, availability of transportation and the ability to offer
a competitive price for natural gas. Competition for customers is primarily
based upon reliability and price of deliverable natural gas. For customers that
have the capability of using alternative fuels, such as oil and coal, the
Company also competes against companies capable of providing these alternative
fuels at a competitive price.
NATURAL GAS SUPPLY
The Company's transmission and end-user pipelines have connections with
major interstate and intrastate pipelines which management believes have
supplies of natural gas in excess of the volumes required for these systems.
However, these purchase contracts may be affected by factors beyond both the
Company's and the gas suppliers' control such as capacity constraints and
temporary regional supply shortages. With regard to its gathering systems,
supply risks include other parties having control over the drilling of new
wells, inability of wells to deliver gas at required pipeline quality and
pressure, and depletion of reserves. The future performance of the Company will
depend to a great extent on the throughput levels achieved by the Company with
respect to its existing pipelines and the pipelines acquired or constructed by
it in the future. In order to maintain the throughput on its gathering systems
at current levels, the Company must access new natural gas supplies to offset
the natural decline in reserves as such supplies are produced. In connection
with the construction and acquisition of its gathering systems, evaluations were
made of well and reservoir data furnished by producers to determine the
availability of natural gas supply for the systems. Based on those evaluations,
it is management's belief that there should be adequate natural gas supply for
the Company to recoup its investment with an adequate rate of return. As such,
management does not routinely obtain independent evaluation of reserves
dedicated to its systems due to the cost of such evaluations. Accordingly, the
Company does not have estimates of total reserves dedicated to its systems or
the anticipated life of such producing reserves.
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RATE AND REGULATORY MATTERS
Various aspects of the transportation of natural gas are subject to or
affected by extensive federal regulation under the Natural Gas Act ("NGA") and
the Natural Gas Policy Act of 1978 ("NGPA"), as well as various regulations
promulgated by the FERC.
INTERSTATE PIPELINE REGULATION
The Company's operations of the MIT and MIDLA Systems constitute the
operations of a "natural gas company", as defined in the NGA. As such, they are
subject to the jurisdiction of the FERC. The interstate pipeline operations of
these systems are operated pursuant to certificates of public convenience and
necessity and other authorization issued under the NGA and pursuant to the NGPA.
The FERC regulates the interstate transportation and certain sales of natural
gas, including among other things, rates and charges allowed natural gas
companies, extensions and abandonment of facilities and service, rates of
depreciation and amortization and certain accounting methods.
Pipeline rates for MIT and MIDLA must be filed with and approved by the
FERC and are submitted as cost-based and have been deemed to be "just and
reasonable". The FERC may suspend for up to five months the effectiveness of
rate changes filed by the pipeline, or permit a changed rate to go into effect
subject to refund. The FERC may require the pipeline to refund, with interest,
all or any portion of any increased amount collected under "subject to refund
rates" that, in the FERC's final determination, is found not to be just and
reasonable. The FERC also may investigate, either on its own motion or pursuant
to protests by third parties, the lawfulness of pipeline rates that are on file.
In April 1993, jurisdictional rates for the MIT System were increased from
rates that had been in effect since April 1990. This rate increase was agreed to
in an uncontested settlement with the MIT System's customers which the FERC
approved in December 1993. That agreement was amended in September 1996 to
eliminate the requirement that a new rate case be filed in September 1996 or any
year thereafter. As part of that agreement, rates on the MIT System were reduced
6% effective September 1996.
In June 1996, a decrease in the jurisdictional rates for the MIDLA System
were proposed from rates that had been in effect since 1990. This rate decrease
was agreed to in an uncontested settlement with MIDLA's customers and was
certified to the FERC by the presiding Administrative Law Judge in November
1996. Accordingly, the FERC approved the settlement by letter order dated March
28, 1997.
INTRASTATE PIPELINE REGULATION
The Company's intrastate pipeline operations are generally not subject to
regulation by the FERC, but are subject to regulation by various agencies of the
states in which the Company operates. The Magnolia System is subject to the
jurisdiction of the FERC with respect to the transportation rates under Section
311. Under Section 311, an intrastate pipeline can provide transportation
service "on behalf of" any interstate pipeline or local distribution company
without prior FERC authorization. Specifically, the FERC adopted a so-called
transport or title standard requiring that for purposes of interstate
transportation under Section 311, the on behalf of entity must either (1) have
physical custody of or (2) hold title to the gas at some point during the
transaction. Section 311 service must be provided without undue discrimination
or preference and is subject to certain FERC filing and reporting requirements.
The Champion and Monsanto Systems are regulated by the Alabama Public Service
Commission ("APSC"). The rates for transportation to customers on these two
systems are determined by negotiated contracts which are approved by the APSC.
The Company's operations in Texas are subject to the Texas Gas Utility
Regulatory Act, as implemented by the Texas Railroad Commission (the "TRC").
Generally, the TRC is vested with authority to ensure that rates charged for
natural gas sales and transportation services are just and reasonable. The
Company must also make filings with the TRC for all new and increased rates. The
Company's intrastate systems in Louisiana are subject to the regulations of the
Office of Conservation, Pipeline Division of the Department of Natural Resources
("Commission"). As in other states, this agency possesses the authority to
review and authorize transactions of those entities under its jurisdiction. This
may include, but not be limited to the construction, acquisition, abandonment
and interconnection of physical facilities and issues regarding transportation
rates and contract pricing. The Company currently conducts no transportation for
others through its Louisiana facilities and therefore, remains regulated only on
issues governing the construction or abandonment of physical facilities and
contract pricing only to the extent that no claims of "unjust" treatment are
received by the Commission. As in the case of potential federal regulatory
changes, there can be no assurances that state regulatory measures will not
adversely affect the Company's business and financial condition. In such events,
the states' regulatory authorities could temporarily suspend or hinder
operations in a particular state, depending on the authority's view of its
jurisdiction.
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GATHERING OPERATIONS REGULATION
The NGA exempts gas gathering facilities from the direct jurisdiction of
the FERC. The Company believes that its gathering facilities and operations meet
the current tests that the FERC uses to grant non-jurisdictional gathering
facility status. Some of the recent cases applying these tests in a manner
favorable to the determination of the Company's non-jurisdictional status are
still subject to rehearing and appeal. In addition, the FERC's articulation and
application of the tests used to distinguish between jurisdictional pipelines
and non-jurisdictional gathering facilities have varied over time. While the
Company believes the current definitions create non-jurisdictional status for
the Company's gathering facilities, no assurance is available that such
facilities will not, in the future, be classified as regulated transmission
facilities and thus, the rates, terms, and conditions of the services rendered
by those facilities would become subject to regulation by the FERC.
No state in which the Company operates currently regulates gathering fees.
Although the Company is not aware that any state in which it operates a natural
gas gathering system is likely to begin regulation of the Company's natural gas
gathering activities and fees, new or increased state regulation has been
adopted or proposed in other natural gas producing states and there can be no
assurance that such regulation will not be proposed or adopted in states where
the Company conducts gathering activities or that the Company will not expand
into or acquire operations in a state where such regulations could be imposed.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's activities in connection with the operation and construction
of pipelines and other facilities for transporting, processing, treating, or
storing natural gas and other products are subject to environmental and safety
regulation by numerous federal, state and local authorities. This can include
ongoing oversight regulation as well as requirements for construction or other
permits and clearances that must be granted in connection with new projects or
expansions. Regulatory requirements can increase the cost of planning,
designing, initial installation and operation of such facilities. Sanctions for
violation of these requirements include a variety of civil and criminal
enforcement measures including assessment of monetary penalties, assessment and
remediation requirements and injunctions as to future compliance. The following
is a discussion of certain environmental and safety concerns related to the
Company. It is not intended to constitute a complete discussion of the various
federal, state and local statutes, rules, regulations, or orders to which the
Company's operations may be subject.
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In most instances, these regulatory requirements relate to the release of
substances into the environment and include measures to control water and air
pollution. Moreover, the Company, without regard to fault, could incur liability
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, or state counterparts, in connection with the disposal or
other releases of hazardous substances, including those arising out of
historical operations conducted by the Company's predecessors. Further, the
recent trend in environmental legislation and regulations is toward stricter
standards, and this will likely continue in the future.
Environmental laws and regulations may also require the acquisition of a
permit before certain activities may be conducted by the Company. Further, these
laws and regulations may limit or prohibit activities on certain lands lying
within wilderness areas, wetlands, areas providing habitat for certain species
which have been identified as "endangered" or "threatened" or other protected
areas. The Company is also subject to other federal, state and local laws
covering the handling, storage or discharge of materials used by the Company, or
otherwise relating to protection of the environment, safety and health. As an
employer, the Company is required to maintain a workplace free of recognized
hazards likely to cause death or serious injury and to comply with specific
safety standards.
The Company will make expenditures in connection with environmental
matters as part of its normal operations and capital expenditures and the
possibility exists that stricter laws, regulations or enforcement policies could
significantly increase the Company's compliance costs and the cost of any
remediation which may become necessary. There is inherent risk of the incurrence
of environmental costs and liabilities in the Company's business due to its
handling of oil, gas and petroleum products, historical industry waste disposal
practices and prior use of gas flow meters containing mercury. There can be no
assurance that material environmental costs and liabilities will not be incurred
by the Company. Management believes, based on its current knowledge, that the
Company has obtained and is in current compliance with all necessary and
material permits and that the Company is in substantial compliance with
applicable material environmental and safety regulations. Further, the Company
maintains insurance coverages that it believes are customary in the industry,
although there can be no assurance that the Company's environmental impairment
insurance will provide sufficient coverage in the event an environmental claim
is made against the Company (See "Insurance"). The Company is not aware of any
existing environmental or safety claims that would have a material impact upon
its financial position or results of operations.
10
<PAGE>
PIPELINE SYSTEMS
As of December 31, 1998, the Company owns an interest in and operates 51
pipelines. Two interstate transmission pipelines, one intrastate transmission
pipelines, twenty end-user pipelines and twenty-eight gathering pipelines. The
majority of these pipelines are situated strategically in the Company's core
Gulf Coast operating area. Certain information concerning the Company's
pipelines is summarized in the following table:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
Date of
Acquisition Average Daily
or Daily Volume
initial Length Volume(2) Capacity(2)
Pipeline System(1) operations Location in miles (Mmbtu/Day) (Mmbtu/Day)
- - ------------------------------------------------------------------------------------------------------------
TRANSMISSION PIPELINES:
<S> <C> <C> <C> <C> <C>
Magnolia 09/95 Central AL 111.0 28,447 120,000
MIT 05/97 Selmer, TN to Huntsville, AL 295.3 101,884 200,000
MIDLA 10/97 Monroe, LA to Baton Rouge, LA 404.6 78,092 190,000
END-USER PIPELINES:
Burnett 12/89 Burnet Co., TX 1.3 666 3,000
Turkey Creek 01/91 Fort Bend Co., TX 15.6 816 5,000
OC Kansas 06/91 Wyandotte Co., KS 1.0 2,817 6,500
Augusta 07/93 Butler Co., KS 0.5 407 5,000
Westlake 11/93 Calcasieu Parish, LA 1.3 14,209 50,000
Quindaro 11/94 Wyandotte Co., KS 3.1 1,309 60,000
OC Albany 12/94 Albany Co., NY 0.5 1,335 3,000
Guadalupe (3) 02/96 Culberson Co., TX 6.1 297 10,000
Roane County (4) 08/96 Roane Co., TN 2.1 1,440 5,000
South Fulton 09/96 Obion Co., TN 2.6 -- (5) 1,200
Salt Creek (3) 09/96 Kent & Scurry Cos., TX 39.1 5,437 20,000
Cuero 10/96 DeWitt Co., TX 5.4 83 2,000
STEC 10/96 Victoria Co., TX 4.0 843 10,000
Falfurrias 01/97 Brooks Co., TX -- (6) 219 8,000
Monsanto 05/97 Morgan Co., AL 1.0 4,432 20,000
Champion 05/97 Lawerence & Colbert Cos., AL 38.0 23,313 50,000
Crown Vantage 10/97 West Feliciana Parish, LA 2.5 8,489 32,800
Farmlands 10/97 Grant Parish, LA 4.3 31,434 62,000
Baton Rouge 10/97 E. Baton Rouge Parish, LA 33.2 26,384 80,000
Creole 06/98 Orleans Parish, LA 44.0 32,181 115,000
GATHERING PIPELINES AND NATURAL GAS PROCESSING:
Zmeskal 06/94 Victoria Co., TX -- (6) 141 3,000
Cook Inlet
Gas(4) 07/94 Cook Inlet, AK 2.7 216 15,000
Cook Inlet
Oil(4) 07/94 Cook Inlet, AK 2.7 17,141 (7) 120,000 (7)
Foss 12/94 Custer Co., OK 4.1 344 5,000
Flores (8) 01/96 Starr Co., TX 9.9 1,474 5,000
Chapa (3) 02/96 Live Oak Co., TX 20.7 1,117 50,000
Guerra (3) 02/96 Webb & Duval Cos., TX 8.4 6,485 50,000
Loma Novia (3) 02/96 Duval & McMullen Cos., TX 15.2 6,178 25,000
Detroit 05/96 Lamar Co., AL 16.5 32 3,000
Fayette 05/96 Fayette Co., AL 62.8 1,170 10,000
Greenwood
Springs 05/96 Monroe Co., MS 7.9 127 5,000
Happy Hill 05/96 Fayette Co., AL 5.5 71 3,000
Heidlberg Koch 05/96 Jasper Co., MS 1.0 136 3,000
Heidlberg TGP 05/96 Jasper Co., MS 3.5 920 2,500
Millbrook 05/96 Wilkinson Co., MS 8.9 223 5,000
Sizemore 05/96 Lamar Co., AL 1.0 10 3,000
Chapparal 10/96 Monroe Co., MS 9.6 495 3,000
Harmony (9) 10/96 Central MS 155.4 5,328 20,000
Minnie Bock 11/96 Nueces Co., TX 14.0 2,898 10,000
Port 11/96 Nueces Co., TX 1.5 978 5,000
Rowden 11/96 Duval Co., TX 1.0 23 3,000
Raymond (10) 03/97 Central KS 120.0 531 5,000
T33 10/97 Offshore LA 3.9 13,898 24,000
T51 10/97 Offshore LA 4.7 18,126 72,000
Texana (11) 04/98 Central TX 46.0 4,488 15,000
Anadarko/
Mendota(9) 08/98 OK and TX Panhandle 731.0 157,829 345,000
Hatcher 08/98 Robert Co., TX 8.0 894 5,000
Tynan 12/98 Bee & Live Oak Cos., TX 24.5 1,031 30,000
------- ------- ---------
Totals 2,306.9 606,838 1,903,000
======= ======= =========
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
11
<PAGE>
- - ----------
(1) Unless otherwise indicated, all systems are 100% owned and operated by the
Company and inactive systems owned by the Company are not included.
(2) All volume and capacity information is approximate. Average daily volumes
are based on total volumes transported during the twelve-month period ended
December 31, 1998, except for the Creole, Anadarko/Mendota, Hatcher and
Tynan Systems that were acquired during 1998. For these systems the average
daily volumes are based on total volumes transported from the date of
acquisition or initial operation through December 31, 1998.
(3) This system is owned by Pan Grande Pipeline L.L.C., in which the Company
owns a 70% interest, and is operated by the Company.
(4) This system is owned and operated by a third-party and the Company receives
throughput charges from this system.
(5) The Company receives a monthly fee on this system which is owned and
operated by a third party.
(6) This system is less than a quarter-mile in length.
(7) Volume has been converted from barrels of oil to equivalent Mmbtu's of gas
using one barrel of oil to six Mmbtu's.
(8) This system is owned by Starr County Gathering System, a Joint Venture in
which the Company owns a 60% interest, and is operated by the Company.
(9) These gathering systems include natural gas processing facilities.
(10) The Company owns approximately 66% of this system, and is operated by the
Company.
(11) This system is owned by Texana Gas Pipeline Company, in which the Company
owns a 50% interest, and is operated by the Company.
12
<PAGE>
OIL AND GAS PROPERTIES
The Company owns several non-operated working interests in producing and
non-producing oil and gas properties. For the year ended December 31, 1998,
revenues from the Company's oil and gas properties were less than 1% of its
total revenues, and for the same period the Company's oil and gas properties
represented less than 1% of its total assets. Although it is not expected to
become a major line of business for the Company, management expects that
acquisition and ownership of non-operated oil and gas interests will remain a
facet of the Company's business for the foreseeable future.
TITLE TO PROPERTIES
The Company, as part of its pipeline construction process, must obtain
certain right-of-way agreements from landowners whose property the proposed
pipeline will cross. The terms and cost of these agreements can vary greatly due
to a number of factors. In addition, as part of its acquisition process, the
Company will typically evaluate the underlying right-of-way agreements for the
particular pipeline to be acquired to determine that the pipeline owner has met
all terms and conditions of the underlying right-of-way agreements and that the
agreements are still in full force and effect. The Company typically relies upon
outside service organizations to review the right-of-way agreements and to make
suggestions to the seller as to any curative work required before closing. The
Company typically does not receive a title opinion or title policy as to these
right-of-way agreements due to the complexity of the records and expense.
Occasionally, the Company may seek to initiate condemnation proceedings
where permitted under state law to obtain a right-of-way necessary for pipeline
construction projects. The Company believes that this process is consistent with
standards in the pipeline industry and that it holds good title to its pipeline
systems, subject only to defects which the Company believes are not material to
the ownership of its properties or results of operations. Substantially all of
the Company's pipeline systems are pledged to secure borrowings under the
Company's credit facility. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources and
Liquidity".
INSURANCE
The Company's operations are subject to many hazards inherent in the
natural gas transmission industry. The Company maintains insurance coverage for
its operations and properties considered to be customary in the industry. There
can be no assurance, however that the Company's insurance coverage will be
available or adequate for any particular risk or loss or that the Company will
be able to maintain adequate insurance in the future at rates it considers
reasonable. Although, management believes that the Company's assets are
adequately covered by insurance, a substantial uninsured loss could have a
material adverse impact on the Company and its financial position.
EMPLOYEES AND CONTRACT SERVICE ORGANIZATIONS
The Company had 149 full-time employees on December 31, 1998. The Company
has arrangements with other unaffiliated independent pipeline operating
companies who service and operate the Company's extensive field operations and
provide for emergency response measures. The Company is not a party to any
collective bargaining agreements. There have been no significant labor disputes
in the past.
FORWARD LOOKING STATEMENTS
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Disclosure Regarding Forward Looking Statements" for
a discussion of forward looking statements contained above and elsewhere in this
Report.
12
<PAGE>
ITEM 2. PROPERTIES
See "Item 1. Business" for a discussion of properties and locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in certain litigation. Management
believes that all such litigation arose in the ordinary course of business and
that costs of settlements or judgments arising from such suits will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters during the fourth quarter to a vote
of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock began trading August 9, 1996 on the American
Stock Exchange ("AMEX") under the symbol "MRS". The following table sets forth
the high and low sales prices for the Company's Common Stock for the period from
January 1, 1997 to December 31, 1998.
Dividends
Paid per
High(1) Low(1) Share
------- ------ -----
1998
First Quarter 19.00 14.72 .06
Second Quarter 18.70 15.09 .06
Third Quarter 18.95 13.30 .06
Fourth Quarter 17.41 13.41 .06
1997
First Quarter 12.72 7.45 .06
Second Quarter 12.64 9.91 .06
Third Quarter 16.50 11.64 .06
Fourth Quarter 20.36 14.19 .06
- - ----------
(1) All prices and dividends per share have been adjusted to reflect the 10%
stock dividend declared on February 3, 1998 and paid on March 2, 1998 to
shareholders of record on February 13, 1998 ("Stock Dividend"), as well as
the five-for-four stock split declared on February 1, 1999, and paid on
March 1, 1999, to shareholders of record on February 11, 1999 ("Stock
Split").
On March 15, 1999, the closing price for the Common Stock, as reported by
the AMEX, was $17.75 per share. As of March 15, 1999, there were 333 holders of
record of Common Stock. The Company believes that there are substantially more
beneficial holders of Common Stock.
DIVIDEND POLICY
Holders of Common Stock are entitled to receive cash dividends out of
Company funds legally available subject to the qualification that dividends need
not be declared or paid by the Board of Directors ("Board") if to do so would be
in violation of laws or restrictions under contractual arrangements (including
credit agreements) to which the Company is or may hereafter become a party. The
Board declared the Company's initial Common Stock dividend of $.06 per share on
August 16, 1996, which was paid on September 3, 1996, and the Company has
declared and paid a $.06 per share cash dividend on its Common Stock in each
successive quarter since that time.
On February 3, 1998, the Board declared a ten percent stock dividend to be
paid to shareholders of record at the close of business on February 13, 1998
("Stock Dividend Record Date") on March 2, 1998. No fractional shares were
issued and shareholders entitled to a fractional share received a cash payment
equal to the market value of the fractional share at the close of the market on
the Stock Dividend Record Date.
14
<PAGE>
On February 1, 1999, the Board declared a five-for-four stock split to be
paid to shareholders of record at the close of business on February 11, 1999
("Stock Split Record Date") on March 1, 1999. No fractional shares were issued
and shareholders entitled to a fractional share received a cash payment equal to
the market value of the fractional share at the close of the market on the Stock
Split Record Date.
All presentations herein are made on a post-Stock Dividend and post-Stock
Split basis.
It is the Company's current policy to continue to pay a quarterly dividend;
however, the amount of future cash dividends, if any, will depend upon future
earnings, results of operations, capital requirements, covenants contained in
various financing agreements of the Company and its subsidiaries, the financial
condition of the Company and certain other factors. Accordingly, there can be no
assurances that dividends will be paid by the Company in the future. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Liquidity".
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical consolidated financial data for Midcoast. This financial
data has been derived from and should be read in conjunction with the
consolidated financial statements of Midcoast and notes thereto included in Part
II, Item 8.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues $234,069 $112,744 $ 29,415 $ 15,622 $ 14,969
Operating income (1) 13,553 7,291 2,573 2,569 349
Interest expense 3,247 1,067 413 339 189
Income before income taxes 10,422 5,914 1,914 2,193 148
Net income 9,113 5,764 1,914 2,193 27
Net income (loss) applicable to common
shareholders 9,113 5,764 1,891 2,134 (32)
PER SHARE DATA:
Net income (loss) per share
applicable to common shareholders
Basic $ 1.29 $ 1.13 $ .73 $ 1.08 $ (.02)
Diluted $ 1.25 $ 1.10 $ .73 $ 1.08 $ (.02)
Weighted average number of
common shares outstanding
Basic 7,074 5,115 2,593 1,980 1,913
Diluted 7,298 5,251 2,598 1,980 1,913
Cash dividends declared
per common share $ .24 $ .24 $ .06 $ -- $ --
OTHER DATA:
Depreciation, depletion
and amortization $ 3,197 $ 1,592 $ 818 $ 452 $ 259
General and administrative 6,283 3,455 1,223 785 849
Cash flow from operating activities 17,169 3,856 2,564 2,361 (515)
DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Working capital (deficit) $ 989 $ 1,888 $ 1,135 $ (99) $ (1,105)
Property, plant and equipment, net 154,247 97,552 16,965 8,206 4,994
Total assets 191,342 128,038 27,303 11,089 7,272
Long-term debt, net of current portion 78,082 28,923 4,015 3,961 1,781
Shareholders' equity 66,284 61,451 13,593 4,157 2,007
- - ----------
(1) Operating revenues less operating expenses.
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the historical financial condition and results
of operations of Midcoast should be read in conjunction with "Selected Financial
Data" contained in Part I, Item 6 and with the consolidated financial statements
and related notes thereto contained in Part II, Item 8.
GENERAL
Since its formation, the Company has grown significantly as a result of the
construction and acquisition of new pipeline facilities. For the three year
period ended 1998, the Company acquired or constructed 39 pipelines for an
aggregate cost of over $141 million. See "Pipeline Systems". 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 and newly constructed 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 facilities. With the exception of the Company's natural gas
processing activities, which represents a small component of the Company's
overall earnings, the Company's revenues are derived from fee based sources. As
a result, the Company's earnings have little sensitivity to changes in commodity
prices. In addition, most of the Company's operating costs do not vary directly
with volume on existing systems, thus, increases or decreases in transportation
volumes generally have a direct effect on net income. 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 natural gas
or crude oil 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 NGLs as well as the sale of the residual natural gas.
These revenues occur under processing contracts with producers of natural gas
utilizing both a "percentage of proceeds" and "keep-whole" basis. The contracts
based on percentage of proceeds provide that the Company receives a percentage
of the NGLs and residual gas revenues as a fee for processing the producer's
gas. The keep-whole contracts require that the Company reimburse the producers
for the Btu energy equivalent of the NGLs and fuel removed from the natural gas
as a result of processing and the Company retains all revenues from the sale of
the NGLs. The Company's processing margins can be adversely affected by declines
in NGLs prices, declines in gas throughput, or increases in shrinkage or fuel
costs, and in the case of "keep whole" contracts, margins can be affected by
rising natural gas prices.
The Company's 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. In particular, demand on the Magnolia, MIT and
MIDLA Systems 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
fluctuations 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 competitive products and
services, pricing of and demand for such products and services and the presence
of competitors with greater financial resources.
16
<PAGE>
RESULTS OF OPERATIONS
As indicated in the table provided in Part I. Pipeline Systems, the
Company has acquired or constructed numerous pipelines in the three-year period
ended December 31, 1998. These assets were acquired from numerous sellers, at
different periods throughout the year and all were accounted for under the
purchase method of accounting for business combinations and accordingly, the
results of operations for such acquisitions are included in the Company's
financial statements only from the applicable date of the acquisition. As a
consequence, the historical results of operations for the periods presented may
not be comparable.
The Company adopted the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, effective January 1, 1998.
Accordingly, the Company has segregated its business activities into three
segments: Transmission Pipelines, End-user Pipelines, and Gathering Pipelines
and Natural Gas Processing.
Consolidated gross margin for the year ended December 31, 1998, increased
88% to $22.6 million compared to $12.0 million in 1997. Consolidated gross
margin for the year ended December 31, 1997, was $7.7 million higher than for
the same period in 1996. Variations for each segment are discussed in the
segment results below.
SEGMENT RESULTS
The following tables present certain data for each of the three operating
segments of Midcoast for the three years ended December 31, 1998. 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 segment where it occurs.
Therefore, the gross margin for each segment includes a transportation component
and a marketing component. The Company evaluates each of its segments on a gross
margin basis, which is defined as the revenues of the segment less related
direct costs and expenses of the segment and does not include depreciation,
interest or allocated corporate overhead. For further analysis on each segment
regarding identifiable assets, depreciation and corporate administrative
expenses, see Note 14 - Segment Data in the Notes to Consolidated Financial
Statements.
17
<PAGE>
TRANSMISSION PIPELINES
For the Year Ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT AMOUNTS PER MMBTU)
OPERATING REVENUES:
Marketing $117,557 $ 61,275 $ 6,586
Transportation Fees 6,387 3,512 979
-------- -------- --------
TOTAL OPERATING REVENUES 123,944 64,787 7,565
-------- -------- --------
OPERATING EXPENSES:
Cost of Natural Gas and
Transportation Charges 106,330 57,332 6,468
Operating Expenses 4,383 1,592 301
-------- -------- --------
TOTAL OPERATING EXPENSES 110,713 58,924 6,769
-------- -------- --------
GROSS MARGIN $ 13,231 $ 5,863 $ 796
======== ======== ========
VOLUME (in Mmbtu)
Marketing 48,538 22,454 2,759
Transportation 49,506 30,752 9,914
-------- -------- --------
TOTAL VOLUME 98,044 53,206 12,673
======== ======== ========
GROSS MARGIN per Mmbtu $ .13 $ .11 $ .06
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company's entrance into the regulated interstate pipeline business
began with the acquisition of the MIT System (June 1997) and the MIDLA System
(November 1997) which significantly enhanced the Company's transmission pipeline
operations in 1998. A complete year of operations in 1998 provided a 91%
increase in revenues, an 84% increase in total volumes and a 126% increase in
gross margin when compared to the same period in 1997. In addition to a complete
year of operations, average daily demand transportation volume ("Average
Demand") increased on both systems in 1998. The MIT System's Average Demand
increased 19% to 158,000 Mmbtu in 1998 while the Midla System's Average Demand
increased 13% to 166,000 Mmbtu in 1998
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
As discussed above, the addition of the MIT System in June 1997 and the
MIDLA System in November 1997 significantly impacted the transmission segment.
The dramatic increases to revenue and gross margin in 1997 as compared to 1996
can be attributed to the partial years inclusion of the operations of the two
acquisitions. However, a smaller portion of the increased gross margin in 1997
can be attributed to negotiating higher transportation rates from customers on
the Magnolia System.
18
<PAGE>
END-USER PIPELINES
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS, EXCEPT AMOUNTS PER MMBTU)
OPERATING REVENUES:
Marketing $90,800 $33,862 $13,367
End-User Transportation Fees 3,287 2,487 1,144
------- ------- -------
TOTAL OPERATING REVENUES 94,087 36,349 14,511
------- ------- -------
OPERATING EXPENSES:
Cost of Natural Gas and
Transportation Charges 88,822 32,673 13,011
Operating Expenses 224 208 106
------- ------- -------
TOTAL OPERATING EXPENSES 89,046 32,881 13,117
------- ------- -------
GROSS MARGIN $ 5,041 $ 3,468 $ 1,394
======= ======= =======
VOLUME (in Mmbtu)
Marketing 40,447 11,867 5,822
Transportation 20,415 12,415 6,682
------- ------- -------
TOTAL VOLUME 60,862 24,282 12,504
======= ======= =======
GROSS MARGIN per Mmbtu $ .08 $ .14 $ .11
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company's end-user segment experienced significant increases in
revenues and gross margin in 1998 compared to 1997, primarily due to 1998 having
the benefit of a complete year of operations of the Champion and Monsanto
Systems (acquired in the MIT Acquisition in June 1997) and Crown Vantage and
Farmlands Systems (acquired in the Midla Acquisition in November 1997). A new
marketing services contract to provide 25 Mmcf/day of marketing services
beginning January 1, 1998 to an industrial facility near Port Hudson, Louisiana
also contributed to the increase in 1998 over 1997.
This trend of increasing revenues and gross margin is expected to continue
into 1999 as an additional 30 Mmcf/day of natural gas marketing services to a
new cogeneration facility near Baton Rouge began at the end of 1998.
The Company's gross margin per Mmbtu declined in 1998 compared to 1997.
The decrease is attributable to an increase in marketing activities, which are
characterized by lower margins and higher volumes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's gross margin for the end-user pipelines segment increased
149% from $1.4 million in 1996 to $3.5 million in 1997. The results of
operations of the Champion System and Monsanto System acquired in the MIT
Acquisition in June 1997 accounted for 75% of the increase. In addition, 1997
results included a full year of operations for several end-user pipeline
acquisitions made during 1996.
19
<PAGE>
GATHERING PIPELINES AND NATURAL GAS PROCESSING
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS, EXCEPT AMOUNTS PER MMBTU)
OPERATING REVENUES:
Marketing $ 6,761 $ 5,597 $ 3,595
Gathering Transportation Fees 3,732 693 825
Processing Revenue 5,107 4,956 2,460
------- ------- -------
TOTAL OPERATING REVENUES 15,600 11,246 6,880
------- ------- -------
OPERATING EXPENSES:
Cost of Natural Gas and
Transportation Charges 4,781 4,548 3,057
Operating Expenses 2,410 415 227
Processing Costs 4,052 3,566 1,443
------- ------- -------
TOTAL OPERATING EXPENSES 11,243 8,529 4,727
------- ------- -------
GROSS MARGIN $ 4,357 $ 2,717 $ 2,153
======= ======= =======
VOLUME (in Mmbtu)
Marketing 4,326 2,170 972
Gathering 48,136 13,603 15,635
Processing 2,544 1,850 799
------- ------- -------
TOTAL VOLUME 55,006 17,623 17,406
======= ======= =======
GROSS MARGIN per Mmbtu $ .08 $ .15 $ .12
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues, gross margins and volumes increased substantially in 1998
compared to 1997 in the Gathering Pipelines and Natural Gas Processing business
segment.
The significant increase in gathering activity in 1998 is attributable to
the Anadarko Acquisition that was effective in August 1998. Although the
Company's 1998 operations only included five months of activity from the
Anadarko System, it was responsible for 50% of the volumes gathered and
approximately $1 million of the gross margin earned in 1998. The Company has
been actively integrating the operations of the Anadarko System and expects to
create operational cost savings to be realized during the second half of 1999.
Despite a 38% increase in the volume of gas processed through its
processing facilities, the Company's gross margin from processing activities
declined significantly in 1998 as compared to 1997. This was due to lower
processing spreads realized in 1998 as NGL commodity prices continued to
deteriorate throughout the year. Processing margins in 1999 have shown signs of
improvement as NGL commodity prices have strengthened in response to rising
crude oil prices. The increase in processing volumes in 1998 is attributable to
the acquisition of the Hobart processing plant in the Anadarko Acquisition in
August 1998.
Marketing volumes increased 99% in 1998 over 1997. Most marketing
activities are characterized by large volumes and low margins; therefore, the
significant increase in volumes during 1998 improved the gross margin for the
segment but not to the same percentage magnitude. The volumetric increases are
the result of various acquisitions.
20
<PAGE>
The Company expects that the volumes, revenues and gross margin of its
gathering and processing business segment will substantially increase in 1999 as
a result of the benefit of a complete year of operations from the Anadarko
System, as well as other acquisitions consummated subsequent to December 31,
1998 (see Note 17 - Subsequent Events in the Notes to Consolidated Financial
Statements). There can be no assurance as to whether such improved operating
results will be realized or as to the timing or size of any profits to be
derived from such acquisitions. Factors that may affect the realization of
additional profits include changes in competition, production levels of natural
gas and potential changes in the regulatory environment affecting natural gas.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The gathering pipelines and natural gas processing business segment
reflected mixed results in 1997 as compared to 1996. The gross margin for the
operating unit as a whole increased to $2.7 million in 1997 from $2.2 million in
1996. Gathering transportation fees decreased by $132,000 in 1997 due
principally to throughput declines on the Company's pipeline investment in
Alaska. This decrease was more than offset by increased margins created from
marketing transactions on gathering pipelines acquired in the fourth quarter of
1996.
The volumes and gross margin related to the Company's processing plant
increased in 1997 as a result of having a full year of operations. However, the
processing margins on a per unit basis were negatively impacted by lower
commodity prices in 1997 as compared to 1996. The Company's share of proceeds
from the sale of NGLs and the residue natural gas declines as the price of the
commodity declines. However, a $600,000 expansion of the Harmony Plant's
gathering pipeline in the fourth quarter of 1997 connected four new wells and
increased NGL sales and residue gas sales by approximately 11% and 5%,
respectively.
OTHER INCOME, COSTS AND EXPENSES
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
In 1998, the Company received revenues of $.4 million from its oil and gas
properties as compared to $.3 million over the same period in 1997. The increase
is primarily attributable to a one-time settlement received by the Company on
its Vealmoor Field properties.
In 1998, the Company's depreciation, depletion and amortization increased
when compared to 1997 primarily due to increased depreciation on assets acquired
in the MIT, Midla and Anadarko Acquisitions. Collectively, these acquisitions
accounted for 105% of the increase of $1.6 million.
The Company's general and administrative expenses in 1998 increased $2.8
million when compared to 1997 primarily due to the numerous acquisitions the
Company has made during 1997 and 1998. In addition, the increase can be
attributed to the Company's expansion of its infrastructure to allow for
continued growth.
Interest expense for the year ended December 31, 1998 increased to $3.2
million, from $1.1 million in 1997. The Company was servicing an average of
$45.6 million in debt for the year ended December 31, 1998 as compared to $13.6
million in debt for the year ended December 31, 1997. The increased debt load in
1998 is primarily associated with the debt used to finance the Midla Acquisition
being outstanding for a full year as compared to only two months in 1997. In
addition, $35 million of additional debt associated with the Anadarko
Acquisition was outstanding for four months in 1998. 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
7.11% and 7.83% for the year ended December 31, 1998 and 1997, respectively.
The Company recognized annual operating income and net income in 1998 of
$13.6 million and $9.1 million, respectively, as compared to $7.3 million in
operating income and $5.8 million in net income for the year ended 1997. Basic
earnings per share ("EPS") increased 14% from $1.13 in 1997 to $1.29 in 1998.
The significant improvement in EPS is primarily attributable to the positive
impact of accretive acquisitions consummated during 1998 and 1997.
21
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
In 1997, the Company received revenues of $.3 million from its oil and gas
properties as compared to $.2 million over the same period in 1996. The increase
is primarily associated with a successful drilling program in the Company's Sun
Field properties.
In 1997, the Company's depreciation, depletion and amortization increased
when compared to 1996 primarily due to increased depreciation on assets acquired
in the MIT and Midla Acquisitions. Collectively, these new acquisitions
accounted for 70% of the increase of $.7 million.
In 1997, the Company's general and administrative expenses increased when
compared to 1996 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 94% of the increase of $2.2 million.
In 1997, the Company's interest expense increased 159% when compared to
the year ended 1996, from $.4 million to $1.1 million. The increase in 1997 is
associated with additional borrowings of approximately $37 million, which was
outstanding for one month and used to bridge finance the MIT Acquisition prior
to an equity offering and the addition of approximately $21.8 million in debt,
that was outstanding for November and December and used to finance the Midla
Acquisition.
The Company recognized annual operating income and net income in 1997 of
$7.3 million and $5.8 million, respectively, as compared to $2.6 million in
operating income and $1.9 million in net income for the year ended 1996. Basic
EPS increased 55% from $0.73 in 1996 to $1.13 in 1997. The Company achieved the
increased EPS despite the dilutive effects of issuing additional shares in the
August 1996 and July 1997 common stock offerings. The significant improvement in
EPS is primarily attributable to the positive impact of accretive acquisitions
consummated during 1997.
INCOME TAXES
As of December 31, 1998, the Company has net operating loss ("NOL")
carryforwards of approximately $16.6 million, expiring in various amounts from
1999 through 2011. These loss carryforwards 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 $4.9 million)
on the use of such carryforwards due to a change in shareholder 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.
For the year ended December 31, 1998, the Company removed a portion of the
valuation allowance related to net operating loss carryforwards that are more
likely than not to be utilized in the future. This resulted in the Company's
income tax expense being lowered by approximately $1.1 million.
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 flexibility has allowed the Company to pursue
acquisition and construction opportunities utilizing lower cost conventional
bank debt financing. These 1998 acquisition and construction projects increased
the Company's long term-debt to total capitalization ratio to 54% at December
31, 1998.
22
<PAGE>
As a result of significantly increased cash flows generated from its
numerous acquisitions, the Company has increased its borrowing availability
under its bank financing agreements with Bank One Texas, N.A. ("Bank One"). In
September 1998, the Company amended and restated its bank financing agreement
with Bank One. Amendments to the bank financing agreement (the "Credit
Agreement") were entered into which increased the Company's borrowing
availability, modified the Letter of Credit facility, established a credit
sharing, extended the maturity two years to August 2002, modified financial
covenants, established waiver and amendment approvals and changed the fee
structure to include a decrease on the interest rate on borrowings.
The amendments to the Credit Agreement increased the Company's borrowing
availability from $80.0 million to $150.0 million (with an initial committed
amount of $100 million). The amended Credit Agreement provides borrowing
availability as follows: (i) up to a $15.0 million sublimit for the issuance of
standby and commercial letters of credit and (ii) the difference between the
$100 million and the used sublimit available as a Revolver. Effective September
8, 1998, at the Company's option, borrowings under the amended Credit Agreement
accrue interest at London Inter-bank Offer Rate ("LIBOR") plus 1.25% or the Bank
One base rate less .25%. Finally, the amended Credit Agreement eliminated
escalations of the interest rate spread when borrowings exceed 50% of the
borrowing base.
Under the amended Credit Agreement, a credit sharing was established among
Bank One, CIBC Oppenheimer, Texas N.A. ("CIBC"), NationsBank Texas, N.A.
("NationsBank"), collectively the "Lenders" and the Company. The Company was
subject to an initial facility fee of $495,000 which represents all fees due on
borrowings up to $100 million. As funds in excess of $100 million are borrowed,
a .15% fee will be imposed. The Company's commitment fee remained at .375%.
Additionally, the Company is subject to an annual administrative agency fee of
$35,000.
In addition, the Credit Agreement is secured by all accounts receivable,
contracts, the pledge of all the Company's subsidiaries' stock and a first lien
security interest in the Company's pipeline systems. The Credit Agreement
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. The Company was in compliance with such financial covenants at
December 31, 1998.
In March 1999, the Company amended the Credit Agreement to increase the
committed amount of borrowing availability and allow for Canadian dollar
denominated loans. In anticipation of a new acquisition in Canada, the committed
amount of borrowing availability under the Credit Agreement was increased from
$100 million to $125 million. In addition, the Credit Agreement was revised to
allow the Company the flexibility to borrow funds in Canadian dollars in order
to eliminate foreign currency exchange risk as the functional currency of a
newly formed Canadian subsidiary will be Canadian dollars. See Note 17 -
Subsequent Events in the Notes to Consolidated Financial Statements for
additional information.
For the year ended December 31, 1998, the Company generated cash flow from
operating activities of approximately $17.2 and had approximately $47.0 million
available to the Company under its Credit Agreement. At December 31, 1998, the
Company had committed to making approximately $3.7 million in construction
related expenditures for 1999 - see "Construction", and an additional $7.5
million in acquisition related expenditures, as indicated in Note 6 -
Commitments and Contingencies, in the Notes to the Consolidated Financial
Statements. The Company believes that its Credit Agreements 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 $3.7
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.
23
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
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 is effective for all fiscal quarters of
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 the Company 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 the Company's financial
statements will depend on a variety of factors, including future interpretative
guidance from the FASB, the extent of the Company's hedging activities, the
types of hedging instruments used and the effectiveness of such instruments.
However, the Company does not believe the effect of adopting SFAS 133 will be
material to its financial position.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculations. As a result, many companies may be forced to upgrade
or completely replace existing hardware and software in order to be Y2K
compliant.
The Company has completed the assessment of its computer software,
hardware and other systems, including embedded technology, relative to Y2K
compliance. Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, the Y2K
problem identified above does impact some of the Company's computer software and
hardware systems. If the problems are not remedied timely, this could cause
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. Such disruption could materially and adversely affect the Company's
results of operation, liquidity and financial condition
The Company is currently updating some of its software and hardware in
order to improve the timeliness and quality of its business information systems.
A by-product of these improvements includes the purchase of Y2K compliant
software and hardware that otherwise are not Y2K compliant today. Software and
hardware selection has been completed and implementation has begun with
anticipated completion dates ranging from December 1998 to June 1999. A budget
for updating computer software and hardware of approximately $1.0 million
dollars has been established of which $.75 million has been spent through
December 31, 1998. Based on a successful implementation of our Y2K plan, we do
not expect the Y2K issue to pose significant operational problems for the
Company's computer systems.
The Company plans to complete its assessment of its key vendors, customers
and other third parties by June 30, 1999 in order to assess the impact such
third party Y2K issues will have, if any, on the Company's business operations.
The Company does not anticipate that any third parties' Y2K issues will
materially impact the Company's operations or financial results. With respect to
suppliers, the Company does not utilize any individual supplier in its
operations with whom interruptions for Y2K problems could have a material impact
on the Company's operations and financial results. In addition, there are
alternative suppliers with whom the Company anticipates that it would be able to
obtain sufficient quantities of products to continue to conduct its business.
Because the Company anticipates that it will complete its Y2K remediation
efforts in advance of December 31, 1999, it has not made any contingency plans
with respect to its operations and systems. However, a contingency plan will be
established by the third quarter of 1999 to address any unforeseen issues, or if
the planned improvements are not completed on schedule.
The above disclosure is a "YEAR 2000 READINESS DISCLOSURE" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All Statements made herein shall be construed within the
confines of that Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in the
Company's Common Stock, this disclosure is made for the SOLE PURPOSE of
communicating or disclosing information aimed at correcting, helping to correct
and/or avoid Year 2000 failures.
24
<PAGE>
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 looking
statements include, without limitation, statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources and Liquidity" regarding Midcoast's estimate of the
sufficiency of existing capital resources, whether funds provided by operations
will be sufficient to meet its operational needs in the foreseeable future, and
its ability to utilize NOL carryforwards prior to their expiration. Although
Midcoast believes that the expectations reflected in such forward looking
statements are reasonable, it can give no assurance that such expectations
reflected in such forward looking statements will prove to be correct. The
ability to achieve Midcoast's expectations is contingent upon a number of
factors which include (i) timely approval of Midcoast's acquisition candidates
by appropriate governmental and regulatory agencies, (ii) the effect of any
current or future competition, (iii) retention of key personnel and (iv)
obtaining and timing of sufficient financing to fund operations and/or
construction or acquisition opportunities. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed in this report, including without limitation those
statements made in conjunction with the forward looking statements included in
this report. All subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes derivative financial instruments to manage market
risks associated with certain energy commodities and interest rates. 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
fluctuations in interest rates. The Company does not engage in speculative
trading. Approvals are required from senior management prior to the execution of
any financial derivative. More detailed information about these financial
instruments, as well as the strategies and policies for their use, are provided
in Note 13.- Financial Instruments and Price Risk Management Activities in the
Notes to Conolidated Financial Statements.
COMMODITY PRICE RISK
The Company's commodity price risk exposure arises from inventory balances
and fixed price purchase and sale commitments. The Company uses exchange-traded
commodity futures contracts, options and swap contracts to manage and hedge
price risk related to these market exposures. The futures and options contracts
have pricing terms indexed to both the New York Mercantile Exchange and Kansas
City Board of Trade.
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 specified 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.
(See Note 13 - Financial Instruments and Price Risk Management Activities in the
Notes to Consolidated Financial Statements). As of December 31, 1998 and 1997,
the Company had a net unrealized loss on its various open commodity futures,
swaps and option contracts of $896,000 and $81,000, respectively. Utilizing the
sensitivity analysis method and assuming a hypothetical change in natural gas
prices of 10%, the Company would realize a net gain of $258,000 and $29,000 on
contracts held as of December 31, 1998 and 1997, respectively.
25
<PAGE>
INTEREST RATE RISK
The Company's debt financial instruments are sensitive to market
flucuations in interest rates. The interest rate swap agreements entered into by
the Company effectively convert $65 million of floating-rate debt to fixed-rate
debt (see Note 13 - Financial Instruments and Price Risk Management Activities
in the Notes to Consolidated Financial Statements). The Company makes payments
to counterparties at fixed rates and in return receives payments at floating
rates. The first swap agreement, which has a notional amount of $25 million, was
entered into in December 1997 and was subsequently transferred to another bank
in November 1998 and replaced with a new swap agreement which has an initial
term of two years through December 2000 but is extendible, at the bank's option,
for an additional 3 years. The second swap agreement, with a notional amount of
$40 million, was entered into in October 1998 and has an initial term of 3 years
through November 2001 but is extendible, at the bank's option, for an additional
2 years. Both transactions are recorded using accrual accounting. The table
below presents notional amounts and weighted average interest rates by expected
or contractual maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the swap agreement. The tabular
presentation related to the Company's interest rate risk is illustrated below
(in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
EXPECTED FISCAL YEAR OF MATURITY
- - -----------------------------------------------------------------------------------------------------------------
FAIR
1999 2000 2001 2002 TOTAL VALUE
- - -----------------------------------------------------------------------------------------------------------------
LIABILITIES:
<S> <C> <C> <C> <C> <C> <C>
Short term borrowing - variable
interest rate of 7.25% at
December 31, 1998 $ 754 $ -- $ -- $ -- $ 754 $ 754
- - -----------------------------------------------------------------------------------------------------------------
Long-term debt, including
current portion -- variable
interest rate of 6.16% at
December 31, 1998 $ 176 $ 82 $ -- $78,000 $78,258 $78,258
- - -----------------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVES:
- - -----------------------------------------------------------------------------------------------------------------
Interest Rate Swap
- - -----------------------------------------------------------------------------------------------------------------
Variable to fixed rate -
notional amounts $ -- $25,000 $40,000 $ -- $65,000 $ 461
- - -----------------------------------------------------------------------------------------------------------------
Average paid rate 4.71% 4.71% 4.48%
- - -----------------------------------------------------------------------------------------------------------------
Average received rate (a) 5.02% 5.08% 5.27%
- - -----------------------------------------------------------------------------------------------------------------
Net cash flow effect $ 202 $ 236 $ 319
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The variable rates presented are the average forward rates for the remaining
term of each swap agreement.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Midcoast Energy Resources, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Midcoast
Energy Resources, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midcoast
Energy Resources, Inc., and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
March 18, 1999
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 200 $ 308
Accounts and notes receivable, net of allowance of
$92 and $494, respectively 33,020 27,524
Materials and supplies, at average cost 1,363 1,225
--------- ---------
Total current assets 34,583 29,057
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas transmission facilities 150,041 90,859
Investment in transmission facilities 1,342 1,341
Natural gas processing facilities 4,917 4,626
Oil and gas properties, using the full-cost method of
accounting 1,383 1,344
Other property and equipment 2,872 2,411
--------- ---------
160,555 100,581
ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION (6,308) (3,029)
--------- ---------
154,247 97,552
OTHER ASSETS, net of amortization 2,512 1,429
--------- ---------
Total assets $ 191,342 $ 128,038
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 32,540 $ 25,779
Current portion of long-term debt payable to banks 176 199
Short-term borrowing from bank 754 700
Other current liabilities 124 491
--------- ---------
Total current liabilities 33,594 27,169
--------- ---------
LONG-TERM DEBT PAYABLE TO BANKS 78,082 28,923
OTHER LIABILITIES 2,024 190
DEFERRED INCOME TAXES (Note 8) 10,808 9,613
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 550 692
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued 7,149,513 and 7,101,663
shares, respectively 71 71
Paid-in capital 80,955 80,681
Accumulated deficit (11,947) (19,283)
Unearned compensation (4) (18)
Treasury stock (at cost), 181,125 shares at
December 31, 1998 (2,791) --
--------- ---------
Total shareholders' equity 66,284 61,451
--------- ---------
Total liabilities and shareholders' equity $ 191,342 $ 128,038
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
28
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Sale of natural gas $ 213,464 $ 100,733 $ 23,547
Transportation fees 13,406 6,693 2,948
Natural gas processing revenue 6,761 4,956 2,460
Other 438 362 460
----------- ----------- -----------
Total operating revenues 234,069 112,744 29,415
----------- ----------- -----------
OPERATING EXPENSES:
Cost of natural gas and transportation
charges 206,950 96,769 23,169
Natural gas processing costs 4,052 3,566 1,443
Depreciation, depletion and amortization 3,197 1,592 818
General and administrative 6,283 3,455 1,223
Other 34 71 189
----------- ----------- -----------
Total operating expenses 220,516 105,453 26,842
----------- ----------- -----------
Operating income 13,553 7,291 2,573
NON-OPERATING ITEMS:
Interest expense (3,247) (1,067) (413)
Minority interest in consolidated
subsidiaries (58) (222) (197)
Other income (expense), net 174 (88) (49)
----------- ----------- -----------
Total non-operating items (3,131) (1,377) (659)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 10,422 5,914 1,914
PROVISION FOR INCOME TAXES:
Current (114) (150) --
Deferred (1,195) -- --
----------- ----------- -----------
Net income 9,113 5,764 1,914
5% CUMULATIVE PREFERRED STOCK DIVIDENDS -- -- (23)
----------- ----------- -----------
NET INCOME TO COMMON SHAREHOLDERS $ 9,113 $ 5,764 $ 1,891
=========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 1.29 $ 1.13 $ .73
=========== =========== ===========
Diluted $ 1.25 $ 1.10 $ .73
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 7,074,372 5,115,169 2,592,694
=========== =========== ===========
Diluted 7,298,345 5,251,456 2,597,649
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
29
<PAGE>
MIDCOAST ENERGY RESOURCES INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
5% TOTAL
CUMULATIVE COMMON PAID-IN ACCUMULATED UNEARNED TREASURY SHAREHOLDERS'
PREFERRED
STOCK STOCK CAPITAL DEFICIT COMPENSATION STOCK EQUITY
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 $ 200 $ 19 $ 18,820 $ (14,775) $ (107) $ -- $ 4,157
Shares issued
in
conjunction
with a
financing
agreement
with an
affiliate -- -- 6 -- -- -- 6
Shares issued
or vested
under various
stock-based
compensation
arrangements -- -- 39 -- 17 -- 56
Redemption of 200,000
shares of 5%
cumulative
preferred
stock (200) -- 82 -- -- -- (118)
Sale of 1,250,000
shares of
common stock -- 13 7,988 -- -- -- 8,001
Net income -- -- -- 1,914 -- -- 1,914
5% cumulative
preferred
stock
dividends -- -- -- (23) -- -- (23)
Common stock
dividends,
$.06 per
share -- -- -- (400) -- -- (400)
----- ------ --------- ---------- --------- ----- ----------
Balance,
December 31,
1996. $ -- $ 32 $ 26,935 $ (13,284) $ (90) $ -- $ 13,593
===== ====== ========= ========== ========= ===== ==========
Shares issued
or vested
under various
stock-based
compensation
arrangements -- -- -- -- 72 -- 72
Sale of 2,893,750
shares of
common stock -- 29 34,024 -- -- -- 34,053
Common stock
warrants
issued in
conjunction
with the
Midla
Acquisition -- 4 9,167 -- -- -- 9,171
10% stock
dividend
(645,375 shares) -- 6 10,555 (10,565) -- -- (4)
Net income -- -- -- 5,764 -- -- 5,764
Common stock
dividends,
$.24 per
share -- -- -- (1,198) -- -- (1,198)
----- ------ --------- ---------- --------- ----- ----------
Balance,
December 31,
1997 $ -- $ 71 $ 80,681 $ (19,283) $ (18) $ -- $ 61,451
===== ====== ========= ========== ========= ===== ==========
Shares issued
or vested
under various
stock-based
compensation
arrangements -- -- -- -- 14 -- 14
Warrants
exercised -- -- 274 -- -- -- 274
Net income -- -- -- 9,113 -- -- 9,113
Treasury stock
purchased -- -- -- -- -- (2,791) (2,791)
Common stock
dividends,
$.24 per
share -- -- -- (1,777) -- -- (1,777)
----- ------ --------- ---------- --------- ----- ----------
Balance,
December 31,
1998 $ -- $ 71 $ 80,955 $ (11,947) $ (4) $(2,791) $ 66,284
===== ====== ========= ========== ========= ====== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
30
<PAGE>
MIDCOAST ENERGY RESOURCES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income applicable to common
shareholders $ 9,113 $ 5,764 $ 1,891
Adjustments to arrive at net cash
provided by operating activities-
Depreciation, depletion and amortization 3,197 1,592 818
Deferred income taxes 1,195 -- --
Recognition of deferred income (83) (83) (83)
Gain on sale of operating pipeline -- -- (81)
Minority interest in consolidated
subsidiaries 58 222 197
Other -- 69 9
Changes in working capital accounts-
Increase in accounts receivable (4,498) (12,022) (6,575)
Increase in other current assets (138) (933) --
Increase in accounts payable and
accrued liabilities 8,325 9,247 6,388
-------- -------- --------
Net cash provided in operating
activities 17,169 3,856 2,564
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (52,076) (60,778) (8,363)
Capital expenditures (7,816) (1,410) (1,028)
Sale of operating pipelines -- -- 212
Other (695) (309) 337
-------- -------- --------
Net cash used in investing
activities (60,587) (62,497) (8,842)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank debt borrowings 89,159 65,321 9,288
Bank debt repayments (39,969) (39,891) (8,389)
Net proceeds from equity offering -- 34,053 8,113
Proceeds from notes payable to
shareholders and affiliates -- -- 100
Repayments on notes payable to
shareholders and affiliates -- -- (1,134)
Advances to joint ventures (724) -- --
Financing costs (588) (504) (120)
Treasury stock purchases (2,791) -- --
Redemption of 5% cumulative preferred
stock -- -- (118)
Dividends on common stock (1,777) (1,198) (400)
-------- -------- --------
Net cash provided by financing
activities 43,310 57,781 7,340
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (108) (860) 1,062
-------- -------- --------
CASH AND CASH EQUIVALENTS,
beginning of year 308 1,168 106
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 200 $ 308 $ 1,168
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR INTEREST $ 2,135 $ 706 $ 411
======== ======== ========
CASH PAID FOR INCOME TAXES $ 311 $ 241 $ 40
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
31
<PAGE>
1. BACKGROUND AND INFORMATION:
Midcoast Energy Resources, Inc. ("Midcoast" or "the Company") was formed on
May 11, 1992, as a Nevada corporation and, in September 1992, became the
successor to Nugget Oil Corporation. The merger was accounted for as a pooling
of interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, all of its wholly owned subsidiaries and those subsidiaries in
which the Company owns a controlling interest or is in a control position. As of
December 31, 1998, the Company's wholly-owned subsidiaries include Magnolia
Pipeline Corporation, Magnolia Resources, Inc., Magnolia Gathering, Inc., H&W
Pipeline Corporation, Midcoast Holdings No. One, Inc., Midcoast Marketing, Inc.
("MMI"), Midcoast Gas Pipeline, Inc., Nugget Drilling Corporation, Midcoast
Interstate Transmission, Inc. ("MIT"), Tennessee River Interstate Gas Company,
Inc., Mid Louisiana Gas Company ("MLGC"), Mid Louisiana Gas Transmission Company
("MLGT"), Creole Gas Pipeline Corporation, Midcoast Energy Marketing Inc.,
Midcoast Gas Services, Inc. ("MGSI"), and Midcoast Del Bajio S. de R.L. de
C.V.,. The consolidated subsidiaries in which the Company owns a controlling
interest or is in a control position are Starr County Gathering System, a Joint
Venture ("Starr County"), Pan Grande Pipeline, L.L.C., a Texas limited liability
company ("Pan Grande") and Arcadia/Midcoast Pipeline of New York, L.L.C., a New
York limited liability company. The Company does not own a controlling interest
in Texana Gas Pipeline Company; therefore, this investment is accounted for
under the equity method of accounting.
All significant intercompany transactions and balances have been
eliminated. Certain amounts for 1997 and 1996 have been reclassified in the
accompanying consolidated financial statements to conform to the current year
presentation. The number of shares and price per share amounts have been
restated for all periods presented to reflect the ten percent stock dividend in
March 1998 and the five-for-four stock split in March 1999 (see Note 7 - Capital
Stock).
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that effect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.
INCOME TAXES
Income taxes are based on income reported for tax return purposes along
with a provision for deferred income taxes. Deferred income taxes are provided
to reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year end.
Tax credits are accounted for under the flow-through method, which reduces the
provision for income taxes in the year the tax credits first become available.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax asset will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
REGULATED PIPELINES
MIT and MLGC are subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." Regulatory assets represent probable future revenue to MIT
and MLGC associated with certain costs which will be recovered from customers
through the regulatory, or the rate making process. MIT and MLGC had no material
regulatory assets or liabilities as of December 31, 1998.
The Federal Energy Regulatory Commission ("FERC") regulates the interstate
transportation and certain sales of natural gas, including among other things,
rates and charges allowed natural gas companies, extensions and abandonment of
facilities and service, rates of depreciation and amortization and certain
accounting methods utilized by MIT and MLGC.
32
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Interstate and intrastate natural gas transmission, distribution and
processing facilities and other equipment are stated at cost and depreciated by
the straight-line method at rates based on the following estimated useful lives
of the assets:
Interstate natural gas transmission facilities 15 - 66.0 Years
Intrastate natural gas transmission facilities 15 - 60.0 Years
Pipeline right-of-ways 17.5 Years
Natural gas processing facilities 30.0 Years
Other property and equipment 3 - 10.0 Years
For regulated interstate natural gas transmission facilities, the cost of
additions to property, plant and equipment includes direct labor and material
allocable overheads and an allowance for the estimated cost of funds used during
construction ("AFUDC"). Provisions for AFUDC are not material, and accordingly,
are not presented separately in the accompanying consolidated statements of
operations. Maintenance and repairs, including the cost of renewals of minor
items of property, are charged principally to expense as incurred. Replacements
of property (exclusive of minor items or property) are charged to the
appropriate property accounts. Upon retirement of a pipeline plant asset, its
cost is charged to accumulated depreciation together with the cost of removal,
less salvage value.
For all other non-regulated assets, repairs and maintenance are charged to
expense as incurred; renewals and betterments, including any direct labor, are
capitalized.
At December 31, 1998, the Company had $8.5 million in construction in
progress and for the year ended December 31, 1998 the Company capitalized
interest costs of $.1 million. No interest was capitalized in 1997.
The Company accounts for its oil and gas production activities using the
full cost method. Under this method, all costs, including indirect costs related
to exploration and development activities, are capitalized as oil and gas
property costs. No gains or losses are recognized on the sale or disposition of
oil and gas reserves, except for sales that include a significant portion of the
total remaining reserves.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers
short-term, highly liquid investments that have an original maturity of three
months or less at the time of purchase to be cash equivalents.
TRANSPORTATION AND EXCHANGE GAS IMBALANCES
In the course of providing transportation and exchange services to
customers, natural gas pipelines may receive different quantities of gas from
shippers than the quantities delivered on behalf of those shippers. These
transactions result in transportation and exchange gas imbalance receivables and
payables that are settled through cash-out procedures specified in each tariff
or recovered or repaid through the receipt or delivery of gas in the future.
Such imbalances are recorded as current assets or current liabilities on the
balance sheet using the posted index prices of the applicable FERC-approved
tariffs, which approximate market rates. Transportation and exchange gas
imbalances were not material as of December 31, 1998 and 1997.
DEFERRED CONTRACT COSTS
Costs incurred to construct natural gas transmission facilities pursuant
to long-term natural gas sales or transportation contracts, which upon
completion of construction are assigned to the contracting party, are
capitalized as deferred contract costs and classified as "Other Assets" on the
consolidated balance sheet. These costs are amortized over the life of the
initial contract on a straight-line basis.
33
<PAGE>
HEDGING ACTIVITIES
The Company's policy is to maintain, as nearly as practicable, a fully
hedged position on its net natural gas purchase and sales commitments using
back-to-back physical transactions. When a back-to-back physical transaction
cannot be completed, the Company will periodically enter into financial
instruments to reduce its exposure to commodity price risk. Midcoast uses
futures and options with maturities of eighteen months or less to hedge against
the volatility of the price of natural gas purchases and sales. The financial
derivatives have pricing terms indexed to both the New York Mercantile Exchange
("NYMEX") and Kansas City Board of Trade ("KBOT") futures contract.
Derivatives held for hedging activities are not recorded on the balance sheet.
Derivative settlements are recorded as a gain or loss in operating income and
cash inflows and outflows are recognized in operating cash flows as the
settlements of the transactions occur. For a further discussion of the Company's
hedging activities see Note 13 - Financial Instruments and Price Risk Management
Activities.
STOCK ISSUANCE COSTS
Direct costs incurred by the Company in connection with its offering of
securities (see Note 7 - Capital Stock) were applied as a reduction of the
offering proceeds.
REVENUE RECOGNITION
Customers are invoiced and the related revenue is recorded as natural gas
deliveries are made. Pipeline sales are recognized upon closing the sale
transaction. Oil and gas revenue from the Company's interests in producing wells
is recognized as oil and gas is produced from those wells.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be disposed of," the Company recognizes impairment losses for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. No impairment losses have been recorded
by the Company.
EMPLOYEE STOCK BASED COMPENSATION
In 1997, the Company adopted FASB Statement No. 123, "Accounting for
Stock-Based Compensation"("SFAS 123"). Under SFAS 123, the Company is permitted
to either record expenses for stock options and other stock-based employee
compensation plans based on their fair value at the date of grant or to continue
to apply Accounting Principles Board Opinion No. 25 ("APB 25") and recognize
compensation expense, if any, based on the intrinsic value of the equity
instrument at the measurement date. The Company elected to continue following
APB 25; therefore, no compensation expense has been recognized because the
exercise price of employee stock options equals the market price of the
underlying stock on the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distribution to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that displays with the same prominence as other financial
statements. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 establishes standards on the
way that public companies report financial information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
34
<PAGE>
The Company has adopted the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, effective January 1, 1998.
Accordingly, the Company has segregated its business activities into three
segments: Transmission Pipelines segment, End-user Pipeline segment, and
Gathering Pipelines and Natural Gas Processing segment.
The FASB also 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 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS 133 will require the Company 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 No. 133 on the
Company's financial statements will depend on a variety of factors, including
future interpretative guidance from the FASB, the extent of the Company's
hedging activities, the types of hedging instruments used and the effectiveness
of such instruments. However, the Company does not believe the effect of
adopting SFAS 133 will be material to its financial position.
3. PIPELINE ACQUISITIONS AND CONSTRUCTION:
THE MIT ACQUISITION
In May 1997, Midcoast acquired the pipeline and energy services operations
from Atrion Corporation ("Atrion") for cash consideration of $38.2 million and
up to $2 million in contingent deferred payments (the "MIT Acquisition"). The
MIT operations include (i) a 295 mile interstate transmission pipeline located
in northern Alabama, Mississippi and southern Tennessee which transports natural
gas to industrial and municipal customers (the "MIT System"), (ii) a 38 mile and
a one mile pipeline in northern Alabama which primarily serve two large
industrial customers and (iii) a natural gas marketing company which was
subsequently merged into MMI. The acquisition was initially funded through the
Company's existing credit facility. Subsequently, the proceeds from the
Company's common stock offering in July 1997 were used to retire the
indebtedness incurred on the MIT Acquisition.
THE MIDLA ACQUISITION
In October 1997, the Company completed its merger of Republic Gas Partners
L.L.C. ("Republic"), which owned MLGC, MLGT and Mid Louisiana Marketing Company
that was subsequently merged into MMI. Consideration for the acquisition
included $3.2 million in cash, the assumption of approximately $19.1 million in
bank indebtedness, 481,247 shares of Midcoast common stock, par value $.01 per
share ("Common Stock"), and warrants to acquire 171,880 shares of Common Stock
(the "Midla Acquisition"). The assets acquired included (i) a 405 mile
interstate gas pipeline which runs from the Monroe gas field in northern
Louisiana, southward through Mississippi to Baton Rouge, Louisiana ("MIDLA
System"), (ii) three end-user gas pipelines with a collective length of 40.0
miles and (iii) two offshore lateral gas gathering pipelines with a collective
length of 8.6 miles. These pipelines serve a number of large industrial and
municipal customers. The acquisition was funded through the Company's existing
credit facility.
As a result of agreements to provide a new source of high-pressure natural
gas for customers in and around the Port Hudson and Baton Rouge area, the
Company has acquired several pipeline systems and is constructing additional
contiguous pipelines to build the needed infrastructure to meet this demand (the
"Baton Rogue Expansion"). The Company has estimated the total cost of the
project to be $10.0 million. At December 31, 1998, $6.3 million has been
incurred in purchase and construction costs. The remaining expenditures are
expected to be incurred no later than the second quarter of 1999 and will be
funded through the Company's credit facility.
35
<PAGE>
ANADARKO ACQUISITION
In September 1998, MGSI purchased the Anadarko gas gathering system from
El Paso Field Services Company, a business unit of El Paso Energy Corporation.
The pipeline system was purchased for cash consideration of $35 million
("Anadarko Acquisition"). The acquisition was financed through the Company's
existing credit facility.
Under the agreement, MGSI acquired ownership and operation of the Anadarko
gas gathering system located in Beckham and Roger Mills counties, Oklahoma and
Hemphill, Roberts and Wheeler counties, Texas effective August 1, 1998. The
system was comprised of over 696 miles of pipeline with an average throughput of
157 Mmcf/day and a total capacity of 345 Mmcf/day ("Anadarko System"). The
system gathers gas from approximately 250 wells and includes a 40 Mmcf/day
natural gas processing facility, 11 compressor stations and interconnections
with eight major interstate and intrastate pipeline systems.
The Company's 1998 operating revenues, net income applicable to common
shareholders, and basic and diluted earnings per common share on an unaudited
pro forma basis are $240 million, $8.9 million, $1.26 and $1.22, respectively.
The Company's 1997 operating revenues, net income applicable to common
shareholders, and basic and diluted earnings per common share on an unaudited
pro forma basis are $140 million, $5.4 million, $1.06 and $1.04, respectively.
The pro forma amounts are based on estimates and assume the Anadarko Acquisition
and $35 million in debt financing occurred as of the beginning of the respective
years. The pro forma combined results presented are not necessarily indicative
of actual results that would have been achieved had the acquisitions occurred at
the beginning of 1998 or the beginning of 1997.
The Company expanded the Anadarko System in December 1998 with the
acquisition of the Mendota system from Seagull Energy Corporation for $3.75
million. The Mendota system, which was interconnected with the Anadarko System,
includes two processing facilities and 35 miles of gathering pipeline.
1999 ACTIVITY
During 1999, the Company has completed several acquisitions totaling $32.3
million. These acquisitions include the purchase of a majority interest in
SeaCrest Company LLC, the Tinsley crude oil gathering system, the acquisition of
Dufour Petroleum Inc. and Flare, LLC. and the Calmar natural gas gathering
system and treating plant. For additional information, see Note 17 - Subsequent
Events.
The Company utilized the purchase method of accounting to record all of
its acquisitions. No goodwill arose from these transactions.
For further information regarding the Anadarko Acquisitions, refer to the
Company's Form 8-K and 8-KA filed on September 22, 1998 and November 20, 1998.
4. DEBT OBLIGATIONS:
At December 31, 1998 and 1997, the Company had outstanding debt
obligations as follows (in thousands):
December 31,
-----------------------
1998 1997
------ ------
(a) Note payable by Starr County to a bank
under a term loan bearing interest
at the prime rate plus 1% (8.75% at
December 31, 1998) $ -- $ 31
(b) Note payable by Pan Grande to a bank
under a term loan bearing interest at
the prime rate plus 1% (8.75% at
December 31, 1998), principal and accrued
interest are payable in 59 installments
of $16,754 with a final payment of
the remaining unpaid principal and interest
due in May 2000 258 425
36
<PAGE>
(c) Revolving credit line with a bank under a
$100 million promissory note (see
following discussion) 78,000 28,666
Revolving credit line with a bank for
working capital needs under a $100
million promissory note bearing interest
at the prime rate less .25% (7.5% at
December 31, 1998 (see following discussion) 754 700
--------- ----------
Total debt 79,012 29,822
Less current portion (930) (899)
--------- ----------
Total long-term debt $ 78,082 $ 28,923
========= ==========
(a) In January 1996, Starr County, in which Midcoast owns a 60% interest
and acts as manager, obtained $175,000 from a bank lender to finance the
acquisition of a gas gathering pipeline. The loan was secured by the pipeline
and related contracts. The Note was retired in the first quarter of 1998.
(b) In March 1996, Pan Grande obtained $800,000 from a bank to partially
finance the acquisition of six pipelines. The loan is secured by the pipelines
and related contracts. Furthermore, members of Pan Grande have guaranteed the
loan in an amount equal to their respective ownership interest.
(c) In September 1998, the Company amended and restated its bank financing
agreement with Bank One Texas, N.A. ("Bank One"). Amendments to the bank
financing agreement (the "Credit Agreement") were entered into which increased
the Company's borrowing availability, modified the Letter of Credit facility,
established a credit sharing, extended the maturity two years to August 2002,
modified financial covenants, established waiver and amendment approvals and
changed the fee structure to include a decrease on the interest rate on
borrowings.
The amendments to the Credit Agreement increased the Company's borrowing
availability from $80.0 million to $150.0 million (with an initial committed
amount of $100 million). The amended Credit Agreement provide borrowing
availability as follows: (i) up to a $15.0 million sublimit for the issuance of
standby and commercial letters of credit and (ii) the difference between the
$100 million and the used sublimit available as a Revolver. Effective September
8, 1998, at the Company's option, borrowings under the amended Credit Agreement
will accrue interest at London Inter-bank Offer Rate ("LIBOR") plus 1.25% or the
Bank One base rate less .25%. These rates reflect a .25% reduction in both the
LIBOR and Bank One base rate option. Finally, the amended Credit Agreement
eliminated escalations of the interest rate spread when borrowings exceed 50% of
the borrowing base.
Under the amended Credit Agreement, a credit sharing has been established
among Bank One, CIBC Oppenheimer, Texas N.A. ("CIBC"), NationsBank Texas, N.A.
("NationsBank"), collectively the "Lenders" and the Company. The Company is
subject to an initial facility fee of $495,000 which represents all fees due on
borrowings up to $100 million. As funds in excess of $100 million are borrowed,
a .15% fee will be imposed. The Company's commitment fee will remain at .375%.
Additionally, the Company is subject to an annual administrative agency fee of
$35,000.
In addition, the Credit Agreement is secured by all accounts receivable,
contracts, the pledge of all the Company's subsidiaries' stock and a first lien
security interest in the Company's pipeline systems. The Credit Agreement
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
December 31, 1998.
37
<PAGE>
In March 1999, the Company amended the Credit Agreement to increase the
committed amount of borrowing availability to $125 million and to allow for
Canadian dollar denominated loans. See Note 17 - Subsequent Events for
additional information.
In an effort to mitigate interest rate fluctuations exposure, the Company
has entered into two separate swap agreements which effectively converts $65
million of floating rate debt to fixed rate debt (See Note 13 - Financial
Instruments and Price Risk Management Activities).
The aggregate maturities of long-term debt at December 31, 1998 are as
follows:
AS OF DECEMBER 31, (In thousands)
------------------ --------------
1999 $ 176
2000 82
2001 --
2002 78,000
-------
Total $78,258
=======
5. RELATED PARTY TRANSACTIONS:
In April 1994, affiliates owned by former officers and directors of the
Company extended collateral needed to obtain long-term bank financing for the
Cook Inlet Pipelines. The collateral was outstanding for a period of
approximately eight months at which point the Company replaced the loan with
another commercial lender and the collateral was released. In consideration for
extending the collateral on the initial loan, the Company assigned a five
percent net revenue interest on the net income derived from the Company's
investment in the oil and natural gas gathering pipelines near Cook Inlet,
Alaska. The five percent override on the net revenue interest became effective
in 1998, after all costs associated with the investment were recaptured by the
Company. As of December 31, 1998, approximately $2,600 has been paid under the
assignment of the net revenue interest to a related party.
6. COMMITMENTS AND CONTINGENCIES:
ACQUISITION CONTINGENCY
In December 1998, the Company entered into separate definitive purchase
and sales agreements with Koch Gateway Pipeline Company ("Koch") to purchase the
Gloria pipeline system in southeastern Louisiana and the Bruni gathering system
in south Texas for a combined total price of $7,525,000. The Gloria system is
comprised of approximately 133 miles of gathering pipeline located in south
Louisiana. The system gathers gas from seven producing fields and also directly
supplies natural gas to an industrial customer and a local distribution company
in the area. The Bruni system is comprised of 142 miles of gathering pipeline
located in south Texas. The system gathers gas from producing wells in the
region and also provides natural gas supply services to several municipalities.
Both pipelines are presently part of Koch's interstate system and the Federal
Energy Regulatory Commission must approve the system's abandonment from
interstate service and sale before the acquisition can be consummated.
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.
LEASES
The Company incurred net lease expenses of $.3 million, $.1 million, and
$.1 million, during the years ended 1998, 1997 and 1996, respectively. As of
December 31, 1998, future minimum lease payments due under these leases are
approximately $.2 million, $.2 million, $.1 million and $.1 million for the
years ended December 31, 1999, 2000, 2001 and 2002, respectively.
38
<PAGE>
MIT ACQUISITION CONTINGENCY
As part of the MIT Acquisition, the Company has agreed to pay additional
contingent annual payments to Atrion, which will be treated as deferred purchase
price adjustments, not to exceed $250,000 per year. The annual payment 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. At December 31, 1998, the Company has accrued $187,500 as an
additional purchase price adjustment.
MIDLA ACQUISITION CONTINGENCY
In conjunction with the Midla 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 137,500 warrants to Republic to acquire Midcoast
Common Stock at an exercise price of $15.82 per share. In addition, concurrent
with initial expenditures on the project, the Company would incur a $1.2 million
cash obligation to Republic. As of December 31, 1998, none of the provisions of
this contingency have been met.
7. CAPITAL STOCK:
COMMON STOCK
In August 1996, the Company sold 1,375,000 shares of its Common Stock at
an offering price of $7.27 per share. Proceeds of $8.8 million, net of issuance
costs, were received by the Company. The proceeds were used to repay
indebtedness with the remainder applied to acquisitions of pipelines and related
assets.
In July 1997, approximately 3.2 million shares of the Company's Common
Stock were issued in a public offering registered under the Securities Act of
1933, as amended, at an offering price of $11.64. Proceeds of approximately $34
million, net of issuance costs, were received and used to repay borrowings on
indebtedness incurred on the MIT Acquisition.
In May 1998, the Board of Directors ("Board") and the Company's
shareholders approved a resolution to amend the Articles of Incorporation to
increase the number of authorized shares of Common Stock, par value $.01 per
share from 10,000,000 to 25,000,000 shares and to authorize 5,000,000 shares of
preferred stock, par value $.001 per share ("Preferred Stock").
The Company has five million shares of Preferred Stock authorized, none of
which are outstanding as of December 31, 1998. The preferred stock may be issued
in multiple series with various terms, as authorized by the Board. The Company
has 25 million shares of Common Stock authorized, of which 7,149,513 shares were
issued and outstanding as of December 31, 1998. In connection with the
five-for-four stock split discussed below, the Company filed a Certificate of
Stock Split in March 1999 to increase the authorized shares of Common Stock to
31.25 million shares.
TREASURY STOCK
In March 1998, the Board authorized the repurchase of the Company's
outstanding shares of Common Stock to be used for specific corporate purposes.
During 1998, the Company repurchased 181,125 common shares at a weighted-average
price of $15.41 per share. In March 1999, the Company issued 140,574 shares of
treasury stock in connection with an acquisition (see Note 17 - Subsequent
Events).
39
<PAGE>
STOCK DIVIDENDS AND STOCK SPLITS
On February 3, 1998, the Board declared a ten percent stock dividend to be
paid to shareholders of record at the close of business on February 13, 1998
("Stock Dividend Record Date") on March 2, 1998. Shareholders of record received
one additional share for each ten shares held. No fractional shares were issued
and shareholders entitled to a fractional share received a cash payment equal to
the market value of the fractional share at the close of the market on the Stock
Dividend Record Date.
On February 1, 1999, the Board declared a five-for-four stock split to be
paid to shareholders of record at the close of business on February 11, 1999
("Stock Split Record Date") on March 1, 1999. No fractional shares were issued
and shareholders entitled to a fractional share received a cash payment equal to
the market value of the fractional share at the close of the market on the Stock
Split Record Date.
All presentations herein are made on a post-dividend and post-split basis.
WARRANTS
In February 1996, the Company issued warrants to purchase 47,231 shares of
the Company's Common Stock at $5.71 per share and were all exercised in 1998.
These warrants were issued in connection with the Company's August 1996 Common
Stock offering.
Also in connection with the Company's August 1996 Common Stock offering,
the underwriters received warrants to acquire 137,500 shares at 142% of the
initial offering price per share. The securities underlying these warrants are
subject to piggyback registration rights and expire August 13, 2001. As of
December 31, 1998, none of these warrants have been exercised.
In connection with the Midla Acquisition, the Company issued warrants to
acquire 171,880 shares of Common Stock at $15.82 per share. The securities
underlying these warrants are subject to demand and piggyback registration
rights and expire in October 2000. As of December 31, 1998, none of these
warrants have been exercised.
8. INCOME TAXES:
The Company has net operating loss ("NOL") carryforwards of approximately
$16.6 million, expiring in various amounts from 1999 through 2011. These loss
carryforwards 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 $4.9 million) on the use of such
carryforwards due to a change in shareholder control under the Internal Revenue
Code triggered by the Company's July 1997 Common Stock offering and the change
of ownership created by the Midla Acquisition.
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1998 and 1997, are as follows (in
thousands):
December 31,
-------------------------
1998 1997
-------- -------
NOL carryforwards $ 5,644 $ 5,756
Investment tax credit carryforwards -- 108
Alternative minimum tax credit 420 94
Financial basis of assets
in excess of tax basis (12,318) (10,990)
Valuation allowance (4,554) (4,581)
-------- -------
Net deferred tax liabilities $(10,808) $(9,613)
======== =======
The valuation allowance declined $27,000 in the year ended December 31,
1998. The decline was the net result of current year utilization of net
operating losses to offset taxable income, the adjustment of the net operating
loss carryforward and related valuation allowance acquired in connection with
the 1997 merger with Republic, and the removal of $1.1 million of valuation
allowance related to net operating losses that are more likely than not to be
utilized in the future.
40
<PAGE>
A reconciliation of the provision for income taxes to the statutory United
States tax rate is as follows (in thousands):
For The Year Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Federal tax computed at
statutory rate $ 3,543 $ 1,960 $ 643
Utilization of net operating loss
carryforwards (1,145) (1,810) (643)
Reduction in valuation allowance (1,089) -- --
------- ------- -------
Actual provision $ 1,309 $ 150 $ --
======= ======= =======
9. MAJOR CUSTOMERS:
For the years ended December 31, 1998, 1997 and 1996, the Company derived
12% of total revenue from a new customer in 1998, 12% from a new customer in
1997, and 31% and 15% of total revenue from two customers in 1996.
10. CONCENTRATION OF CREDIT RISK:
The Company derives revenue from commercial companies located in Alabama,
Alaska, Kansas, Louisiana, Mississippi, New York, Oklahoma, Tennessee and Texas.
Two of Midcoast's largest customers account for 15% or approximately $5.1
million of the outstanding accounts receivable at December 31, 1998. These
accounts receivable were subsequently collected under normal credit terms and
the Company believes that future accounts receivable with these companies will
continue to be collected under normal credit terms based on previous experience.
The Company performs ongoing evaluations of its customers and generally does not
require collateral. The Company assesses its credit risk and provides an
allowance for doubtful accounts for any accounts that it deems doubtful of
collection. At December 31, 1998, $92,000 was reserved as a provision for
doubtful accounts.
The Company periodically maintains cash balances with banks exceeding the
amounts insured by the Federal Deposit Insurance Corporation ("FDIC"). As of
December 31, 1998, none of the Companies cash balances with banks exceeded FDIC
limits. At December 31, 1998 and 1997 the Company had no cash or cash
equivalents under repurchase agreements originated by the Company's bank under
an arrangement whereby collected balances held in the Company's main operating
account are invested overnight.
The derivative financial instruments utilized by the Company in its
hedging activities include NYMEX and KBOT futures and option contracts that are
guaranteed by their respective exchange and have nominal risk. The change in
market value of futures and option contracts requires daily cash settlement in
margin accounts with brokers. At December 31, 1998, the Company had $181,000 in
margin cash accounts to service these derivative financial instruments. Swap
contracts and most other over-the-counter instruments are generally settled at
the expiration of the contract term. The Company is exposed to credit risk in
the event of nonperformance by a counterparty. For each counterparty, the
Company analyzes its financial condition prior to entering into the agreement,
establishes credit limits and monitors the appropriateness of these limits on an
ongoing basis.
11. EMPLOYEE BENEFITS:
The Company issued a total of 87,096 and 35,760 shares of Common Stock to
certain key employees in 1995 and 1996, respectively. Of the shares issued in
1996, 12,266 were issued in connection with employment agreements with certain
employees and vest in equal amounts over a three-year period. The shares were
valued at the estimated fair market value on the date of issuance. Compensation
expense is being recognized ratably over the vesting period.
In December 1996, the Company established a defined contribution 401(k)
Profit Sharing Plan for its employees. The plan provides participants a
mechanism for making contributions for retirement savings. Each participant may
contribute certain amounts of eligible compensation. The Company made a matching
contribution to the plan of approximately $83,000 and $81,000 for the years
ended December 31, 1998 and 1997, respectively.
In October 1998, the Board approved an Employee Stock Purchase Plan
("ESPP"), subject to shareholder approval at the Company's 1999 annual
shareholders meeting. The purpose of the ESPP, as amended, is to permit Company
employees to purchase Common Stock on a monthly basis at a 15% discount to the
market price in order to attract and retain dedicated and reliable employees.
The maximum number of shares of the Company's Common Stock which shall be
reserved for sale under the ESPP, not including treasury shares or shares
purchased in the open market, shall be 100,000 shares. Through December 31,
1998, all shares purchased under the plan have been acquired on the open market
and the Company has recognized $3,000 of compensation expense in connection with
the ESPP.
41
<PAGE>
12. STOCK OPTION PLANS:
The Company has two stock option plans: the 1996 Incentive Stock Plan (the
"Incentive Plan") and the 1997 Non-Employee Director Stock Option Plan (the
"Director's Plan").
In May 1996, the Board adopted the Incentive Plan, which was subsequently
approved by the Company's shareholders in May 1997. All employees, including
officers (whether or not directors) and consultants of the Company and its
subsidiaries are currently eligible to participate in the Incentive Plan.
Persons, who are not in an employment or consulting relationship with the
Company or any of its subsidiaries, including non-employee directors, are not
eligible to participate in the Incentive Plan. Under the Incentive Plan, as
amended in May 1998, the Compensation Committee may grant incentive awards with
respect to a number of shares of Common Stock that in the aggregate do not
exceed 531,250 shares of Common Stock, subject to adjustment upon the occurrence
of certain recapitalizations of the Company.
The Incentive Plan provides for the grant of (i) incentive stock options,
(ii) shares of restricted stock, (iii) performance awards payable in cash or
Common Stock, (iv) shares of phantom stock, and (v) stock bonuses. In addition,
the Incentive Plan provides for the grant of cash bonuses payable when a
participant is required to recognize income for federal income tax purposes in
connection with the vesting of shares of restricted stock or the issuance of
shares of Common Stock upon the grant of a performance award or a stock bonus,
provided, that such cash bonus may not exceed the fair market value (as defined)
of the shares of Common Stock received on the grant or exercise, as the case may
be, of an Incentive Award.
With respect to incentive stock options, no option may be granted more
than ten years after the effective date of the stock option plan or exercised
more than ten years after the date of the grant (five years if the optionee owns
more than 10% of the Common Stock of the Company at the date of the grant).
Additionally, with regard to incentive stock options, the exercise price of the
options may not be less than the fair market value of the Common Stock at the
date of the grant (110% if the optionee owns more than 10% of the Common Stock
of the Company). Subject to certain limited exceptions, options may not be
exercised unless, at the time of the exercise, the optionee is in the service of
the Company.
Transactions with regard to incentive stock options issued pursuant to the
Plan are as follows:
WEIGHTED
TOTAL SHARES AVERAGE PRICE
UNDER OPTION PER SHARE
-------------- ---------------
Balance - January 1, 1997 -- $ --
Granted 295,627 8.65
Canceled \ Forfeited -- --
Exercised -- --
------- ------
Balance - December 31, 1997 295,627 $ 8.65
Granted 148,125 16.66
Canceled \ Forfeited (1,250) 16.80
Exercised (688) 7.64
------- ------
Balance - December 31, 1998 441,814 $11.32
======== ======
42
<PAGE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
- - --------------------------------------------------------------------------------
Weighted
Average
Range Remaining Weighted Weighted
of Years of Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- - --------------------------------------------------------------------------------
$ 7.64 140,939 8.10 $ 7.64 28,188 $ 7.64
8.40 78,375 3.10 8.40 15,675 8.40
10.50 72,875 8.42 10.50 41,938 10.50
15.40 14,375 9.74 15.40 - 15.40
16.60 3,125 9.92 16.60 - 16.60
16.80 129,375 9.29 16.80 - 16.80
19.36 2,750 8.81 19.36 550 19.36
----------------------------------------------------------------------
441,814 7.69 $ 11.32 86,351 $ 9.24
----------------------------------------------------------------------
In April 1997, the Board adopted the Director's Plan, which was
subsequently approved by the Company's shareholders in May 1997. The Director's
Plan is for the benefit of Directors of the Company, who at the time of their
service, are not employees of the Company or any of its subsidiaries. Under the
Director's Plan, 68,750 shares of the Company's Common Stock are reserved for
issuance. In February 1999, the Board approved an amendment to the Director Plan
which increased the shares reserved for issuance from 68,750 to 150,000 subject
to shareholder approval.
The Director's Plan provides for the granting of non-qualified stock
options ("NQO"), the provisions of which do not qualify as "incentive stock
options" under the Internal Revenue Code. Options granted under the Director's
Plan must have an exercise price at least equal to the fair market value of the
Company's Common Stock on the date of the grant. Pursuant to the Director's
Plan, options to purchase 15,000 shares of Common Stock are granted to each
non-employee director upon their election to the Board. In addition, all
non-employee Director are eligible to receive a NQO to purchase 5,000 shares of
Common Stock at the time of the Directors re-election to the Board, subject to
share availability. Options granted under the Director's Plan are fully vested
upon issue and expire ten years after the date of the grant. As of December 31,
1998, 40,000 non-qualified stock options have been issued at option prices
ranging from $11.00 to $18.40 per share and all of these options were
exercisable as of that date at a weighted average price of $13.71 per share.
The Company applies APB Opinion No, 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock option plans. Had
compensation expense for the Company's stock-based compensation plans been
determined based on the Black Scholes option pricing model with the following
assumptions used for grants: risk-free interest rates ranging from of 4.67% and
5.84%; expected volatility of 36.29%; expected life of 7 years for employees and
2 years for directors; and a dividend yield of 0.4%, the Company's net income
and earnings per common share would have been decreased to the pro forma amounts
indicated below:
For The Year Ended
December 31,
----------------------------
1998 1997
------------- ------------
Net income:
As reported $9,113,018 $5,764,451
Pro forma $8,316,584 $5,686,133
Earnings per common share (basic):
As reported $ 1.29 $ 1.13
Pro forma $ 1.18 $ 1.11
Earnings per common share (diluted):
As reported $ 1.25 $ 1.10
Pro forma $ 1.14 $ 1.08
43
<PAGE>
13. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT ACTIVITIES
Fair Value of Financial Instruments
As of December 31, 1998 and 1997, the carrying amounts of certain
financial instruments held by the Company, including cash, cash equivalents,
trade receivables and payables, and short-term borrowings are representative of
fair value because of the short-term maturity of these instruments. The fair
value of long-term debt with variable interest rates is the carrying value
because of the variable nature of the debt's interest rate. The fair value of
all derivative financial instruments is the estimated amount at which management
believes the instruments could be liquidated over a reasonable period of time,
based on quoted market prices, current market conditions, or other estimates
obtained from third-party brokers or dealers.
Price Risk Management Activities
The Company utilizes derivative financial instruments to manage market
risks associated with certain energy commodities and interest rates. 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
fluctuations in interest rates. The Company does not engage in speculative
trading. Approvals are required from senior management prior to the execution of
any financial derivative.
COMMODITY PRICE RISK:
The Company's commodity price risk exposure arises from inventory
balances and fixed price purchase and sale commitments. The Company uses
exchange-traded commodity futures contracts, options and swap contracts to
manage and hedge price risk related to these market exposures. The futures and
options contracts have pricing terms indexed to both the New York Mercantile
Exchange and Kansas City Board of Trade.
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 fixed 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.
The gains, losses and related costs of the financial instruments that
qualify as a hedge are not recognized until the underlying physical transaction
occurs. At December 31, 1998, the Company had unrealized losses from such
hedging contracts of $896,000. The market value, notional amount and notional
contract quantity of open commodity futures, options and swaps contracts used
for hedging purposes were as follows (in thousands):
As of December 31,
----------------------------
1998 1997
------------- ------------
Market Value - Unrealized Gain/(Loss):
Swap contracts $ (695) $ --
Futures contracts (178) (78)
Options contracts (23) (3)
Notional Contract Amount:
Swap contracts $ 11,729 $ --
Futures contracts 683 924
Options contracts 23 252
Notional Contract Quantity (Mmbtu):
Swap contracts 5,606 --
Futures contracts 270 390
Options contracts 120 1,320
44
<PAGE>
INTEREST RATE RISK:
The Company's Credit Facility provides an option for the Company to borrow
funds at a variable interest rate of LIBOR plus 1.25%(See Note 4 - Debt
Obligations). In an effort to mitigate interest rate fluctuation exposure, the
Company has entered into $65 million dollars of interest rate swaps, under two
separate swap agreements. The interest rate swap agreements entered into by the
Company effectively convert $65 million of floating-rate debt to fixed-rate
debt.
The first interest rate swap agreement was entered into with Bank One in
December 1997. The swap agreement effectively established a fixed three-month
LIBOR interest rate setting of 6.02% for a two-year period on a notional amount
of $25 million. This swap agreement was subsequently transferred to NationsBank
in November 1998 and replaced with a new swap agreement. The new swap agreement
provides a fixed 5.09% three month LIBOR interest rate to Midcoast with a new
two year termination date of December 2000 which may, however, be extended
through December 2003 at NationsBank's option on the last day of the initial
term. The variable three-month LIBOR rate is reset quarterly based on the
prevailing market rate and Midcoast is obligated to reimburse NationsBank when
the three-month LIBOR rate is reset below 5.09%. Conversely, NationsBank is
obligated to reimburse Midcoast when the three-month LIBOR rate is reset above
5.09%. At December 31, 1998, the fair value of this interest rate swap through
the initial termination date was a net liability of $20,000.
The second interest rate swap agreement was entered into with CIBC in
October 1998. The swap agreement effectively established a fixed three-month
LIBOR interest rate setting of 4.475% for a three-year period on a notional
amount of $40 million. The agreement, however, may be extended an additional two
years through November 2003 at CIBC's option on the last day of the initial
term. The variable three-month LIBOR rate is reset quarterly based on the
prevailing market rate and Midcoast is obligated to reimburse CIBC when the
three-month LIBOR rate is reset below 4.475%. Conversely, CIBC is obligated to
reimburse Midcoast when the three-month LIBOR rate is reset above 4.475%. At
December 31, 1998, the fair value of this interest rate swap through the initial
termination date was a net asset of $481,000.
The effect of these swap agreements was to lower interest expense by
$37,000 in 1998 and increase interest expense by $2,000 in 1997.
14. SEGMENT DATA:
The Company has three reportable segments that are primarily in the
business of transporting, gathering, processing and marketing of natural gas and
other petroleum products. The Company's assets are segregated into reportable
segments based on the type of business activity and type of customer served on
the Company's assets. The Company evaluates performance based on profit or loss
from operations before income taxes and other income and expense items
incidental to core operations. Operating income for each segment includes total
revenues less operating expenses (including depreciation) and excludes corporate
administrative expenses, interest expense, interest income and income taxes. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The following table presents certain financial information relating to the
Company's business segments (in thousands):
For the Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ----------
Segment Revenues:
Transmission $123,944 $ 64,787 $ 7,565
End-user 94,087 36,349 14,511
Gathering and processing 15,600 11,246 6,880
-------- -------- -------
Total segment revenues $233,631 $112,382 $28,956
======== ======== =======
Segment Operating Income:
Transmission $ 11,677 $ 5,310 $ 664
End-user 4,509 3,047 1,157
Gathering and processing 3,516 2,376 1,738
-------- -------- -------
Total segment operating income 19,702 10,733 3,559
-------- -------- -------
Corporate administrative expenses (6,283) (3,455) (1,223)
Interest expense (3,247) (1,067) (413)
Other income (expense),net 250 (297) (9)
-------- -------- --------
Income before income taxes $ 10,422 $ 5,914 $ 1,914
======== ======== =======
45
<PAGE>
The identifiable assets of the Company, by segment, are as follows (in
thousands):
December 31,
---------------------------------
1998 1997
-------------- ---------------
Property, Plant, and Equipment:
Transmission $ 84,037 $ 75,287
End-user 18,862 12,917
Gathering and processing 53,401 8,622
--------- ---------
Total segment assets 156,300 96,826
Corporate & other 4,255 3,755
--------- ---------
Total assets $ 160,555 $ 100,581
========= =========
The depreciation expense of the Company, by segment, is as follows (in
thousands):
For the Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- ----------
Depreciation Expense:
Transmission $ 1,554 $ 553 $ 132
End-user 532 421 237
Gathering and processing 841 341 415
------- ------- -------
Total segment depreciation expense 2,927 1,315 784
Corporate & other 270 277 34
------- ------- -------
Total depreciation expense $ 3,197 $ 1,592 $ 818
======= ======= =======
15. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarters Ended
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(In thousands, except per share amounts)
1998
Operating revenues $ 67,339 $ 49,545 $ 50,301 $ 66,884
Operating income 4,134 2,551 2,589 4,279
Net income 2,761 1,728 1,580 3,044
Basic earnings per share 0.39 0.24 0.22 0.43
Diluted earnings per share 0.38 0.23 0.22 0.42
1997
Operating revenues $ 12,964 $ 12,661 $ 24,523 $ 62,596
Operating income 1,299 1,064 1,748 3,180
Net income 1,132 623 1,182 2,827
Basic earnings per share 0.33 0.18 0.18 0.41
Diluted earnings per share 0.33 0.18 0.17 0.39
46
<PAGE>
16. EARNINGS PER SHARE:
In March 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
establishes new guidelines for calculating earnings per share. The pronouncement
is effective for reporting periods ending after December 15, 1997. SFAS No. 128
requires companies to present both a basic and diluted earnings per share amount
on the face of the statement of operations and to restate prior period earnings
per share amounts to comply with this standard. Basic and diluted earnings per
share amounts calculated in accordance with SFAS No. 128 are presented below for
the years ended December 31 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
AVERAGE EARNINGS AVERAGE EARNINGS AVERAGE EARNINGS
NET SHARES PER NET SHARES PER NET SHARES PER
INCOME OUTSTANDING SHARE INCOME OUTSTANDING SHARE INCOME OUTSTANDING SHARE
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic $9,113 7,074 $ 1.29 $5,764 5,115 $ 1.13 $1,891 2,593 $ 0.73
====== ====== ========
Effect of
dilutive
securities
Stock options -- 151 -- 86 -- --
Warrants -- 73 -- 50 -- 5
------ ----- ------ ----- ------ -----
Diluted $9,113 7,298 $ 1.25 $5,764 5,251 $ 1.10 $1,891 2,598 $ 0.73
====== ===== ====== ====== ===== ====== ====== ===== ========
</TABLE>
17. SUBSEQUENT EVENTS:
In January 1999, the Company filed a shelf registration statement pursuant
to which the Company may offer up to $200 million of common or preferred
equities and various forms of debt securities. Currently, no securities have
been sold under this shelf registration.
In March 1999, the Company acquired through merger two related companies,
Flare, LLC ("Flare") and Dufour Petroleum, Inc. ("DPI"). The total value of the
transaction was
47
<PAGE>
approximately $11.1 million and could include future consideration should
certain contingencies be met. The Flare and DPI shareholders received cash
consideration of approximately $3.2 million, Midcoast assumed $5.5 million in
debt, and the DPI shareholders received 140,574 shares of Common Stock. Flare is
a natural gas processing and treating company whose principal assets include 27
natural gas processing and treating plants from which it earns revenues based on
treating and processing fees and/or a percentage of the natural gas liquids
("NGLs") produced. DPI is a NGLs, crude oil and CO2 transportation and marketing
company. DPI operates 43 NGL and crude oil trucks and trailers, a fleet of 40
pressurized railcars and in excess of 400,000 gallons of NGL storage facilities
and product treating and handling equipment. The acquisition was financed
through the Company's existing credit facility and the issuance of Common Stock
held in treasury.
In March 1999, the Company completed two separate acquisitions for a
combined $8.0 million in cash consideration. The acquisitions include the
purchase of the Tinsley crude oil gathering pipeline from Producers Pipeline
Corporation, as well as the purchase of a 70% interest in SeaCrest Company LLC
("SeaCrest"), which in turn acquired eight offshore natural gas gathering
pipelines. The Tinsley system is located in Mississippi and consists of 60 miles
of crude oil gathering pipeline, related truck and Mississippi River barge
loading facilities and 170,000 barrels of crude oil storage. The gathering
pipelines that SeaCrest acquired from Koch Industries Inc. include eight
separate systems located offshore in the Gulf of Mexico, south of Louisiana, and
comprise approximately 87 miles of pipeline. These systems gather gas from 23
offshore producing wells with a current total throughput of approximately 50
Mmcf/day. The Tinsley acquisition was financed through the Company's existing
credit facility and the acquisition by Seacrest was financed by Midcoast which
borrowed from its existing credit facility.
In March 1999, Midcoast announced that its newly formed, wholly owned,
Midcoast Canada Operating Corporation ("MCOC") subsidiary purchased the Calmar
natural gas treating plant and gathering system in Alberta, Canada from Probe
Exploration Inc.("Calmar Acquisition"). The total value of the transaction was
$20 million (Canadian) or approximately $13.2 million (U.S.). The assets
purchased include a 30,000 Mcf/day amine sweetening plant, 30 miles of 10" and
6" gas gathering pipeline and approximately 4,000 horsepower of compression
located near Edmonton, Alberta. The system currently gathers and treats
approximately 26,000 Mcf/day of sour gas from 27 producing wells operated by
Probe and Courage Energy Inc. In conjunction with the purchase, Probe entered
into a gas gathering and treating agreement with Midcoast, including the
long-term dedication of Probe's reserves in the Leduc Field, a right of first
refusal agreement on new or existing midstream assets within a defined 390
square mile area of interest, and assignment to Midcoast of an existing third
party gathering and treating agreement. The acquisition was financed through the
Company's credit facility which was amended as discussed below.
In March 1999, the Company amended the Credit Agreement to increase the
committed amount of borrowing availability and allow for Canadian dollar
denominated loans. In anticipation of the Calmar Acquisition described above,
the borrowing availability under the Credit Agreement was increased from $100
million to $125 million. In addition, the Credit Agreement was revised to allow
the Company the flexibility to borrow funds in Canadian dollars in order to
eliminate foreign currency exchange risks as the functional currency of the MCOC
subsidiary will be Canadian dollars.
48
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SCHEDULE
Shareholders and Board of Directors
Midcoast Energy Resources, Inc.
Houston, Texas
We have audited the consolidated financial statements Midcoast Energy Resources,
Inc. and subsidiaries as of December 31, 1998 and 1997, and for each of the
years in the three-year period ended December 31, 1998. Our audits for such
years also included the financial statement schedule of Midcoast Energy
Resources, Inc. and subsidiaries, listed in Item 14-2, for each of the years in
the three-year period ended December 31, 1998. This financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
herein.
HEIN + ASSOCIATES LLP
Houston, Texas
March 18, 1999
49
<PAGE>
SCHEDULE II
MIDCOAST ENERGY RESOURCES INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ----------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED BALANCE
AT TO COSTS CHARGED AT END
BEGINNING AND TO OTHER OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
- - ----
Allowance for doubtful
accounts $ 494 $ -- $ (309)(a) $ (93) (b) $ 92
Valuation allowance on
deferred tax assets $ 4,581 $(1,089)(c) $ 2,207(d)(e) $(1,145) (f) $ 4,554
1997
- - ----
Allowance for doubtful
account $ -- $ -- $ 494(a) $ -- $ 494
Valuation allowance on
deferred tax assets $ 3,727 $ -- $ 2,664(d) $(1,810)(f) $ 4,581
1996
- - ----
Valuation allowance on
deferred tax assets $ 4,834 $ -- $ -- $(1,107) (f) $ 3,727
</TABLE>
(a) Due to Midla Acquisition.
(b) Represents uncollectible accounts written off.
(c) Removal of valuation allowance on deferred tax assets that are more likely
than not to be utilized in the future.
(d) Adjustment of federal net operating loss carryforwards and related
valuation allowance to reconcile to federal income tax return.
(e) Valuation allowance on federal net operating loss carryforwards acquired
in connection with the Midla Acquisition.
(f) Represents utilization of federal net operating loss carryforwards.
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and 13 are
omitted because the Company will file with the SEC a definitive proxy statement
(the "Proxy Statement") pursuant to regulation 14A under the Securities Exchange
Act of 1934 not later than 120 days after the close of the fiscal year. The
information required by such Items will be included in the Proxy Statement to be
filed in connection with the Company's annual meeting of shareholders scheduled
for May 17, 1999 and is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial statements.
All financial statements of Midcoast Energy Resources, Inc. and
subsidiaries are included under Part II, Item 8 beginning on page 27
of this Form 10-K.
2. Financial statement schedules and supplementary information required
to be submitted.
Schedule II - Valuation and qualifying accounts is included on page 50 of
this Form 10-K.
3. An exhibit list is included on page 52 of this Form 10-K.
(B) REPORTS ON FORM 8-K:
A report on Form 8-KA was filed during the fourth quarter of 1998. Such
report was filed on November 20, 1998 as an amendment to the Form 8-K filed on
September 22, 1998. The amendment was filed to include the required audited
historical summary of revenue and direct operating expenses of the Anadarko Gas
Gathering System of El Paso Field Services Company for the year ended July 31,
1998. In addition, the unaudited Midcoast Pro Forma Statement of Operations for
the six months ended June 30, 1998 and for the year ended December 31, 1997 and
unaudited Pro Forma Balance Sheet at June 30, 1998 were included.
51
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
EXHIBIT LIST
DECEMBER 31, 1998
Each exhibit identified below is filed as a part of this report. An
asterisk designates exhibits not incorporated by reference to a prior filing;
all exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 Agreement for Sale and Purchase of Harmony Gas Processing Plant and
Related Gathering System dated October 3, 1996, by and between Koch
Hydrocarbon Company, a division of Koch Industries, Inc. and Midcoast
Holdings No. One, Inc. (Incorporated by reference from Midcoast Form 8-K
dated October 21, 1996, as Exhibit 2.1).
2.2 Stock Purchase Agreement dated March 18, 1997, by and between Midcoast
Energy Resources, Inc. and Atrion Corporation. (Incorporated by reference
from Midcoast Form 10-KSB for the fiscal year ended December 31, 1996, as
Exhibit 2.7).
2.3 Agreement and Plan of Merger dated October 31, 1997 by and between
Republic Gas Partners, LLC. And Midcoast Energy Resources, Inc.
(Incorporated by reference from Midcoast Form 8-K dated November 13, 1997
as Exhibit 2.2)
2.4 Purchase and Sale Agreement dated September 8, 1998, by and between El
Paso Field Services Company, a Delaware corporation, and Midcoast Gas
Services, Inc., a Delaware corporation. (Incorporated by reference from
Midcoast Form 10-Q for the nine month period ended September 30, 1998, as
Exhibit 2.8).
*2.5 Agreement and Plan of Merger dated March 11, 1999, by and between Dufour
Petroleum, Inc., Flare L.L.C. Partners and Midcoast Energy Resources, Inc.
*2.6 Purchase and Sale Agreement dated March 23, 1999, by and between Probe
Exploration Inc. and Midcoast Canada Operating Corporation.
3.1 Articles of Incorporation of Midcoast Energy Resources, Inc. (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year ended December
31, 1992).
3.2 Certificate of Amendment of Articles of Incorporation of Midcoast Energy
Resources, Inc. (Incorporated by reference from Midcoast Registration
Statement on Form SB-2 (No.
333-4643) dated August 8, 1996).
3.3 Certificate of Amendment of Articles of Incorporation of Midcoast Energy
Resources, Inc. dated May 15, 1998 (Incorporated by reference from
Midcoast Form 10-Q for the six month period ended June 30, 1998 as Exhibit
3.4).
*3.4 Certificate of Stock Split of Midcoast Energy Resources, Inc. dated
February 24, 1999.
3.5 Bylaws of Midcoast Energy Resources, Inc. (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1992).
4.1 Specimen Certificate for Shares of Common Stock, par value $.01 per share.
(Incorporated by reference from Midcoast Registration Statement on Form
SB-2 (No. 333-4643) dated August 8, 1996).
4.2 Representative's Warrants. (Incorporated by reference from Midcoast
Registration Statement on Form SB-2 (No. 333-4643) dated August 8, 1996).
4.3 Voting Proxy Agreement dated August 5, 1996, by and between Midcoast
Energy Resources, Inc., Stevens G. Herbst, Kenneth B. Holmes, Jr., Rainbow
Investments Company and Texas Commerce Bank National Association.
(Incorporated by reference from Midcoast Registration Statement on Form
SB-2 (No. 333-4643) dated August 8, 1996).
4.4 Registration Rights Agreement dated August 5, 1996, by and between
Midcoast Energy Resources, Inc. and Stevens G. Herbst. (Incorporated by
reference from Midcoast Registration Statement on Form SB-2 (No. 333-4643)
dated August 8, 1996).
52
<PAGE>
4.5 Registration Rights Agreement dated August 5, 1996, by and between
Midcoast Energy Resources, Inc. and Kenneth B. Holmes, Jr. (Incorporated
by reference from Midcoast Registration Statement on Form SB-2 (No.
333-4643) dated August 8, 1996).
4.6 Registration Rights Agreement dated August 5, 1996, by and between
Midcoast Energy Resources, Inc. and Rainbow Investments Company.
(Incorporated by reference from Midcoast Registration Statement on Form
SB-2 (No. 333-4643) dated August 8, 1996).
4.7 Executive Severance Agreement by and between Midcoast Energy Resources,
Inc. and Dan Tutcher, dated August 15, 1997. (Incorporated by reference
from Form 10-K for the year ended December 31, 1997 as Exhibit 4.11)
4.8 Executive Severance Agreement by and between Midcoast Energy Resources,
Inc. and I.J. Berthelot, II, dated August 15, 1997. (Incorporated by
reference from Form 10-K for the year ended December 31, 1997 as Exhibit
4.12)
4.9 Executive Severance Agreement by and between Midcoast Energy Resources,
Inc. and Richard Robert, dated August 15, 1997. (Incorporated by reference
from Form 10-K for the year ended December 31, 1997 as Exhibit 4.13)
4.10 Executive Severance Agreement by and between Midcoast Energy Resources,
Inc. and Duane Herbst, dated August 15, 1997. (Incorporated by reference
from Form 10-K for the year ended December 31, 1997 as Exhibit 4.14)
4.11 First Amendment to Voting/Proxy Agreement dated April 29, 1998 by and
between Midcoast Energy Resources, Inc. and Steven G. Herbst, June Herbst,
Kenneth Holmes, Jr., Dorothy C. Holmes and Rainbow Investments Company and
Chase Bank of Texas. (Incorporated by reference from Form 10-Q for the
three months ended March 31, 1998 as Exhibit 4.14)
10.1 Employment Agreement dated January 1, 1993, by and between Midcoast Energy
Resources, Inc. and Dan C. Tutcher (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1992).
10.2 Amendment to the Employment Agreement dated April 1, 1993, by and between
Midcoast Energy Resources, Inc. and Dan C. Tutcher (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1993).
10.3 Amendment to Employment Agreement dated April 14, 1997, by and between
Midcoast Energy Resources, Inc. and Dan Tutcher (Incorporated by reference
from Midcoast Form 10-QSB for the three-month period ended March 31,
1997).
10.4 Employment Agreement dated April 30, 1994, by and between Midcoast Energy
Resources, Inc. and Richard A. Robert (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1994).
10.5 Amendment to the Employment Agreement dated April 8, 1996, by and between
Midcoast Energy Resources, Inc. and Richard A. Robert (Incorporated by
reference from Midcoast Form 10-QSB for the three-month period ended March
31, 1996).
10.6 Employment Agreement dated April 25, 1995, by and between Midcoast Energy
Resources, Inc. and I.J. Berthelot, II (Incorporated by reference from
Midcoast Form 10-KSB for the fiscal year ended December 31, 1995).
10.7 Amendment to Employment Agreement dated April 14, 1997, by and between
Midcoast Energy Resources, Inc. and I.J. Berthelot, II (Incorporated by
reference from Midcoast Form 10-QSB for the three-month period ended March
31, 1997).
10.8 Amendment to Employment Agreement dated December 8, 1995, by and between
Midcoast Energy Resources, Inc. and I.J. Berthelot, II (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1995).
10.9 Assignment of Net Revenue Interest dated July 1, 1994, by and between
Texline Gas Company and Midcoast Energy Resources, Inc. (Incorporated by
reference from Midcoast Form 10-KSB for the fiscal year ended December 31,
1994).
53
<PAGE>
10.10 Assignment of Net Revenue Interest dated July 1, 1994, by and between
Rainbow Investments Co. and Midcoast Energy Resources, Inc. (Incorporated
by reference from Midcoast Form 10-KSB for the fiscal year ended December
31, 1994).
*10.11 Midcoast Energy Resources, Inc. 1996 Incentive Stock Plan, as amended on
May 15, 1998.
10.12 Credit Agreement dated August 22, 1996, by and between Bank One, Texas
N.A. and Midcoast Energy Resources, Inc., Magnolia Pipeline Corporation
and H&W Pipeline Corporation. (Incorporated by reference from Midcoast
Form 10-QSB for the nine-month period ended September 30, 1996).
10.13 Midcoast Energy Resources, Inc. 1997 Non-Employee Director Stock Option
Plan (Incorporated by reference from Midcoast Form 10-QSB for the
three-month period ended March 31, 1997).
10.14 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and Richard A. Robert (Incorporated by reference from
Midcoast Registration Statement on Form S-1 (No. 333-27885) dated June
26, 1997).
10.15 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and I.J. Berthelot, II. (Incorporated by reference from
Midcoast Registration Statement on Form S-1 (No. 333-27885) dated June
26, 1997). 10.16 Indemnity Agreement dated April 23, 1997 between
Midcoast Energy Resources, Inc. and Richard N. Richards. (Incorporated
by reference from Midcoast Registration Statement on Form S-1 (No.
333-27885) dated June 26, 1997)
10.17 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and Duane S. Herbst. (Incorporated by reference from
Midcoast Registration Statement on Form S-1 (No. 333-27885) dated June
26, 1997)
10.18 Indemnity Agreement dated April 23, 1997 between Midcoast Energy
Resources, Inc. and Dan C. Tutcher. (Incorporated by reference from
Midcoast Registration Statement on Form S-1 (No. 333-27885) dated June
26, 1997)
10.19 First Amendment to Credit Agreement dated May 30, 1997 by and between
Bank One, Texas N.A. and Midcoast Energy Resources, Inc., Magnolia
Pipeline Corporation, H&W Pipeline Corporation, Magnolia Resources,
Inc., Magnolia Gathering Inc., Midcoast Holdings No. One, Inc., Midcoast
Gas Pipeline, Inc., Nugget Drilling Corporation, Midcoast Marketing,
Inc., AlaTenn Energy Marketing Company, and Tennessee River Intrastate
Gas Co. (Incorporated by reference from Midcoast Registration Statement
on Form S-1 (No. 333-27885) dated June 26, 1997)
10.20 Second Amendment to Credit Agreement dated October 31, 1997 by and
between Bank One, Texas N.A. and Midcoast Energy Resources, Inc.,
Magnolia Pipeline Corporation, H&W Pipeline Corporation, Magnolia
Resources, Inc., Magnolia Gathering Inc., Midcoast Holdings No. One,
Inc., Midcoast Gas Pipeline, Inc., Nugget Drilling Corporation, Midcoast
Marketing, Inc., AlaTenn Energy Marketing Company, Tennessee river
Intrastate Gas Co., Mid Louisiana Gas Company, Mid Louisiana Gas
Transmission Company and Midla Energy Services Company. (Incorporated by
reference from Midcoast Form 8-K dated October 13, 1997).
10.21 First Amendment to Credit Agreement dated October 31, 1997 by and
between Bank One, Texas N.A. and Midcoast Interstate Transmission, Inc.
(f/k/a/ Alabama Tennessee Natural Gas Company). (Incorporated by
reference from Midcoast Form 8-K dated October 13, 1997).
10.22 Third Amendment to Employment Agreement dated March 2, 1998 by and
between Midcoast Energy Resources, Inc. and Dan Tutcher. (Incorporated
by reference from Form 10-K/A dated February 2, 1999, for the fiscal
year ended December 31, 1997).
10.23 Third Amendment to Employment Agreement dated March 18, 1998 by and
between Midcoast Energy Resources, Inc. and I.J. Berthelot, II.
(Incorporated by reference from Form 10-K/A dated February 2, 1999, for
the fiscal year ended December 31, 1997).
54
<PAGE>
10.24 Second Amendment to Employment Agreement dated March 18, 1998 by and
between Midcoast Energy Resources, Inc. and Richard Robert.
(Incorporated by reference from Form 10-K/A dated February 2, 1999, for
the fiscal year ended December 31, 1997).
10.25 Amended and Restated Credit Agreement dated August 31, 1998, by and
among Midcoast Energy Resources, Inc., and, Bank One Texas, N.A., CIBC
Inc., and Nationsbank, N.A. (Incorporated by reference from Midcoast
Form 10-Q for the nine month period ended September 30, 1998, as Exhibit
10.30).
*10.26 First Amendment to the Amended and Restated Credit Agreement dated March
12, 1999, by and among Midcoast Energy Resources, Inc., and, Bank One
Texas, N.A., CIBC Inc., and Nationsbank, N.A.
*21.1 Schedule listing subsidiaries of Midcoast Energy Resources, Inc.
*23.1 Consent of independent accountants.
*27.1 Financial Data Schedule for the year ended December 31, 1998.
55
<PAGE>
Signatures
In accordance with Section 13 or 15 (d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MIDCOAST ENERGY RESOURCES, INC.
(Registrant)
BY: /S/ DAN C. TUTCHER
Dan C. Tutcher
Chief Executive Officer
Date: March 31, 1999
In accordance with the Securities and Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES CAPACITY IN WHICH SIGNED
- - ---------- ------------------------
/s/ DAN C. TUTCHER Chairman of the Board
(Dan C. Tutcher) Chief Executive Officer
Date:________________ and President
/s/ I. J. BERTHELOT, II Executive Vice President, Chief Operating
(I. J. Berthelot, II) Officer and Director
Date:________________
/s/ TED COLLINS, JR. Director
(Ted Collins, Jr.)
Date:________________
/s/ CURTIS J. DUFOUR III. Director
(Curtis J. Dufour, III.)
Date:________________
/s/ RICHARD N. RICHARDS Director
(Richard N. Richards)
Date:________________
/s/ RICHARD A. ROBERT Treasurer, Principal Financial Officer
(Richard A. Robert) Principal Accounting Officer
Date:________________
/s/ BRUCE WITHERS Director
(Bruce Withers)
Date:________________
CERTIFICATE OF STOCK SPLIT
OF
MIDCOAST ENERGY RESOURCES, INC.
The undersigned President and Secretary of Midcoast Energy Resources,
Inc., a Nevada corporation (the "Corporation"), hereby certify for the purposes
of Nevada Revised Statutes Section 78.207 that the Board of Directors of the
Company has adopted a resolution providing for an increase in the number of
shares of authorized capital stock of the Corporation (the "Stock Split") as
follows:
1. The total authorized number of shares of the Corporation's capital
stock immediately before the effective date of the Stock Split was Thirty
Million (30,000,000) shares of capital stock in two authorized classes,
classified as (i) Five Million (5,000,000) shares of preferred stock, par
value $.001 per share, and (ii) Twenty-Five Million (25,000,000) shares of
common stock, par value $.01 per share.
2. The total authorized number of shares of the Corporation's capital
stock immediately after the effective date of the Stock Split shall be
Thirty-Six Million Two Hundred Fifty Thousand (36,250,000) shares of
capital stock in two authorized classes, classified as (i) Five Million
(5,000,000) shares of preferred stock, par value $.001 per share, and (ii)
Thirty-One Million Two Hundred Fifty Thousand (31,250,000) shares of
common stock, par value $.01 per share.
3. The Corporation shall issue five (5) shares of Common Stock in exchange
for every four (4) shares of Common Stock issued and outstanding
immediately prior to the effective date of the Stock Split.
4. Stockholders of record on February 11,1999 (the "Record Date") who
would otherwise be entitled to be issued a fractional share of Common
Stock upon the effective date of the Stock Split in exchange for a full or
fractional share of the Common Stock shall instead be given cash at the
market value of the fractional share at the close of the market on the
Record Date, payable to stockholders on the effective date of the Stock
Split. The payment of cash in lieu of the issuance of fractional shares
will affect approximately one percent of the shares of Common Stock issued
and outstanding immediately prior to the effective date of the Stock
Split.
5. The approval of the shareholders of the Corporation was not required in
connection with the Stock Split.
6. The Stock Split shall be effective on the 1st day of March, 1999, which
date is not more than ninety (90) days after the filing of this
Certificate of Stock Split.
Dated this 24th day of February, 1999.
<PAGE>
MIDCOAST ENERGY RESOURCES, INC.
By: /s/ DAN C. TUTCHER
Dan C. Tutcher
President and Chief Executive Officer
By: /s/ DUANE S. HERBST
Duane S. Herbst, Secretary
THE STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
Before me, the undersigned authority, on this day personally appeared Dan
C. Tutcher, President and Chief Executive Officer 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 24th day of February, 1999.
____________________________________
Notary Public, the State of Texas
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "AGREEMENT") is entered into as
of March 23, 1999, by and between PROBE EXPLORATION INC., an Alberta corporation
(the "SELLER"), and Midcoast Canada Operating Corporation, an Alberta
corporation (the "BUYER"). The Seller and the Buyer are referred to collectively
herein as the "PARTIES", and individually as a "PARTY".
W I T N E S S E T H:
WHEREAS, this Agreement contemplates transactions in which (a) the
Buyer will purchase from the Seller, and the Seller will sell to the Buyer, the
Assets, (b) Seller and Buyer will enter into the Gas Gathering and Treating
Agreement, (c) Seller and Buyer will enter into the Area of Interest Agreement,
and (d) Seller and Buyer will enter into the Probe System Gathering Agreement
all for the Consideration to be paid by Buyer to Seller;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties
and covenants herein contained, the Parties agree as follows:
1) DEFINITIONS.
(1) "ACID GAS DISPOSAL WELL" means the well Mama Santos #1 Leduc
100/07-23-049-27W4 into which the Seller has been injecting
volumes of H2S and CO2 derived as a consequence of the normal
operation of the Calmar Gas Plant and Gas Gathering System.
(2) "ADVERSE CONSEQUENCES" means: all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims,
demands, injunctions, judgments, orders, decrees, rulings,
damages, dues, penalties, fines, costs, amounts paid in
settlement, liabilities, obligations, taxes, liens, losses,
expenses and fees, including court costs and fees and expenses
on a solicitor-client basis, but excluding consequential
damages.
(3) "AFFILIATES" means, with respect to the relationship between
corporations, that one of them is controlled by the other or
that both of them are controlled by the same Person,
corporation or body politic; and for this purpose a
corporation shall be deemed to be controlled by those Persons,
corporations or bodies politic who own or effectively control,
other than by way of security only, sufficient voting shares
of the corporation (whether directly through the ownership of
shares of the corporation or indirectly through the ownership
of shares of another corporation which owns shares of the
corporation) to elect the majority of its board of directors.
(4) "AREA OF INTEREST AGREEMENT" means the Agreement attached
hereto as Exhibit "B".
(5) "ASSETS" has the meaning set forth in Section 2(a) hereof,
giving due effect to the provisions of Section 2(b) hereof.
(6) "ASSUMED OBLIGATIONS" has the meaning set forth in Section
2(c) hereof.
(7) "BUSINESS DAY" means any day other than a Saturday, Sunday or
statutory holiday in Calgary, Alberta.
<PAGE>
(8) "BUYER" has the meaning set forth in the preface hereof.
(9) "CALMAR GAS PLANT AND GAS GATHERING SYSTEM" has the meaning
set forth in Section 2(a)(i) hereof.
(10) "CLOSING" has the meaning set forth in Section 7(e) hereof.
(11) "CLOSING DATE" has the meaning set forth in Section 7(e)
hereof.
(12) "CONFIDENTIALITY AGREEMENT" means the letter confidentiality
agreement dated March 23, 1999 between Probe Exploration Inc.
and Midcoast Energy Resources Inc. respecting the subject
matter of this Agreement.
(13) "CONSIDERATION" has the meaning set forth in Section 7(a)
hereof.
(14) "CUSTOMARY POST-CLOSING CONSENTS" means consents and approvals
from Governmental Authorities that are customarily obtained
after closing in connection with a sale of ownership interests
or assets of the nature of the Assets.
(15) "DEFERRED CONTINGENT CONSIDERATION" means the additional
consideration for the Assets which may, if the Escrow
Conditions are satisfied in favour of the Seller, become
payable to the Seller in whole or in part in accordance with
the terms of Section 7(b).
(16) "DISCLOSURE SCHEDULE" means the schedule attached to this
Agreement referenced in Section 8(a) hereof and elsewhere in
this Agreement.
(17) "EFFECTIVE TIME" has the meaning set forth in Section 7(e)
hereof.
(18) "ENCUMBRANCE" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, and any restriction on
right of conveyance other than Permitted Encumbrances.
(19) "ENVIRONMENTAL LAW" or "ENVIRONMENTAL LAWS" has the meaning
given to that term in Section 9(i) hereof.
(20) "EQUIPMENT" has the meaning set forth in Section 2(a)(ii)
hereof.
(21) "ESCROW AGENT" means the escrow agent appointed pursuant to
the Escrow Agreement.
(22) "ESCROW AGREEMENT" means the agreement attached hereto as
Exhibit "D".
(23) "ESCROW CONDITIONS" means the conditions upon which the Escrow
Funds shall be paid to the Seller or the Buyer as set forth
in Section 7(c).
(24) "ESCROW FUNDS" means the monies paid to and held by the Escrow
Agent pursuant to the Escrow Agreement, including all accrued
interest thereon.
(25) "EXCLUDED ASSETS" has the meaning set forth in Section 2(b)
hereof.
(26) "EXCLUDED OBLIGATIONS" has the meaning set forth in Section
2(d) hereof.
(27) "GAS CONTRACTS" has the meaning set forth in Section 2(a)(v)
hereof.
(28) "GAS GATHERING AND TREATING AGREEMENT" means the agreement
attached hereto as Exhibit "A".
(29) "GOVERNMENTAL AUTHORITY" or "GOVERNMENTAL AUTHORITIES" means
the Commonwealth of Canada and any province, county, city or
other political subdivision, agency, court or instrumentality
thereof.
2
<PAGE>
(30) "HAZARDOUS SUBSTANCES" means all materials, substances and
wastes which are regulated under any Environmental Law or
which may form the basis for liability under any Environmental
Law.
(31) "INDEMNIFIED PARTY" has the meaning set forth in Section 13(e)
hereof.
(32) "INDEMNIFYING PARTY" has the meaning set forth in Section
13(e) hereof.
(33) "INTERCREDITOR AGREEMENT" means the agreement attached hereto
as Exhibit "E".
(34) "LAWS" means any constitution, statute, code, regulation,
rule, injunction, judgment, order, decree, ruling, charge or
other restriction of any applicable Governmental Authority.
(35) "MATERIAL ADVERSE EFFECT" means any change or effect that,
individually or in the aggregate with other changes or
effects, is, or is reasonably likely to be, adverse to the
business, operations and properties comprising the Assets, in
the aggregate amount of ten thousand dollars ($10,000.00)
Canadian or more provided that a change in the prices at which
petroleum substances may be sold or in the economic conditions
affecting the oil and gas industry generally shall not in any
event be found to constitute or result in a Material Adverse
Effect.
(36) "ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with the affected Party's past custom and
practice (including with respect to quantity and frequency).
(37) "PARTNERSHIP INTERESTS" means the collective interests in the
Assets owned by Probe 1997 Processing Facility Limited
Partnership and PRX 1997 Processing Facility Limited
Partnership.
(38) "PARTY" and "PARTIES" have the meaning set forth in the
preface hereof.
(39) "PERMITS" shall have the meaning set forth in Section 9(j)
hereof.
(40) "PERMITTED ENCUMBRANCES" means any of the following:
(1) any liens for taxes and assessments not yet delinquent;
(2) any obligations or duties reserved to or vested in any
municipality or other Governmental Authority to regulate
any Asset in any manner including all applicable Laws;
(3) any Customary Post-Closing Consents with respect to the
Assets;
(4) any right reserved to or vested in any governmental or
other public authority by the terms of any lease, licence,
franchise, grant or permit or by a Law to terminate any
such lease, licence, franchise, grant or permit or to
require periodic payments as a condition of the
continuance thereof;
(5) easements, rights of way, servitudes or other similar
rights in land which do not materially impair the use or
exploitation of the Assets or any of them, including,
without in any way limiting the generality of the
foregoing, rights of way and servitudes for highways,
railways, sewers, drains, gas and oil pipelines, gas and
water mains, electric light, power, telephone or cable
television conduits, poles, wires or cables;
3
<PAGE>
(6) inchoate mechanics' builders' and materialmans' liens in
respect of services rendered or goods supplied for which
payment is not yet due;
(7) the reservations, limitations, provisos and conditions in
any grants or transfers from the Crown of any of the lands
comprising any of the Assets or interests therein and
statutory exceptions to title;
(8) Encumbrances of which discharges or releases in a form
satisfactory to Buyer acting reasonably are delivered to
Buyer at Closing; and
(9) the Renaissance Claim.
(41) "PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture,
an unincorporated organization or a governmental entity (or
any department, agency, or political subdivision thereof).
(42) "PRE-CLOSING CONSENTS" means consents and approvals from
Governmental Authorities that are required to be obtained or
which are customarily obtained prior to closing in connection
with a sale of ownership interests or assets of the nature of
the Assets.
(43) "PROBE SYSTEM GATHERING AGREEMENT" means the Agreement
attached as Exhibit "C" hereto.
(44) "RENAISSANCE CLAIM" means the claims heretofor or hereafter
advanced by Renaissance Energy Ltd. or any successor thereto
("Renaissance") arising out of the past ownership and
operation of the Leduc/Calmar Original Plant and/or its
gathering lines or a claim of ownership rights to the Calmar
Gas Plant and Gas Gathering System insofar only as such claim
may be made against the Buyer, or the Calmar Gas Plant and Gas
Gathering System, or the operation thereof or the right to use
a certain capacity thereof at a reduced rate both before and
after the Effective Time, or other similar claim, including
but not limited to those of such allegations contained in a
letter dated March 1, 1999 from Renaissance Energy Ltd. to the
Seller and a letter dated March 11, 1999 from Blain & Company
to the Seller;
(45) "RIGHTS-OF-WAY" has the meaning set forth in Section 2(a)(iii)
hereof.
(46) "SELLER" has the meaning set forth in the preface hereof.
(47) "SURFACE ADJUSTMENTS" means those additions to, deletions from
or amendments of certain of the surface rights which formed a
portion of the Assets in order to facilitate the sale of the
Assets apart from the Leduc/Calmar Original Plant of which the
Buyer had knowledge prior to the date hereof.
(48) "TAX(ES)" means any federal, state, local or foreign income,
gross receipts, license, payroll, employment, excise,
severance, stamp, occupation, premium, windfall profits,
environmental, custom duties, capital stock, franchise
profits, withholding, social security (or similar),
unemployment, disability, real property, personal property,
sales, use, transfer, registration, value added, alternative
or add-on minimum, estimated or other tax of any kind
whatsoever, including any interest, penalty or addition
thereto, whether disputed or not.
(49) "TAX RETURN" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including
any amendment thereof.
(50) "THIRD PARTY CLAIM" has the meaning set forth in Section 13(e)
hereof.
(51) "TRANSACTION DOCUMENTS" means the Confidentiality Agreement,
the Gas Gathering and Treating Agreement, the Area of Interest
Agreement, the Probe System Gathering Agreement and the Escrow
Agreement and the instruments of assignment, conveyance and
transfer of the Assets from Seller to Buyer covering the
Assets.
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(52) "TRANSITION PERIOD" has the meaning set forth in Section
11(c).
2) PURCHASE AND SALE OF THE ASSETS.
(1) ASSETS. Subject to the terms and conditions of this Agreement,
the Seller agrees to sell to the Buyer, and the Buyer agrees
to purchase from the Seller, the following (collectively, the
"ASSETS"):
(1) the Calmar gas plant and gas gathering system, compression
facilities and dehydration facilities depicted on the maps
attached hereto as Schedule 2(a)(i), together with all
valves, taps, interconnections, and flow meters attached
thereto or used in connection therewith (the "CALMAR GAS
PLANT AND GAS GATHERING SYSTEM");
(2) all equipment, whether owned or leased, including, but not
limited to, the compressor units, scrubbers, dehydration
units, tanks, traps, cathodic protection equipment, computer
systems, data files, CAD files and other personal property
which is used or held for use in connection with and is
situate in, on or appurtenant to the Calmar Gas Plant and
Gas Gathering System, (collectively, the "EQUIPMENT");
(3) all real property interests currently used by the Seller in
connection with the Calmar Gas Plant and Gas Gathering
System, including, but not limited to those fee interests,
surface leases, easements, rights-of-way, surface use
agreements and other similar agreements listed on the
attached Schedule 2(a)(iii) (collectively, the
"RIGHTS-OF-WAY");
(4) the vehicles and heavy motorized equipment, trailers and
like equipment listed on the attached Schedule 2(a)(iv);
(5) the gas service contracts, gas gathering agreements and
third party contractor or supplier agreements, together with
all amendments thereto and ratifications thereof, listed on
the attached Schedule 2(a)(v) (collectively, the "GAS
CONTRACTS");
(6) any and all other facilities, equipment, tools, office
furniture and equipment, operating supplies, gasoline or
diesel fuel, spare parts, chemicals and other tangible
assets currently located at or attached or appurtenant to
the Calmar Gas Plant and Gas Gathering System and used or
intended for use in connection therewith, whether in use or
non-use, and whether specifically described or not described
in the schedules attached to this Agreement;
(7) all books, files, maps, records and reports other than those
which are owned or licenced by third parties with
restrictions on their deliverability or disclosure by the
Seller to any assignee which is not an Affiliate of the
Seller and the Seller's tax records pertaining primarily to
the Calmar Gas Plant and Gas Gathering System and the
Equipment, including, but not limited to, all pipeline and
plant construction and testing records, vessel and pipe
certifications and weld x-rays, and reports and filings to
and with the Governmental Authorities; and
(8) all permits, licenses, orders, certificates of occupancy and
other governmental authorizations obtained by the Seller
pertaining or relating to the Calmar Gas Plant and Gas
Gathering Systems set forth on Schedule 2(a)(viii) hereto,
to the extent legally assignable or transferable.
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(2) EXCLUDED ASSETS. Notwithstanding any provision of Section
2(a) hereof, the Assets do not include, and the Seller shall
retain all right, title and interest in and to the following
assets (the "EXCLUDED ASSETS"):
(1) all cash and cash equivalents of the Seller;
(2) all accounts and notes receivable arising out of,
resulting from or relating to the business and
operations of the Assets for periods up to and
including the Effective Time, and all claims, causes of
action and rights relating thereto and proceeds
thereof; and
(3) all rights under insurance policies of the Seller and
its Affiliates relating to the Assets; and
(4) the original natural gas plant constructed by Seller
and located in close proximity to the Calmar Gas Plant
and Gas Gathering System (the "Leduc/Calmar Original
Plant") as depicted within the red line on the plat
attached hereto as Schedule 2(b)(iv), together with all
equipment comprising a part thereof and all real
property interests used or owned by Seller to the
extent comprising a part of the plant site of the
Leduc/Calmar Original Plant and not currently used in
connection with the Calmar Gas Plant and Gas Gathering
System.
(3) ASSUMED OBLIGATIONS. Except for the obligations (and the
liabilities attendant thereto) described in Section 2(d)
below, subject to the terms and conditions of, and the
closing of, this Agreement, effective as of the Effective
Time, the Buyer shall assume and shall thereafter be
responsible for and covenants to pay and discharge when due,
all obligations relating to the ownership and operation of
the Assets or the business pertaining thereto which accrue
at any time after the Effective Time (collectively, the
"ASSUMED OBLIGATIONS"). The assumption of the Assumed
Obligations by Buyer hereunder shall not be deemed to
create, confirm or give rise to any rights of any third
party, as third party beneficiary or otherwise, or to waive
any defenses available to Seller or Buyer with respect to
any such obligations; it being understood that such
assumption is for the purpose of allocated responsibility
between Seller and Buyer. Further, assumption of the Assumed
Obligations by Buyer hereunder shall not be deemed a waiver
of any misrepresentation or breach of any warranty,
covenant, agreement, or undertaking of Seller under this
Agreement even though such misrepresentation or breach gives
rise to Assumed Obligations.
(4) EXCLUDED OBLIGATIONS. Notwithstanding Section 2(c) hereof or
any other provisions of this Agreement, the Buyer is not
assuming, and the Seller shall retain and be responsible for
and covenants to pay and discharge when due, the following
(collectively, the "EXCLUDED OBLIGATIONS"):
(1) all accounts and notes payable arising out of,
resulting from or relating to the Assets for periods up
to and including the Effective Time;
(2) all indebtedness of the Seller;
(3) all Taxes arising out of, resulting from or relating to
the business and operation of Assets for whole or
partial taxable periods on or before the Effective
Time;
(4) subject always to the provisions of Section 13(d), all
obligations (and the liabilities attendant thereto)
relating to the ownership or operation of the Assets or
the business pertaining thereto which accrue at any
time prior to the Effective Time, and those obligations
(and the liabilities attendant thereto) which accrue
after the Effective Time by reason of contractual
breaches, violations of Laws, negligence, fraud,
intentional misconduct or other malfeasance of Seller
or Seller's predecessors-in-interest prior to the
Effective Time;
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(5) all liabilities and obligations arising out of,
resulting from, attributable to or connected with
Seller's ownership and/or operation of the Leduc/Calmar
Original Plant, including without limitation, the cost
of abandoning, decommissioning, disassembling and
removing it or any portion of it and the reclamation of
all real property interests comprising the plant site
and not currently used in connection with the Calmar
Gas Plant and Gas Gathering System.
3) GAS GATHERING AND TREATING AGREEMENT. Subject to the terms and conditions of
this Agreement, at the Closing, Seller and Buyer shall both execute and deliver
to the other duplicate originals of that certain "Gas Gathering and Treating
Agreement" attached hereto as Exhibit "A".
4) AREA OF INTEREST AGREEMENT. Subject to the terms and conditions of this
Agreement, at the Closing, Seller and Buyer shall both execute and deliver to
the other a duplicate original of that certain "Area of Interest Agreement"
attached hereto as Exhibit "B".
5) PROBE SYSTEM GATHERING AGREEMENT. Subject to the terms and conditions of this
Agreement, at the Closing, Seller and Buyer shall both execute and deliver to
the other a duplicate original of that certain "Probe System Gathering
Agreement" attached hereto as Exhibit "C".
6) ESCROW AGREEMENT AND INTERCREDITOR AGREEMENT. Subject to the terms and
conditions of this Agreement, at the Closing, Seller and Buyer shall both
execute and deliver to the other a duplicate original of that certain "Escrow
Agreement" attached hereto as Exhibit "D" as well as a duplicate original of
that certain "Intercreditor Agreement" attached hereto as Exhibit "E", executed
as well by the Bank of Montreal.
7) CONSIDERATION AND CLOSING.
(1) CONSIDERATION. The Buyer agrees to pay to the Seller, at the
Closing, the sum of nineteen million three hundred
thirty-three thousand three hundred and thirty-four and
no/100 dollars ($19,333,334.00) in lawful money of Canada
(the "CONSIDERATION"), payable by certified cheque or bank
draft or delivery of other immediately available funds in
form satisfactory to Seller.
(2) DEFERRED CONTINGENT CONSIDERATION The parties acknowledge
that the Consideration payable by the Buyer to the Seller
for the Assets shall be increased by an amount equal to the
sum of six hundred and sixty-six thousand six hundred and
sixty-six and no/100 dollars ($666,666.00) plus the amount
of any accrued interest thereon to which the Seller becomes
entitled in accordance with the provisions of Section 7(c),
less the amounts, if any, paid by the Escrow Agent to the
Buyer in accordance with Section 7(c) (such net amount being
herein referred to as the Deferred Contingent
Consideration). The Buyer shall remain the sole beneficial
owner of the Deferred Contingent Consideration and accrued
interest thereon until such time as the Seller becomes
entitled to the payment of all or a portion of the Deferred
Contingent Consideration and accrued interest thereon in
accordance with Section 7(c) at which time the Seller shall
become the beneficial owner of such monies to which it is
entitled at that time.
(3) ESCROW CONDITIONS. The Parties acknowledge and agree that
following payment of the Escrow Funds to the Escrow Agent in
accordance with Section 7(f), such monies shall be held by
the Escrow Agent in accordance with the terms of the Escrow
Agreement and shall be governed by the following conditions:
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<PAGE>
(1) In the event that Buyer and Seller have no actual knowledge
on March 25, 2001, of the filing of suit against the Buyer
or its Affiliates or against the Assets in rem in connection
with the Renaissance Claims and at any time on or after
March 25, 2001, the Seller has delivered to Buyer record
searches from the Court of Queen's Bench of Alberta in each
judicial district in the Province of Alberta disclosing that
Renaissance Energy Ltd. (or any successor thereof known to
the Seller on the date of such searches) has not commenced
legal proceedings against the Buyer or any of its Affiliates
in connection with the Renaissance Claim and further
provided that no arbitration proceedings shall have been
commenced by Renaissance Energy Ltd. at any time prior to
March 25, 2001 with respect to the Renaissance Claim, the
Seller and the Buyer shall jointly advise the Escrow Agent
that this Escrow Condition 7(c)(i) has been satisfied in
favour of the Seller and shall instruct the Escrow Agent to
pay all of the Escrow Funds in his possession or under his
control at that time to the Seller.
(2) In the event that the Seller, at any time hereafter,
delivers to the Buyer a quit claim and release of any claims
that Renaissance Energy Ltd. (or any successor thereof known
to the Seller as of the date of such quit claim and release)
may have against the Buyer and its Affiliates and the Calmar
Gas Plant and Gas Gathering System, the operation thereof
and the right to utilize a certain capacity thereof at
reduced rates, both before and after the Effective Time
(other than any rights to capacity at such volumes or at
such rates not to exceed $0.55 per MCF which has been made
available by the Seller to Renaissance or any such successor
thereto being part of the capacity allocated to the Seller
in the Gas Gathering and Treating Agreement in settlement of
such claims), together with an assignment and conveyance of
the entire undivided interest Renaissance Energy Ltd. (or
any successor thereof known to the Seller at the time of
such assignment and conveyance) may hold in the Calmar Gas
Plant and Gas Gathering System, if any, each executed by
Renaissance Energy Ltd. or any such successor thereof and in
favour of the Buyer, each in a form which would be
acceptable to a prudent purchaser of the Assets acting
reasonably, the Seller and the Buyer shall, provided that
all other disbursements of the Escrow Funds to which the
Buyer is otherwise entitled pursuant to Section 7(c)(iv)
have been paid, jointly advise the Escrow Agent that this
Escrow Condition 7(c)(ii) has been satisfied in favour of
the Seller and shall instruct the Escrow Agent to pay all of
the Escrow Funds in his possession or under his control at
that time to the Seller.
(3) In the event that at any time before the Seller becomes
entitled to the payment of the whole of the Escrow Funds
remaining in the possession or control of the Escrow Agent,
legal or arbitration proceedings are commenced against the
Buyer or its Affiliates, or in the Assets in rem, by
Renaissance Energy Ltd. or any successor thereof in respect
of the Renaissance Claim, then the Escrow Funds shall remain
subject to the Escrow Agreement until the Escrow Funds have
been fully disbursed to the Seller and/or the Buyer in
accordance with Section 7(c)(iv) or otherwise agreed between
the Parties.
(4) In the event that legal or arbitration proceedings are
commenced by Renaissance Energy Ltd. or any successor
thereof against the Buyer or its Affiliates as contemplated
in Section 7(c)(iii):
(1) upon delivery to the Seller, from time to time during
the continuance of any legal or arbitration proceedings
described in Section 7(c)(iii), of evidence of the
reasonable disbursement or the assumption of liability
for the reasonable disbursement of any amounts for
which the Buyer has been indemnified by the Seller in
respect of the Renaissance Claim (including, but not
limited to, reasonable legal fees and other
out-of-pocket costs and expenses incurred by Buyer in
connection with such legal or arbitration proceedings),
the Seller and the Buyer shall jointly advise the
Escrow Agent that this Escrow Condition 7(c)(iv)(A) has
been satisfied in full or in part in favour of the
Buyer and shall instruct the Escrow Agent to pay that
specified amount of the Escrow Funds in his possession
or under his control at that time to the Buyer or as
the Buyer may direct in satisfaction of such amounts;
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<PAGE>
(2) upon the delivery to the Seller of evidence of the
reasonable disbursement by or the imposition of
liability upon the Buyer for any amounts for which the
Buyer has been indemnified by the Seller in respect of
the Renaissance Claim required to obtain a final
settlement of such claim or to satisfy any arbitration
award or judgment which cannot be appealed which has
been made against the Buyer or adversely affects the
Calmar Gas Plant and Gas Gathering System or the
operation or capacity thereof after the Effective Time,
the Seller and the Buyer shall jointly advise the
Escrow Agent that this Escrow Condition 7(c)(iv)(B) has
been satisfied and shall jointly instruct the Escrow
Agent to pay that amount of the Escrow Funds in his
possession or under his control at that time to the
Buyer or as the Buyer may direct in satisfaction of
such amount, to pay to the Buyer any additional portion
of the Escrow Funds to which it is otherwise entitled
pursuant to Section 7(c)(iv), and to pay the balance,
if any to the Seller;
(3) In the event that any legal or arbitration proceedings
described in Section 7(c)(iii) are discontinued insofar
as they pertain to the Renaissance Claim, the Seller
and the Buyer shall jointly advise the Escrow Agent
that such proceedings have been discontinued as
aforesaid and shall jointly instruct the Escrow Agent
to pay to the Buyer any portion of the Escrow Funds to
which it is otherwise entitled pursuant to Section
7(c)(iv) and to pay the balance, if any, to the Seller.
(4) ARBITRATION. Should a dispute or disagreement arise between
the parties in respect of any matters made the subject of
Section 7(c), then either Party may refer the settlement of
the dispute to arbitration in accordance with Section 16(u).
(5) CLOSING AND THE EFFECTIVE TIME. Subject always to the
provisions of Section 14 hereof, the closing of the
transactions contemplated by this Agreement (the "CLOSING")
shall take place at the offices of Blake Cassels & Graydon,
counsel to the Seller, commencing at 2:00 p.m. local time on
March 23, 1999 or such other date as the Buyer and the
Seller may mutually determine (the "CLOSING DATE"). Upon the
Closing, the transactions shall be deemed effective for all
purposes as of 8:00 a.m. local time on March 1, 1999 (the
"EFFECTIVE TIME").
(6) DELIVERIES AT THE CLOSING. At the Closing, (i) the Seller
will deliver to the Buyer the various certificates,
instruments and documents referred to in Section 12(a)
below, (ii) the Buyer will deliver to the Seller the various
certificates, instruments and documents referred to in
Section 12(b) below, (iii) the Seller will deliver to the
Buyer such instruments of assignment, conveyance and
transfer, in form and content mutually acceptable to Seller
and Buyer acting reasonably, as shall be necessary for
Seller to convey to the Assets to Buyer provided that such
documents shall not require Seller to assume or incur any
obligation or to provide any representation or warranty
beyond those contained in this Agreement, (iv) the Seller
and the Buyer will execute and deliver to the other a
duplicate original of the Gas Gathering and Treating
Agreement, the Area of Interest Agreement, the Probe System
Gathering Agreement, the Intercreditor Agreement and the
Escrow Agreement, (v) the Buyer will deliver to the Seller
the Consideration specified in Section 9(a) above and any
other monies payable by the Buyer to the Seller at Closing
hereunder, and (vi) the Buyer will deliver the Deferred
Contingent Consideration to the Escrow Agent in accordance
with and subject to the terms of the Escrow Agreement. The
Buyer acknowledges that a portion of the Consideration will
be required by the Seller to pay the purchase price due to
be paid to complete the acquisition of the Partnership
Interests by the Seller and agrees that so much of the
Consideration as is required may be used by the Seller for
that purpose provided that escrow arrangements satisfactory
to the Buyer acting reasonably are put into place to assure
the purchase of the Partnership Interests by the Buyer in
accordance with the terms hereof.
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(7) APPORTIONMENTS.
(1) All benefits and obligations of any kind and nature
accruing, payable, paid, received or receivable with respect
to the Assets (including, without limitation, maintenance,
development, capital and operating costs and payments with
respect to the Permitted Encumbrances, proceeds from the
processing of production, accounts receivable and incentives
accruing pursuant to the Law) shall be apportioned, as of
the Effective Time, between the Seller and the Buyer in
accordance with Canadian generally accepted accounting
principles, subject to the provisions of this Agreement. All
costs of whatever nature pertaining to work performed or
goods or services provided with respect to the Assets prior
to the Effective Time shall be borne by the Seller,
notwithstanding that such costs may be payable in whole or
in part after the Effective Time. Subject to the preceding
sentence, the Seller shall be entitled to a credit for all
cash advances, operating funds and similar advances to third
parties in respect of the Assets which stand to the credit
of the Seller at the Closing Date and which are hereby
assigned to the Buyer upon Closing. For further clarity, all
accounts receivable shall be deemed to have accrued when
earned (whether or not billed); any accounts payable shall
be deemed to have accrued when the events giving rise to
such accounts payable occurred (whether or not such accounts
payable were invoiced or paid on the Closing Date).
(2) Notwithstanding the provisions of Section 7 (g) (i), all
rentals and all similar payments required to preserve any of
the surface rights forming part of the Assets and all ad
valorem and property taxes levied with respect to the Assets
shall be apportioned between the Seller and the Buyer on a
per diem basis as of the Effective Time.
(3) An interim accounting and adjustment shall be conducted for
Closing, based on the Seller's and the Buyer's good faith
estimate of all adjustments to be made for the transactions
herein pursuant to this Article. An estimate of all property
taxes which are anticipated to become payable by the Buyer
in the calender year in which Closing occurs shall be
included in the interim accounting and adjusted in
accordance with Section 7 (g) (ii). The Seller shall deliver
a written statement to the Buyer of all proposed interim
adjustments a reasonable time before Closing and shall
provide reasonable assistance to the Buyer as may be
required to verify such written statement prior to Closing.
The Parties shall endeavor to conduct a final accounting and
adjustment in like manner within ninety (90) days following
the Closing Date and subject to subsections (iv) and (v) of
this Section, the Parties shall not be obligated to make any
adjustments after one (1) year following the Closing Date
unless such adjustment has been specifically requested, by
notice, within such period. All adjustments shall be settled
by payment by the Party required to make payment hereunder
within fifteen (15) days of being notified of the
determination of the amount owing.
(4) During the one (1) year period following the Closing Date,
the Buyer may audit the books, records and accounts of the
Seller respecting the Assets, for the purpose of effecting
adjustments pursuant to this Section. Such audit shall be
conducted upon reasonable notice to the Seller at the
Seller's offices during the Seller's normal business hours,
and shall be conducted at the sole expense of the Buyer. Any
claims of discrepancies disclosed by such audit shall be
made in writing to the Seller within two (2) months
following the completion of such audit, and the Seller shall
respond in writing to any claims of discrepancies within six
(6) months of the receipt of such claims. To the extent that
the Parties are unable to resolve any outstanding claims of
discrepancies disclosed by such audit within two (2) months
of the Seller's response thereto, such audit exceptions
shall be resolved pursuant to Section 16(u).
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(5) Notwithstanding the preceding subsections of this Section
and Section 13(a), any adjustments established by a joint
venture audit or by an audit conducted pursuant to the Laws
shall be made at the time such adjustment is established,
with payment being made by the Party required to make
payment hereunder within fifteen (15) days of being notified
of the determination of the amount owing.
(6) Any adjustments made hereunder, except for revenues and
operating expenses attributable to the operation of the
Plant after the Effective Time, shall constitute an increase
or decrease, as the case may be, to the Purchase Price and
to the amount allocated to tangibles.
(8) ALLOCATION OF CONSIDERATION. Buyer and Seller agree that the
Consideration shall be allocated among the Assets as follows:
Allocation of
ASSET TYPE Consideration
---------- ($CANADIAN)
--------------
Cash (US Class I ) $ -0-
Cash - like (USClass II) $ -0-
Tangibles (US Class III) $ 19,333,333.00
Intangibles (US Class IV) $ 1.00
Goodwill and going concern
(US Class V) $ -0-
----------------
TOTAL $19,333,334.00
In the event that the amount of the Consideration is increased upon the payment
of all or a portion of the Deferred Contingent Consideration to the Seller in
accordance with the provisions of Section 7(b), the amount by which the
Consideration is increased as a result thereof shall be allocated to Tangibles
(US Class III).
8) REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION.
(1) REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to the Buyer that the statements
contained in this Section 8(a) are correct and complete as of
the date of this Agreement and will be correct and complete as
of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement
throughout this Section 8(a)).
(1) ORGANIZATION OF THE SELLER. The Seller is a corporation duly
organized, validly existing and in good standing under the laws
of the Province of Alberta.
(2) AUTHORIZATION OF TRANSACTIONS. The Seller has full power and
authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations
hereunder, except that the Seller cannot convey a 100% interest
in the Assets unless the Partnership Interests are acquired by it
prior to Closing. This Agreement constitutes the valid and
legally binding obligation of the Seller, enforceable in
accordance with its terms and conditions, subject, however, to
the effects of bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally, and to
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at
law). The Seller need not give any notice to, make any filing
with or obtain any authorization, consent or approval of, any
Governmental Authority in order to consummate the transactions
contemplated by this Agreement, except for Customary Post-Closing
Consents and those described in Section 8(a)(ii) of the
Disclosure Schedule.
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(3) NONCONTRAVENTION. Except for the approvals and filings specified
in Section 8(a)(ii), neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated
hereby, will (A) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge or
other restriction of any Governmental Authority to which the
Seller is subject or any provision of its charter or bylaws or
(B) except as set forth in Section 8(a)(iii)(B) of the Disclosure
Schedule conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any
Person the right to accelerate, terminate, modify or cancel, or
require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which the Seller is a party or
by which it is bound or to which any of its assets is subject,
except for such violations, defaults, breaches or other
occurrences that do not, individually or in the aggregate, have a
material adverse effect on the ability of the Seller to
consummate the transactions contemplated by this Agreement.
(4) BROKERS' FEES. The Seller has no liability or obligation to pay
any fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement for
which the Buyer could become liable or obligated.
(5) GST REGISTRATION: The Seller's GST registration No. is 104309364.
(6) CANADIAN RESIDENCY: The Seller is not a non-resident of Canada
within the meaning of the INCOME TAX ACT (Canada).
(2) REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer
represents and warrants to the Seller that the statements
contained in this Section 8(b) are correct and complete as of
the date of this Agreement and will be correct and complete as
of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement
throughout this Section 8(b).
(1) ORGANIZATION OF THE BUYER. The Buyer is a corporation duly
organized, validly existing, and in good standing under the laws
of Alberta.
(2) AUTHORIZATION OF TRANSACTION. The Buyer has full power and
authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally
binding obligation of the Buyer, enforceable in accordance with
its terms and conditions, subject, however, to the effects of
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally and to general
principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law). The Buyer
need not give any notice to, make any filing with or obtain any
authorization, consent or approval of any Governmental Authority
in order to consummate the transactions contemplated by this
Agreement, except for the approvals and filings specified in
Section 8(a)(ii) and Section 8(b)(v).
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(3) NONCONTRAVENTION. Except for the approvals and filings specified
in Section 8(a)(ii) and Section 8(b)(v), neither the execution
and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (A) violate any
constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction of any
Governmental Authority to which the Buyer is subject or any
provision of its charter or bylaws or (B) conflict with, result
in a breach of, constitute a default under, result in the
acceleration of, create in any Person the right to accelerate,
terminate, modify or cancel, or require any notice under any
agreement, contract, lease, license, instrument or other
arrangement to which the Buyer is a party or by which it is bound
or to which any of its assets is subject, except for such
violations, defaults, breaches or other occurrences that do not,
individually or in the aggregate, have a material adverse effect
on the ability of the Buyer to consummate the transactions
contemplated by this Agreement.
(4) BROKERS' FEES. Neither the Buyer nor any Affiliate of it has any
liability or obligation to pay any fees or commissions to any
broker, finder or agent with respect to the transactions
contemplated by this Agreement for which the Seller could become
liable or obligated.
(5) INVESTMENT CANADA ACT: The Buyer shall comply with the INVESTMENT
CANADA ACT to the extent, if any, that it is applicable to the
transactions herein.
(6) GST REGISTRATION: The Buyer's GST registration no. is
873220222RT.
9) REPRESENTATIONS AND WARRANTIES CONCERNING THE ASSETS. The Seller represents
and warrants to the Buyer that the statements contained in this Section 9 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 9).
(1) NONCONTRAVENTION. Except for the approvals and filings specified
in Section 8(a)(ii) or as set forth in Section 9(a) of the
Disclosure Schedule, neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated
hereby, will (i) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge or
other restriction of any Governmental Authority to which any
Asset is subject or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create
in any party the right to accelerate, terminate, modify or
cancel, or require any notice or trigger any rights to payment or
other compensation under any agreement, contract, lease, license,
instrument or other arrangement to which any Asset is subject (or
result in the imposition of any Encumbrance upon any of the
Assets), except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation, failure to
give notice, right to payment or other compensation, or
Encumbrance would not have a Material Adverse Effect, or
materially adversely affect the ability of the Seller to
consummate the transactions contemplated by this Agreement.
(2) TITLE TO TANGIBLE ASSETS AND CONDITION. The Seller, subject to
its acquisition of the Partnerships Interests, owns good and
marketable title to the tangible assets included in the Assets
free and clear of any and all liens, mortgages, pledges, claims,
options, encumbrances, interests or other burdens other than the
Permitted Encumbrances; The tangible assets included in the
Assets are, to the knowledge and good faith belief of the Seller,
in good operating condition and repair, ordinary wear and tear
excepted and are suitable for the use for which such assets are
currently used.
(3) FINANCIAL STATEMENTS. Section 9(c) of the Disclosure Schedule
sets forth the unaudited earnings before interest, taxes,
depreciation and amortization for the Assets for the 12-month
period ended December 31, 1998 (collectively, the "FINANCIAL
DATA"). The Financial Data is derived from the books and records
of the Seller, has been prepared in accordance with generally
accepted Canadian accounting principles consistently with past
practices of Seller in reporting the financial results of
Seller's operation of the Assets, and is true and correct and
presents fairly the financial results of Seller's operation of
the Assets at the date specified.
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(4) MATERIAL CHANGE. Except as set forth in Section 9(d) of the
Disclosure Schedule, since January 1, 1998:
(1) to the Seller's knowledge and good faith belief, there has
not been any Material Adverse Effect;
(2) the Assets have been operated and maintained in the Ordinary
Course of Business;
(3) there has not been any physical damage, destruction or loss
to any portion of the Assets, whether or not covered by
insurance, in the aggregate amount of ten thousand dollars
($10,000.00) Canadian or more;
(4) other than with respect to the Partnership Interests in the
Assets, there has been no purchase, sale or lease of assets
included in the Assets, other than in the Ordinary Course of
Business;
(5) there has been no actual, or to the knowledge of the Seller,
pending or threatened change affecting any of the Assets
with any customers, licensors, suppliers, distributors or
sales representatives, except such as has not had a Material
Adverse Effect;
(6) there has been no contract or commitment given or made by
the Seller outside the Ordinary Course of Business;
(7) there has been no contract which grants to a Person a
preferential right to purchase any of the Assets;
(8) there has been no contract or commitment for capital
expenditures or the acquisition or construction of fixed
assets for which Buyer shall or may have responsibility for
after the Closing except as set forth in Section 9(g) of the
Disclosure Schedule;
(9) there has been no commitment of any kind made or given by
the Seller, or to the best of the Seller's knowledge and
good faith belief, the occurrence of any event, giving rise
to any contingent liability for which Buyer shall or may
have responsibility for after the Closing; and
(10) there is no contract, commitment or agreement made, given or
entered into by the Seller to do any of the foregoing,
except as expressly permitted hereby.
(5) LEGAL COMPLIANCE. The Seller (with respect to the Assets) has
complied with all applicable laws (including rules,
regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of all Governmental
Authorities having jurisdiction (and all agencies thereof),
except where the failure to comply would not have a Material
Adverse Effect.
(6) TAX MATTERS. Except as set forth in Section 9(f) of the Disclosure Schedule:
(1) the Seller (with respect to the Assets) has filed all
material Tax Returns due that it was required to file. All
Taxes owed by the Seller (with respect to the Assets) shown
on any such Tax Return have been paid; and
(2) there is no material dispute or claim concerning any Tax
liability of the Seller (with respect to the Assets) either
(A) claimed or raised by any authority in writing or (B) as
to which the Seller has knowledge.
(7) CONTRACTS AND COMMITMENTS. Section 9(g) of the Disclosure
Schedule includes a list of all material contracts and
commitments (including, without limitation, any contract,
lease, agreement or commitment, written or oral, providing for
receipt or payment, contingent or otherwise, of ten thousand
dollars ($10,000.00) Canadian or more or which may not be
terminated without payment or penalty, or restricting the
ability of the owner of the Assets to engage in any line of
business in any geographic area, or containing any indemnity
obligation, or relating to indebtedness or guarantee
obligations) which are included in the Assets, and each such
contract is in full force and effect, except where the failure
to be in full force and effect would not have a Material
Adverse Effect. The Seller has performed all obligations
required to be performed by it to date under the contracts,
and is not in default under any obligation of any such
contracts, except when such default would not have a Material
Adverse Affect. To the knowledge of the Seller, no other party
to any contract is in default thereunder.
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(8) LITIGATION. Section 9(h) of the Disclosure Schedule sets forth
each instance in which any of the Assets (i) is subject to any
outstanding injunction, judgment, order, decree or ruling or
(ii) to the knowledge and good faith belief of the Seller, is
the subject of any action, suit, proceeding, hearing or
investigation of, in or before any court or quasi-judicial or
administrative agency of any federal, state, local or foreign
jurisdiction, or is to the knowledge and good faith belief of
the Seller, subject to any pending or threatened claim, demand
or notice of violation or liability from any party, except
where any of the foregoing would not have a Material Adverse
Effect.
(9) ENVIRONMENTAL MATTERS. Except as set forth in Section 9(i) of the Disclosure
Schedule:
(1) to the Seller's knowledge and good faith belief, the Seller
(with respect to the Assets) is and has been in compliance
with all applicable laws (including common law), ordinances,
orders, agreements, decisions, orders, rules and regulations
of Governmental Authority having jurisdiction relating to
protection or enhancement of human health or the environment
(collectively, the "ENVIRONMENTAL LAWS" and individually an
"ENVIRONMENTAL LAW"), except for such instances of
noncompliance that individually or in the aggregate do not
have a Material Adverse Effect;
(2) the Seller (with respect to the Assets) has obtained all
permits, licenses, franchises, authorities, consents and
approvals, and has made all filings and maintained all
material information, documentation, and records, as
necessary under applicable Environmental Laws for operating
the business conducted with the Assets as it is presently
conducted, and to the Seller's knowledge and good faith
belief all such permits, licenses, franchises, authorities,
consents, approvals, and filings remain in full force and
effect, except for such matters that individually or in the
aggregate do not have a Material Adverse Effect;
(3) there are to the Seller's knowledge, no pending or
threatened claims, demands, actions, administrative
proceedings, lawsuits or investigations against the Seller
(with respect to the Assets), and the Seller (with respect
to the Assets) to the Seller's knowledge is not subject to
any injunction, judgment, order, decree or ruling under any
Environmental Laws;
(4) one of the real property included in the Assets and, to the
Seller's knowledge, no off-site location used for the
treatment, storage or disposal of waste from any Asset, is:
(A) to the knowledge of the Seller, listed by any
Governmental Authority as requiring remedial action; (B) to
the knowledge of the Seller, being considered for possible
inclusion on a list by any Governmental Authority for
remedial action; or (C) to the knowledge of the Seller, the
subject of any action or investigation that may lead to
claims under any Environmental Law;
(5) no part of any of the real property included in the Assets
is now being used, or has been used, as a landfill, dump or
other disposal area for Hazardous Substances other than that
portion on which the Acid Gas Disposal Well is located and
the wellbore thereof; and
(6) the Seller has not received any notice or other
communication that it (with respect to the Assets) is or may
be a potentially responsible party or otherwise liable under
any Environmental Law in connection with any site actually
or allegedly containing or used for the treatment, storage
or disposal of Hazardous Substances.
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(10) PERMITS. Except as set forth in Section 9(j) of the
Disclosure Schedule, the Seller owns or holds all
franchises, licenses, permits, consents, approvals and
authorizations of all Governmental Authorities necessary for
the conduct of the business and operations conducted with
the Assets (collectively, the "PERMITS"), except for Permits
whose absence would not have a Material Adverse Effect. Each
Permit is in full force and effect, and to the Seller's
knowledge and good faith belief, the Seller is in compliance
with all of its obligations with respect to each Permit,
except where the failure to be in full force and effect or
to be in compliance would not have a Material Adverse
Effect, and (ii) to the knowledge of the Seller, no event
has occurred that permits, or upon the giving of notice or
the lapse of time or otherwise would permit, revocation or
termination of any Permit except such as in the aggregate
would not have a Material Adverse Effect.
(11) NO "TAKE OR PAY". Except as expressly set forth in Section
9(k) of the Disclosure Schedule, there are currently no
arrangements under any of the Gas Contracts by which Buyer
will be obligated by virtue of a prepayment arrangement, a
"take-or-pay" arrangement, a production payment, or any
other arrangement, to sell, transport or deliver
hydrocarbons at some future time without then or thereafter
receiving full payment therefor, or to make payment at some
future time for hydrocarbons or the transportation or the
delivery of hydrocarbons previously purchased or
transported.
(12) PIPELINE RIGHTS-OF-WAY. Other than the Partnership
Interests, Seller has not sold or assigned any
Rights-of-Way, in whole or in part, or any undivided
interest therein, to any Person whatsoever, except as
expressly disclosed in Section 9(l) of the Disclosure
Schedule. (1)
(13) GAS IMBALANCES. Except as expressly set forth in Section
9(m) of the Disclosure Schedule, there are no gas imbalances
for which the Buyer shall have any liability or other
obligation after the Effective Time.
(14) TARIFFS. Except as expressly set forth in Section 9(n) of
the Disclosure Schedule, to the extent that the operations
with respect to the Assets are subject to a tariff approved
by any Governmental Agency, those operations are in
compliance with each such tariff, except where such
noncompliance would not, individually or in the aggregate,
have a Material Adverse Effect. Seller has no knowledge of
any refund claim of any customers or any refund obligation
imposed by Governmental Authority, by Laws, by contract, or
by any other means, and, except as expressly set forth in
Section 9(n) of the Disclosure Schedule, has no knowledge of
any facts or circumstances which would give rise to any such
refund claim or refund obligation. Except as expressly set
forth, there are no customer complaints to Seller's
knowledge, pending or threatened, which would, either
individually or in the aggregate, have a Material Adverse
Effect.
(15) NO PARTNERSHIP. The Assets are not currently subject to any
partnership or joint venture except as disclosed in Section
9(o) of the Disclosure Schedule.
(16) NO CURTAILMENTS OR OTHER CHANGES. Except as expressly set
forth in Section 9(p) of the Disclosure Schedule, Seller
does not have any knowledge of any threatened or planned
plant closings of customers served by the Assets or reason
to believe that there will likely be curtailment by such
customers of future gas purchases by such customers, or any
knowledge of or reason to believe that there will be any
change in the business pertaining to the Assets or of other
Persons that could have a Material Adverse Effect upon the
presently existing economics of the business pertaining to
the Assets, including without limitation, any change in
tariffs or transportation rates with respect to any
pipelines of Persons that compete or could reasonably
compete with the existing or potential customers served by
the Assets.
(17) REAL PROPERTY. Seller has no knowledge of any threatened
termination or reduction of the current access to or from
the real property comprising a part of the Assets to
existing roads or the sewer or other utility services
presently serving such real property other than the Surface
Adjustments. Seller has not received any notice that its
real property is in violation of any zoning, laws, statutes,
ordinances or building or use restrictions applicable to
such real property or which prohibit the use of such real
property for its current use or uses with respect to the
Assets.
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(18) PATENTS, COPYRIGHTS, TRADEMARKS, ETC. Except as expressly
set forth in Section 9(r) of the Disclosure Schedule, to the
Seller's knowledge, the present conduct of business with
respect to the Assets does not conflict with, infringe upon
or violate the patents, trademarks, servicemarks, trade
names, copyrights or trade secrets or other intangible
assets of any other person or entity, and Seller has not
received any notice of any infringement thereof, except
where such conflicts, infringements and violations would
not, either individually or in the aggregate, have a
Material Adverse Effect.
(19) NO LEASES. Except as expressly set forth in Section 9(s) of
the Disclosure Schedule, all the equipment and other
tangible property which are material to the operations of
the Assets is owned by the Seller and not leased or rented.
(20) MATERIAL MISSTATEMENTS OR OMISSIONS. No statement,
representation, warranty or covenant made by the Seller in
this Agreement or in any Exhibit or Schedule to this
Agreement contains or will contain any untrue statement of
material fact or to the Seller's knowledge and good faith
belief, omits or will omit to state any material fact
necessary in order to make the statements herein or therein,
in the light of the circumstances under which they were
made, not misleading.
(21) UNDISCLOSED LIABILITIES. Except as expressly set forth on
Section 9(u) of the Disclosure Schedule or otherwise
provided herein, Seller has no knowledge of any facts or
circumstances with respect to the ownership or operation of
the Assets or the businesses conducted with respect thereto
as to which there are, or are likely to be, liabilities
(fixed or contingent) which have NOT been otherwise
disclosed by Seller to Buyer in the Disclosure Schedule.
10) PRE-CLOSING COVENANTS. The Parties agree as follows with respect to
the period between the date of this Agreement and the
Closing:
(1) GENERAL. Each Party will use its reasonable best efforts to
take all action and to do all things necessary, proper or
advisable in order to consummate and make effective the
transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set
forth in Section 12 hereof).
(2) NOTICES AND CONSENTS. The Seller will give any notices to
third parties, and will use its reasonable best efforts to
obtain the third party consents necessary to effect the
assignment of all Gas Contracts, Rights-of-Way and other
Assets to Buyer. If Seller is unable to obtain any necessary
third party consents to the assignment of any Gas Contracts
or Rights-of-Way, then Seller shall hold such Gas Contract
or Right-of-Way for the benefit of Buyer after the Closing
for its term and Seller shall provide Buyer with the
economic benefits thereof until such Gas Contract or
Right-of-Way is terminated. Insofar as the Seller holds any
Gas Contracts or Rights-of -Way for the benefit of the Buyer
after Closing and takes actions with respect thereto on
behalf of the Buyer pursuant to this Section, the Seller
shall be deemed to have been the agent of the Buyer
hereunder. The Buyer ratifies all actions taken by the
Seller or refrained to be taken by the Seller pursuant to
the terms of this Section in such capacity during such
period, with the intention that all such actions shall be
deemed to be those of the Buyer. Insofar as the Seller
exercises rights or takes any actions as the agent of the
Buyer pursuant to this Section, the Seller may require the
Buyer to secure the costs to be incurred by the Seller on
behalf of the Buyer in such manner as may be reasonably
appropriate in the circumstances. The Buyer shall indemnify
the Seller and its directors, officers, servants, agents or
employees against all liabilities, losses, costs (including
legal costs on a solicitor-client basis), claims or damages
which the Seller or its directors, officers, servants,
agents or employees may suffer or incur as a result of
holding any of the Gas Contracts or Rights-of-Way as the
agent of the Buyer pursuant to this Section insofar as such
liabilities, losses, costs, claims or damages are not a
direct result of the gross negligence or wilful misconduct
of the Seller or its directors, officers, servants, agents
or employees. An action or omission of the Seller or its
directors, officers, servants, agents or employees shall not
be regarded as gross negligence or wilful misconduct,
however, to the extent it was done or omitted to be done in
accordance with the instructions of or with the concurrence
of the Buyer. Each of the Parties will give any notices to,
make any filings with, and use its reasonable best efforts
to obtain any authorizations, consents and approvals of
Governmental Authorities which are required prior to
Closing.
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(3) OPERATION OF BUSINESS. Other than the acquisition of the
Partnership Interests or actions taken or transactions entered
into in order to effect a settlement of the Renaissance Claim
which may be undertaken with the prior consent of the Buyer
which consent shall not be unreasonably withheld, the Seller
will not, without the consent of the Buyer, engage in any
practice, take any action or enter into any transaction with
respect to the Assets outside the Ordinary Course of Business.
Without limiting the generality of the foregoing, the Seller
will not, without the consent of the Buyer, do any of the
following with respect to the Assets:
(1) cause or allow any of the Assets to become subject to an
Encumbrance except for Permitted Encumbrances;
(2) (A) acquire (including, without limitation, by merger,
consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or
any division thereof or any material amount of assets other
than in the Ordinary Course of Business; (B) sell, lease or
otherwise dispose of any property or assets, other than
sales of goods or services in the Ordinary Course of
Business; or (C) enter into or amend a contract, agreement,
commitment or arrangement with respect to any matter set
forth in this paragraph (ii); or
(3) amend in any respect any contract or agreement relating to
the Assets, or terminate any such contract or agreement
other than in the Ordinary Course of Business.
provided however, the Seller may take any such action or enter
into any such commitments without the prior consent of the
Buyer, if the Seller reasonably determines that such actions
are necessary for the protection of life or property, in which
case the Seller shall promptly notify the Buyer of such
intention or actions and the Seller's estimate of the costs
and expenses associated therewith.
(4) FULL ACCESS. The Seller will, subject to all contractual or
fiduciary obligations and limits, permit representatives of
the Buyer to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business
operations of the Seller, to all premises, properties,
personnel, books, records (including tax records), contracts
and documents of or pertaining to the Assets.
(5) NOTICE OF DEVELOPMENTS. Each Party will give prompt written
notice to the other of any Material Adverse Effect of which it
has knowledge causing a breach of any of its representations
and warranties. No disclosure by any Party pursuant to this
subsection 8(e), however, shall be deemed to amend or
supplement any Schedule hereto or to prevent or cure any
misrepresentation or breach of warranty.
(6) CASUALTY LOSS. If, prior to the Closing, any portion of the
Assets have been or are damaged or destroyed by fire, flood,
storm or other casualty or shall be taken by condemnation or
under the right of eminent domain (all of which are herein
called "Casualty Loss"), and the Casualty Loss is NOT a
Material Adverse Effect, then Buyer shall bear the --- risk
of loss, provided, however, Seller shall, at the Closing,
pay by means of an adjustment to the Consideration to Buyer,
all sums paid to Seller by persons or governmental bodies by
reason of the damage, destruction or taking of such assets
and shall assign, transfer and set over unto Buyer all of
the right, title and interest of Seller in and to any unpaid
proceeds or other payments from third parties arising out of
such destruction or taking, and all claims and chooses in
action with respect to such destruction or taking; further,
provided, however, if the Casualty Loss is a Material
Adverse Effect and such Assets are not repaired or replaced
and the business operation restored to its original state by
Seller prior to Closing, then Seller shall bear the risk of
loss, and Buyer shall have the right to terminate this
Agreement unless Buyer and Seller mutually shall have agreed
upon an appropriate adjustment to the Consideration which
reflects not only the cost of repair or replacement of the
damaged, destroyed or taken assets, but also includes an
amount for the economic losses incurred or which will be
incurred by Buyer to such business operation. If this
Agreement is terminated in accordance with this Section
10(f) prior to Closing, then except for the confidentiality
provisions contained in the Confidentiality Agreement, the
Parties shall be released from all of their obligations
under this Agreement. If this Agreement is so terminated,
the Buyer shall promptly return to the Seller all materials
delivered to the Buyer by the Seller hereunder, together
with all copies of them that may have been made by or for
the Buyer. Prior to Closing, Seller shall not voluntarily
compromise, settle or adjust any amount payable by reason of
any Casualty Loss which has been assigned to Buyer pursuant
to the foregoing provisions of this Section 10(f).
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11) POST-CLOSING COVENANTS. The Parties agree as follows:
(1) GENERAL. In case at any time after the Closing any further
action is necessary to carry out the purposes of this
Agreement, each of the Parties will take such further action
(including the execution and delivery of such further
instruments and documents) as the other Party reasonably may
request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to
indemnification therefor under Section 13 below).
(2) LITIGATION SUPPORT. In the event and for so long as any
Party actively is contesting or defending against any
action, suit, proceeding, hearing, investigation, charge,
complaint, claim or demand in connection with (i) any
transaction contemplated under this Agreement or (ii) any
fact, situation, circumstance, status, condition, activity,
practice, plan, occurrence, event, incident, action, failure
to act or transaction on or before the Closing Date
involving any Asset, the other Party shall cooperate with
the contesting or defending Party and its counsel in the
defense or contest, make available its personnel, and
provide such testimony and access to its books and records
as shall be commercially reasonable in connection with the
defense or contest, all at the sole cost and expense of the
contesting or defending Party (unless the contesting or
defending Party is entitled to indemnification therefor
under Section 13 below).
(3) TRANSITION PERIOD OFFICE SPACE. The Seller shall and does
hereby, for a period of not less than one (1) month and not
more than three (3) months after the Closing Date (the
"TRANSITION PERIOD"), grant to the Buyer a licence to use
and occupy office space being comprised of one office during
normal business hours of the Seller for the purpose of
conducting normal business operations of the Buyer in
connection with the Assets.
(4) DELIVERY AND RETENTION OF RECORDS. On or promptly after the
Closing Date, the Seller will deliver or cause to be
delivered to the Buyer all files, records, information and
data relating to the Assets (other than Tax Returns, Tax
work papers and other Tax records and information) that are
in the possession or control of the Seller and its
Affiliates (together with all of the Seller's and its
Affiliates' contractual rights to request other such files,
records, information and data from any third party) (the
"Records"). The Buyer agrees to (i) hold the Records and not
to destroy or dispose of any thereof for a period of six
years from the Closing Date, provided that, if it desires to
destroy or dispose of such Records during such period, it
will first offer in writing at least 60 days before such
destruction or disposition to surrender them to the Seller
and if the Seller does not accept such offer within 20 days
after receipt of such offer, the Buyer may take such action
and (ii) following the Closing Date to afford the Seller,
its accountants and counsel, during normal business hours,
upon reasonable request, at any time, full access to the
Records and to the Buyer's employees to the extent that such
access may be requested for any legitimate purpose at no
cost to the Seller (other than for reasonable out-of-pocket
expenses); provided, however, that such access will not be
construed to require the disclosure of Records that would
cause the waiver of any attorney-client, work product or
like privilege; provided, further, that in the event of any
litigation nothing herein shall limit either Party's rights
of discovery under applicable law. The Buyer shall have the
same rights, and the Seller shall have the same obligations,
as are set forth in this Section with respect to any copies
of the Records of the Seller pertaining to the Assets that
are retained by the Seller, with the exception of Tax
Returns, Tax work papers and other Tax records and
information retained by the Seller, provided that such
access will not be construed to require the disclosure of
Records that would cause the waiver of any attorney-client,
work product or like privilege.
(5) MAIL; PAYMENTS. Each Party hereby authorizes the other from
and after the Closing to receive and open all mail and other
communications relating to the business conducted with the
Assets, and subject to the terms hereof, to act with respect
to such communications in such manner as that Party may
elect to the extent that such communications relate to the
rights and obligations of such Party with respect to the
Assets. If any communication does not relate exclusively to
the rights and obligations of the recipient with respect to
the Assets, the recipient shall forward the original or a
copy of such communication promptly to the other Party. Each
Party shall promptly deliver to the other any moneys, checks
or other instruments of payment received by that Party to
which the other Party is entitled hereunder.
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12) CONDITIONS TO OBLIGATION TO CLOSE.
(1) CONDITIONS TO OBLIGATION OF THE BUYER. The obligation of the
Buyer to consummate the transactions to be performed by it
in connection with the Closing is subject to satisfaction of
the following conditions:
(1) the representations and warranties set forth in Section
8(a) and Section 9 above shall be true and correct in
all material respects at and as of the Closing Date;
(2) the Seller shall have performed and complied with all
of its covenants hereunder in all material respects
through the Closing;
(3) there shall not be any injunction, judgment, order,
decree or ruling in effect preventing consummation of
the transactions contemplated by this Agreement;
(4) the Seller shall have delivered to the Buyer a
certificate to the effect that each of the conditions
specified above in subsections 12(a)(i)-(iii) is
satisfied in all respects;
(5) the Parties shall have received all other
authorizations, consents, and approvals of Governmental
Authorities referred to in subsection 8(a)(ii) above
(other than Customary Post-Closing Consents) and in
Section 9(a) of the Disclosure Schedule, if any, and
all material consents, approvals and waivers of third
parties, if any, required for Seller's assignment of
any of the Gas Contracts, Rights-of-Way or other Assets
to Buyer other than those that are customarily obtained
after Closing in connection with a sale of ownership
interests or assets of the nature of the Assets;
(6) all actions to be taken by the Seller in connection
with consummation of the transactions contemplated
hereby and all certificates, instruments and other
documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in
form and substance to the Buyer; and
(7) the Seller shall have completed the acquisition of the
Partnership Interests and the Buyer shall be satisfied
that it will be acquiring title and ownership of a 100%
interest in the Assets, free and clear of all title
defects and Encumbrances other than the Permitted
Encumbrances.
The Buyer may waive any condition specified in this Section
12(a) if it executes a writing so stating at or before the
Closing.
(2) CONDITIONS TO OBLIGATION OF THE SELLER. The obligation of the
Seller to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the
following conditions:
(1) the representations and warranties set forth in Section
3(b) above shall be true and correct in all material
respects at and as of the Closing Date;
(2) the Buyer shall have performed and complied with all of
its covenants hereunder in all material respects
through the Closing;
(3) there shall not be any injunction, judgment, order,
decree or ruling in effect preventing consummation of
the transactions contemplated by this Agreement;
(4) the Buyer shall have delivered to the Seller a
certificate to the effect that each of the conditions
specified above in subsections 12(b)(i)-(iii) is
satisfied in all respects;
20
<PAGE>
(5) the Parties shall have received all other
authorizations, consents, and approvals of Governmental
Authorities referred to in subsection 8(a)(ii) above
(other than Customary Post-Closing Consents) and in
Section 9(a) of the Disclosure Schedule, if any and all
material consents, approvals and waivers of third
parties, if any, required for Seller's assignment of
any of the Gas Contracts, Rights-of-Way or other Assets
to Buyer other than those that are customarily obtained
after closing in connection with a sale of ownership
interests or assets of the nature of the Assets;
(6) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby
and all certificates, instruments and other documents
required to effect the transactions contemplated hereby
will be reasonably satisfactory in form and substance
to the Seller;
(7) the Seller shall have completed the acquisition of the
Partnership Interests on terms and conditions
satisfactory to the Seller; and
(8) there shall, prior to the Closing, be no sale, transfer
or other disposition of any of the shares of the Seller
which has the effect of altering the effective control
of the Seller nor shall any Person other than the
Seller have made a take-over-bid in respect of shares
of the Seller.
The Seller may waive any condition specified in this Section
12(b) if it executes a writing so stating at or before the
Closing.
(3) In the event any of the conditions in Sections 12(a) or 12(b)
has not been satisfied at or before the Closing Date and such
condition has not been waived by the Party for the benefit of
which such condition has been included, such Party may by
written notice to the other Party, elect without prejudice to
any other rights or remedies it may have available to it, to
terminate this Agreement or to treat this Agreement as being
binding and enforceable. However, a Party may not terminate
this Agreement in such manner after Closing, and its remedies
thereafter, if any, with respect to the failure to satisfy
such condition shall be limited to damages.
13) REMEDIES FOR BREACHES OF THIS AGREEMENT.
(1) SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
All of the representations and warranties of the
Parties contained in this Agreement shall survive the
Closing and continue in full force and effect for a
period of twenty-four (24) months, for the benefit of
the Party for which such representations and warranties
were made. Other than a claim or action based on the
fraud of a Party, no claim or action shall be commenced
with respect to a breach of any such representation or
warranty, unless, within such period, written notice
specifying such breach in reasonable detail has been
provided to the Party which made such representation or
warranty. The covenants contained in this Agreement to
be performed after the Closing shall survive the
Closing indefinitely.
(2) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE BUYER.
Subject to Sections 13 (a), (c) and 13 (d) and provided
that Closing has occurred, the Seller shall:
1. be liable to the Buyer for all Adverse
Consequences whatsoever which the Buyer may
suffer, sustain, pay or incur; and
2. indemnify and save the Buyer and its directors,
officers, servants, agents and employees harmless
from and against all Adverse Consequences
whatsoever which may be brought against or
suffered by the Buyer, its directors, officers,
servants, agents or employees or which they may
sustain, pay or incur;
21
<PAGE>
(1) as a direct result of any matter or thing
arising out of, resulting from or
attributable to a representation or warranty
contained in Section 8 (a) or Section 9 being
inaccurate or untruthful or Seller's breach
of a covenant to Buyer under this Agreement
or the Transaction Documents;
(2) as a direct result of any matter or thing
arising out of, resulting from or
attributable to or connected with the
ownership and/or operation of the Assets
(whether by Seller or Seller's predecessors
in interest) prior to the Effective Time; or
(i) as a direct result of the Renaissance Claim;
except any Adverse Consequences to the extent that
the same are caused by the gross negligence or wilful
misconduct of the Buyer, its directors, officers,
servants, agents, employees or assigns. The indemnity
granted by the Seller herein, however, is not a title
warranty and does not provide either an extension of
any representation or warranty contained in this
Agreement or an additional remedy with respect to the
Seller's breach of such a representation or warranty.
(3) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE SELLER. Provided that Closing
has occurred, the Buyer shall:
1. be liable to the Seller for all Adverse Consequences that the
Seller may suffer, sustain, pay or incur; and
2. indemnify and save the Seller and its directors, officers,
servants, agents and employees harmless from and against all
Adverse Consequences which may be brought against or suffered by
the Seller, its directors, officers, servants, agents or
employees or which they may sustain, pay or incur;
(i) as a direct result of any matter or thing arising out
of, resulting from or attributable to a representation
or warranty contained in Section 8(b) being inaccurate
or untruthful or Buyer's breach of a covenant to Seller
under this Agreement or the Transaction Documents; or
(ii) as a direct result of any matter or thing arising out
of, resulting from or attributable to or connected with
the ownership and/or operation of the Assets whether by
Buyer or Buyer's successors in interest and occurring
or accruing after the Effective Date;
except any Adverse Consequences to the extent that the same
are caused by the gross negligence or wilful misconduct of the
Seller, its directors, officers, servants, agents, employees
or assigns. The responsibility prescribed by this Section
however, does not provide either an extension of any
representation or warranty contained in this Agreement or an
additional remedy for the Buyer's breach of such a
representation or warranty.
(4) ASSETS ACQUIRED ON "AS IS" BASIS
Notwithstanding the foregoing provisions of Section 13(b), the Buyer
acknowledges that it is acquiring the Assets on an "as is" basis, as of
the Effective Time. The Buyer acknowledges that it is familiar with the
present condition of the Assets, that the Seller has provided the Buyer
with a reasonable opportunity to inspect the Assets at the sole cost,
risk and expense of the Buyer (insofar as the Seller could reasonably
provide such access) and that the Buyer is not relying upon any
representation or warranty of the Seller as to the condition,
environmental or otherwise, of the Assets, except as is specifically
made pursuant to Section 8(a) or Section 9.
22
<PAGE>
(5) MATTERS INVOLVING THIRD PARTIES.
(1) If any third party shall notify any Party (the "INDEMNIFIED
PARTY") with respect to any matter (a "THIRD PARTY CLAIM")
that may give rise to a claim for indemnification against
any other Party (the "INDEMNIFYING PARTY") under this
Section 13, then the Indemnified Party shall promptly (and
in any event within five (5) Business Days after receiving
notice of the Third Party Claim) notify the Indemnifying
Party thereof in writing.
(2) The Indemnifying Party will have the right to assume and
thereafter conduct the defense of the Third Party Claim with
counsel of its choice reasonably satisfactory to the
Indemnified Party; provided, however, that the Indemnifying
Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim
without the prior written consent of the Indemnified Party
(not to be withheld unreasonably) unless the judgment or
proposed settlement involves only the payment of money
damages and does not impose an injunction or other equitable
relief upon the Indemnified Party.
(3) Unless and until the Indemnifying Party assumes the defense
of the Third Party Claim as provided in subsection 13(e)(ii)
above, however, the Indemnified Party may defend against the
Third Party Claim in any manner it reasonably may deem
appropriate.
(4) In no event will the Indemnified Party consent to the entry
of any judgment or enter into any settlement with respect to
the Third Party Claim without the prior written consent of
the Indemnifying Party which consent shall not be withheld
unreasonably.
14) TERMINATION.
(1) TERMINATION OF AGREEMENT. The Parties may terminate this Agreement as
provided below:
(1) the Buyer and the Seller may terminate this Agreement by
mutual written consent at any time before the Closing;
(2) the Buyer may terminate this Agreement by giving written
notice to the Seller at any time before Closing (A) in the
event the Seller has breached any representation, warranty
or covenant contained in this Agreement in any material
respect, the Buyer has notified the Seller of the breach,
and the breach has continued without cure for a period of
ten (10) days after the notice of breach, or (B) if the
Buyer has elected to terminate this Agreement in accordance
with Section 12 (c), and
(3) the Seller may terminate this Agreement by giving written
notice to the Buyer at any time before the Closing (A) in
the event the Buyer has breached any representation,
warranty or covenant contained in this Agreement in any
material respect, the Seller has notified the Buyer of the
breach, and the breach has continued without cure for a
period of 10 days after the notice of breach, or (B) if the
Seller has elected to terminate this Agreement in accordance
with Section 12(c).
(2) EFFECT OF TERMINATION. If any Party terminates this Agreement
pursuant to Section 16(a) above, all rights and obligations of
the Parties hereunder shall terminate without any liability of
either Party to the other Party (except for any liability of
any Party then in breach); provided, however, that the
confidentiality provisions contained in the Confidentiality
Agreement shall survive termination.
15) PROHIBITED ACTIVITIES OF SELLER. In order to protect the goodwill and
business interests of the Buyer as to its utilization of the Assets for a period
of twenty (20) years following the Closing, Seller covenants and agrees that it
and its Affiliates, now or hereafter existing will not:
23
<PAGE>
(1) directly or indirectly, request or advise any party to any Gas
Contract pursuant to which Seller is or Buyer or its Affiliates will
after Closing be, gathering or treating any natural gas owned or
controlled by a Person other than the Seller or its Affiliates at or
through the Calmar Gas Plant and Gas Gathering System, now or
hereafter existing, to withdraw, curtail or cancel any service to or
from the Buyer or its Affiliates under the terms of such contract;
(2) aid, abet or otherwise assist any person, firm or corporation seeking
to interfere with the Buyer's or its Affiliates' relationship with the
parties to, or the term of, any Gas Contract pursuant to which Seller
is or Buyer will after Closing be, gathering or treating any natural
gas owned or controlled by a Person other the Seller or its Affiliates
at or through the Calmar Gas Plant and Gas Gathering System, now or
hereafter; or
(3) acting alone or in conjunction with others, directly or indirectly,
engage in competition with the Buyer or its Affiliates with respect to
any Persons to and in respect of the present Gas Contracts pursuant to
which Seller is or Buyer will after Closing be, gathering or treating
any natural gas owned or controlled by a Person other the Seller or
its Affiliates at or through the Calmar Gas Plant and Gas Gathering
System, or their successors-in-interest, whether for its own account
or for others.
16) MISCELLANEOUS.
(1) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. The Parties may issue press
releases upon the execution of this Agreement, provided that each
Party shall submit to the other Party a copy of its intended press
release not less than twenty-four (24) hours prior to the time of
release and the other party shall have provided written approval of
such press release which approval shall not be unreasonably withheld.
No Party shall issue any press release or make any public announcement
relating to the subject matter of this Agreement during the period
after the press release hereinbefore mentioned and before the Closing
without the prior written approval of the other Party which approval
shall not be unreasonably withheld; provided, however, that any Party
may make any public disclosure it believes in good faith is required
by applicable law or any listing or trading agreement concerning its
publicly traded securities or in order to enable a Party to fulfill
its obligations in respect of any consents or approvals required
hereunder (in which case the disclosing Party will use its reasonable
best efforts to advise the other Party before making the disclosure).
(2) NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
(3) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this
Agreement or any of its rights, interests or obligations hereunder
without the prior written approval of the other Party, except that the
Buyer may assign its rights hereunder to any wholly owned subsidiary
of the Buyer, provided that no such assignment shall relieve the Buyer
of any of its liabilities or obligations hereunder.
(4) COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but which together will constitute
one and the same instrument.
(5) HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
(6) NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request,
demand, claim, or other communication hereunder shall be deemed duly
given two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the
intended recipient as set forth below:
24
<PAGE>
IF TO THE BUYER: Midcoast Canada Operating Corporation
c/o Midcoast Energy Resources, Inc.
1100 Louisiana Street,
Suite 2950
Houston, Texas 77002
Attn: General Counsel
Fax: (713) 653-6710
IF TO THE SELLER:Probe Exploration Inc.
2400, 530-8th Avenue
Calgary, Alberta T2P 3S8
Attn: President
Fax: (403) 233-2486
Any Party may send any notice, request, demand, claim or other
communication hereunder to the intended recipient at the
addresses set forth above using any other means (including
personal delivery, expedited courier, messenger service,
telecopy, ordinary mail, or electronic mail), but no such
notice, request, demand, claim or other communication shall be
deemed to have been duly given unless and until it actually is
received by the intended recipient. Any Party may change the
address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the
other Party notice in the manner herein set forth.
(7) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the domestic laws of the
Commonwealth of Canada without giving effect to any choice or
conflict of law provision or rule (whether of the Commonwealth
of Canada or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the
Commonwealth of Canada. Each party accepts the jurisdiction of
the courts of the Province of Alberta and all courts of appeal
in therefrom.
(8) AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing
and signed by the Buyer and the Seller. No waiver by any Party
of any default, misrepresentation or breach of warranty or
covenant hereunder, whether intentional or not, shall be
deemed to extend to any prior or subsequent default,
misrepresentation or breach of warranty or covenant hereunder
or affect in any way any rights arising by virtue of any prior
or subsequent such occurrence.
(9) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction
shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(10) TRANSACTION EXPENSES. Each of the Buyer and the Seller will
bear its own costs and expenses (including legal fees and
expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, except as provided in
paragraph (k) below.
(11) CERTAIN TAXES. Notwithstanding anything in this Agreement to
the contrary, the Seller and/or the Buyer will prepare and
file all necessary Tax Returns, elections and other
documentation with respect to all transfer, documentary,
sales, use, stamp, registration and other Taxes and fees
required under Canadian Laws in connection with this Agreement
and the consummation of the transactions contemplated hereby,
and, the Buyer and/or the Seller will prepare and file the
same, if any, required under United States Laws. If required
by applicable Laws, each Party will join in the execution of
such Tax Returns or other documentation to be prepared by the
other Party under this Section 16(k). For clarity and
notwithstanding anything to the contrary herein, the Seller
and the Buyer shall jointly elect in the prescribed form,
pursuant to Section 167(1.1) of the EXCISE TAX ACT (Canada) to
have such provisions apply to the transactions contemplated
herein and the Buyer shall file such election with Revenue
Canada in a timely fashion. Provided that Closing has
occurred, the Buyer shall:
25
<PAGE>
(1) be liable to the Seller for all Adverse Consequences that
the Seller may suffer, sustain, pay or incur; and
(2) indemnify and save the Seller and its directors, officers,
servants, agents and employees harmless from and against all
Adverse Consequences which may be brought against or
suffered by the Seller, its directors, officers, servants,
agents or employees or which they may sustain, pay or incur
as a direct result of any matter or thing arising out of,
resulting from or attributable to the election prepared,
executed and filed pursuant to Section 167(1.1) of the
EXCISE TAX ACT (Canada) pursuant to this Section.
(3) in the event that the amount of the Consideration is
increased upon the release of all or a portion of the
Deferred Contingent Consideration in accordance with the
provisions of Section 7(b), any tax returns, elections and
other documents filed pursuant to this Section, including
without limitation, any elections pursuant to Section
167(1.1) of the Excise Tax Act (Canada), shall be amended by
the Buyer and/or the Seller accordingly and in a consistent
manner between them.
(12) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the
Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship
of any of the provisions of this Agreement. Any reference to
any federal, state, local or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word
"including" shall mean including without limitation.
(13) INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and
Schedules (including the Disclosure Schedule) identified in
this Agreement are incorporated herein by reference and made a
part hereof.
(14) BULK TRANSFERS. The Parties waive compliance with the
requirements of the bulk sales law of any jurisdiction in
connection with the sale of the Assets to the Buyer hereunder.
The Seller shall indemnify and hold harmless the Buyer against
all Adverse Consequences which may be incurred by the Buyer as
a result of noncompliance with any such bulk sales laws.
(15) ENTIRE AGREEMENT. THIS AGREEMENT (INCLUDING THE TRANSACTION
DOCUMENTS REFERRED TO HEREIN) CONSTITUTES THE ENTIRE AGREEMENT
AMONG THE PARTIES AND SUPERSEDES ANY PRIOR UNDERSTANDINGS,
AGREEMENTS OR REPRESENTATIONS BY OR AMONG THE PARTIES, WRITTEN
OR ORAL, TO THE EXTENT THEY HAVE RELATED IN ANY WAY TO THE
SUBJECT MATTER HEREOF.
(16) KNOWLEDGE AND AWARENESS. Where in this Agreement, a
representation and warranty is made on the basis of the
knowledge, belief or awareness of a Party, such knowledge,
belief or awareness consists only of the actual knowledge,
belief or awareness, as the case may be, of the officers and
employees of such Party and does not include the knowledge,
belief or awareness of any other Person.
(17) CONFLICTS. If there is any conflict or inconsistency between a
provision of the body of this Agreement and that of a schedule
attached hereto or another Transaction Document, the provision
of the body of this Agreement shall prevail. If any term or
condition of this Agreement conflicts with a term or condition
of a Law, the term or condition of such Law shall prevail, and
this Agreement shall be deemed to be amended to the extent
required to eliminate any such conflict.
26
<PAGE>
(18) NO ADDITIONAL REPRESENTATIONS AND WARRANTIES BY SELLER. The
Seller makes no representations or warranties to the Buyer in
addition to those expressly enumerated in Section 8 (a) and
Section 9. Except and to the extent provided in Section 8(a)
and 9 the Seller does not make representations or warranties
with respect to: (i) the quantity, quality or recoverability
of petroleum substances subject to the Gas Contracts; (ii) any
estimates of the value of the Assets or the revenues
applicable to future operations thereof; (iii) any engineering
or other interpretations or economic evaluations respecting
the Assets; (iv) the rates of production of petroleum
substances subject to the Gas Contracts; (v) the quality,
condition or serviceability of the Assets; (vi) the
suitability of their use for any purpose; or (vii) the degree
to which computer firmware, hardware, software or process
control systems included in the Assets, including without
limitation, micro codes, application programs, electronic data
files and databases, may be impacted or adversely affected by
the transition from the year 1999 to 2000 or the leap year in
the year 2000. Without restricting the generality of the
foregoing, but subject always to Section 8(a) and Section 9,
the Buyer acknowledges that it has made its own independent
investigation, analysis, evaluation and inspection of the
Assets and the state and condition thereof and that it has
relied solely on such investigation, analysis, evaluation and
inspection and the representations and warranties of the
Seller contained in Sections 8(a) and 9 hereof as to its
assessment of the condition, quantum and value of the Assets.
(19) NO LIABILITY FOR COLLATERAL INFORMATION. Except with respect
to the representations and warranties in Section 8(a) and
Section 9, or in the event of fraud or gross negligence of
Seller or its directors, officers, servants, agents or
employees, the Buyer forever releases and discharges the
Seller and its directors, officers, servants, agents and
employees from any claims and all liability to the Buyer or
the Buyer's assigns and successors, as a result of the use or
reliance upon advice, information or materials pertaining to
the Assets which was delivered or made available to the Buyer
by the Seller or its directors, officers, servants, agents or
employees prior to or pursuant to this Agreement, including,
without limitation, any evaluations, projections, reports and
interpretive or non-factual materials prepared by or for the
Seller, or otherwise in the Seller's possession.
(20) TIME OF THE ESSENCE. Time shall be of the essence in this
Agreement.
(21) ARBITRATION. Insofar as the Parties are unable to agree on any
matter which expressly may be referred to arbitration
hereunder, either Party may serve the other Party written
notice that it wishes such matter be referred to arbitration.
The Parties shall meet within seven (7) days of the receipt of
a notice issued pursuant to this Subsection 14 (u) to attempt
to agree on a single arbitrator qualified by experience,
education and training, to determine such matter. If the
Parties are unable to agree on the selection of the
arbitrator, the Party which issued such notice shall forthwith
make application to a judge of the Court of Queen's Bench of
the Province of Alberta pursuant to the ARBITRATION ACT
(Alberta) as amended from time to time, hereinafter referred
to as the "ARBITRATION ACT") for the appointment of a single
arbitrator, and failing such action on the part of the Party
which issued such notice, the other Party may make such
application.
The arbitrator selected pursuant to shall proceed as soon as
is practicable to hear and determine the matter in dispute,
and shall be directed to provide a written decision respecting
such matter within forty-five (45) days of appointment. The
Parties shall provide such assistance and information as may
be reasonably necessary to enable the arbitrator to determine
such matter.
Except to the extent modified in this Subsection, the
arbitrator shall conduct any arbitration hereunder pursuant to
the provisions of the ARBITRATION ACT.
27
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
SELLER:
PROBE EXPLORATION INC.
Per:______________________________
President
Per:______________________________
BUYER:
MIDCOAST CANADA OPERATING CORPORATION
Per:______________________________
Vice President
Per:______________________________
28
<PAGE>
Exhibit "A"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Gas Gathering and Treating Agreement
29
<PAGE>
Exhibit "B"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Area of Interest Agreement
30
<PAGE>
Exhibit "C"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Probe System Gathering Agreement
31
<PAGE>
Exhibit "D"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Escrow Agreement
32
<PAGE>
Exhibit "E"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Intercreditor Agreement
33
<PAGE>
Schedule "1"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Disclosure Schedule
34
<PAGE>
Schedule "2(a)(i)"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Calmar Plant and Gas Gathering System - Maps
35
<PAGE>
Schedule "2(a)(iii)"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Listed Surface Rights
36
<PAGE>
Schedule "2(a)(iv)"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Listed Motor Vehicles
NIL
37
<PAGE>
Schedule "2(a)(v)"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Listed Gas Contracts
NIL
38
<PAGE>
Schedule "2(a)(viii)"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Listed Permits and Licences
Alberta Energy and Utilities Board Approval No. 7017
Alberta Energy and Utilities Board Approval No. 1997-833
Alberta Energy and Utilities Board Approval No.8239
Alberta Energy and Utilities Board Approval No.30800
Alberta Energy and Utilities Board Approval No.30164
Alberta Energy and Utilities Board Approval No.31174
Alberta Environmental Protection Approval No.11344-01-00
Alberta Environmental Protection Approval No.47779-00-00
County of Leduc No. 25 Development Permit No. D98-027
County of Leduc No. 25 Development Permit No. D98-114
Alberta Environmental Protection Permit No. 97-28-PKL
Alberta Boilers Safety Association Vessel Registration Nos:
0437000; 0438883; 0438908; 0442338; 0442333; 0438616; 0438614; 0439613;
0436994; 0439612; 0438882; 0438907; 0442339; 0442334;
0430615; 0438613; 0436993; 0439627;
0428501; 0438881; 0438906; 0442340; 0442335; 0438617; 0438612; 0439612; 0436897;
0428929; 0438880; 0438905; 0442341; 0438817; 0438620; 0438611; 0439601; 2732343;
0403529; 0438879; 0438904; 0442331; 0428501; 0438619; 0438609; 0436999; 0436999;
0428929; 0438878; 0438903; 0442332; 0438618; 0438610; 0437000; 0439602; 0439601
0436994; 0436993; 0439613
39
<PAGE>
Schedule "2(b)(iv)"
to a Purchase and Sale Agreement
dated as of March 23, 1999 between
Probe Exploration Inc. and Midcoast Canada Operating Corporation
Leduc/Calmar Original Plant
40
AGREEMENT AND PLAN OF MERGER
WITH RESPECT TO
DUFOUR PETROLEUM, INC.
AND
PURCHASE AGREEMENT PERTAINING TO
REMAINING FLARE, LLC MEMBERSHIP INTERESTS
AGREEMENT AND PLAN OF MERGER
WITH RESPECT TO
DUFOUR PETROLEUM, INC.
AND
PURCHASE AGREEMENT PERTAINING TO
REMAINING FLARE, L.L.C. MEMBERSHIP INTERESTS
THIS AGREEMENT AND PLAN OF MERGER WITH RESPECT TO DUFOUR PETROLEUM, INC.
AND PURCHASE AGREEMENT PERTAINING TO REMAINING FLARE, L.L.C. MEMBERSHIP
INTERESTS (this "Agreement") dated as of March 11, 1999, is made by and among
the following parties (hereinafter collectively referred to as the "Parties" and
individually as a "Party"): MIDCOAST ENERGY RESOURCES, INC., a Nevada
corporation ("Midcoast"); MAGNOLIA RESOURCES, INC., a Mississippi corporation
("Magnolia); DPI/MIDCOAST, INC., a Mississippi corporation ("DPI/Midcoast");
DUFOUR PETROLEUM, INC., a Mississippi corporation ("DPI"); CURTIS J. DUFOUR,
III, and wife, DONNA M. DUFOUR (collectively, the "DPI Shareholders"); JAMES D.
LAUGHLIN, MICHAEL E. HOWELL, GREG A. HAEUSLER, GREG L. ROBBINS, DEWAY GREENE,
RONALD R. LUBRITZ, and DAVID I. HIRSCH (collectively, the "Flare Minority
Owners").
W I T N E S S E T H:
WHEREAS, Dufour Petroleum, Inc. is taxed as a "C" corporation and all of
its issued and outstanding shares of capital stock are owned fifty percent (50%)
by Curtis Dufour, III and fifty percent (50%) by Donna M. Dufour; Dufour
Petroleum, Inc. owns eighty percent (80%) of all of the issued and outstanding
membership interests of Flare, L.L.C. ("Flare"), which is a Mississippi limited
liability company taxed as a partnership; and the Flare Minority Owners
collectively own the remaining twenty percent (20%) of all of the issued and
outstanding membership interests of Flare, as follows: James D. Laughlin, five
percent (5%); Michael E. Howell, three percent (3%); Greg A. Haeusler, two
percent (2%); Greg L. Robbins, two and one-half percent (2.5%); Deway Greene,
two and one-half percent (2.5%); Ronald R. Lubritz, two and one-half percent
(2.5%); and David I. Hirsch, two and one-half percent (2.5%); and
WHEREAS, the DPI Shareholders desire to merge DPI with and into
DPI/Midcoast, a wholly-owned subsidiary of Midcoast with DPI/Midcoast as the
surviving corporation of the merger, subject to the terms and conditions of this
Agreement; and the Flare Minority Owners desire to sell and convey to Magnolia,
a wholly-owned subsidiary of Midcoast, contemporaneously therewith all of their
respective membership interests of Flare, subject to the terms and conditions of
this Agreement; and
WHEREAS, Midcoast desires for DPI to merge with and into DPI/Midcoast,
with DPI/Midcoast as the surviving corporation of the merger, subject to the
terms and conditions of this Agreement; and Magnolia desires to purchase and
acquire from the Flare Minority Owners all of their respective membership
interests of Flare, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the Parties hereby agree as follows:
1. DEFINITIONS.
"ACTUAL VALUE" has the meaning set forth in Section 4 of this Agreement.
"ACQUISITION EFFECTIVE DATE" shall have the meaning set forth in Section 5
of this Agreement.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"AFFILIATED GROUP" means any affiliated group within the meaning of Code
Section 1504.
"BASE CONSIDERATION" has the following meanings: (a) with respect to the
DPI Shareholders, the meaning set forth in Section 2(b) of this Agreement; and
(b) with respect to the Flare Minority Owners, the meaning set forth in Section
3(b) of this Agreement.
"CAPITAL COST" means the actual out-of-pocket cost incurred to develop,
design and build a project through the point of successful initial operation,
including actual dedicated time of management (excluding any indirect corporate
general and administrative allocation).
"CLAIMS" means all demands, claims, actions, investigations, causes of
action, proceedings, arbitrations, injunctions, hearings, orders, rulings and
decrees, whether or not ultimately determined to be valid.
"CLOSING" has the meaning set forth in Section 5 of this Agreement.
"CLOSING DATE" has the meaning set forth in Section 5 of this Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONTINGENT DEFERRED CONSIDERATION" means: (a) with respect to the Merger
of DPI into DPI/Midcoast, the total consideration which may be payable by
Midcoast to the DPI Shareholders subsequent to Closing pursuant to Section 2(d)
of this Agreement; and, (b) with respect to the purchase of membership interests
of Flare by Magnolia from the Flare Minority Shareholders, the total
consideration which may be payable by Midcoast to the Flare Minority Owners
pursuant to Section 3(d) of this Agreement.
"DISCLOSURE SCHEDULE" means the schedule attached to this Agreement in
which the DPI Shareholders and the Flare Minority Owners disclose certain
matters with respect to their representations and warranties made under this
Agreement to Midcoast and DPI/Midcoast.
"DPI" means Dufour Petroleum, Inc.
"DPI PROJECTS" means the proposed long term projects of Dufour Petroleum,
Inc. set forth on EXHIBIT B attached hereto and made a part hereof.
"DPI SHAREHOLDERS" means Curtis J. Dufour, III and Donna M. Dufour.
"DPI DRAFT BALANCE SHEET" has the meaning set forth in Section 4 of this
Agreement.
"EBITDA PROJECTION" means: (a) with respect to each individual DPI
Project, Midcoast and DPI's projected average annual gross operating revenues,
less average annual operating expenses projected by them for such period
(excluding general and administrative overhead costs) before interest, income
taxes, depreciation and amortization, computed over the first ten (10) years
after the Project becomes operational, with consideration being given to (i) the
reasonable salvage value of the equipment at the end of the Project, (ii) the
term of the contract(s), and (iii) the long term economic viability of the
project; and (b) with respect to each individual Flare Project, Midcoast and
DPI's projected average annual gross operating revenues, less the average annual
operating expenses projected by them before interest, income taxes, depreciation
and amortization, computed over the first ten (10) years after the Project
becomes operational, with consideration being given to (i) the reasonable
salvage value of the equipment at the end of the Project, (ii) the term of the
contract(s) and (iii) the long term viability of the project.
"EFFECTIVE DATE" shall have the meaning set forth in Section 5 of this
Agreement.
"ENCUMBRANCE" means any mortgage, pledge, lien, encumbrance, charge, other
security interest or defect in title.
"ENVIRONMENTAL LAW" or "ENVIRONMENTAL LAWS" has the meaning given to that
term in Section 7(a)(10)(i) of this Agreement.
"EQUIPMENT BASE PAYMENT" shall have the meaning set forth in Section 2(d)
and 3(d) of this Agreement.
"FIRPTA CERTIFICATE" shall have the meaning set forth in Section 8(c) of
this Agreement.
"FLARE DRAFT BALANCE SHEET" has the meaning set forth in Section 4 of this
Agreement.
"FLARE EQUIPMENT" means the equipment owned by Flare, LLC and listed on
EXHIBIT E attached hereto and made a part hereof.
"FLARE MINORITY OWNERS" means James D. Laughlin, Michael E. Howell, Greg
A. Hauesler, Greg L. Robbins, Deway Greene, Ronald L. Lubritz and David I.
Hirsch.
"FLARE PROJECTS" means the proposed long term projects of Flare, LLC set
forth on EXHIBIT D attached hereto and made a part hereof.
"GAAP" means U.S. generally accepted accounting principles consistently
applied as in effect from time to time.
"GOVERNMENTAL AUTHORITY" means the United States and any state, county,
city or other political subdivision, agency, court or instrumentality.
"HAZARDOUS SUBSTANCES" means all materials, substances and wastes which
are regulated under any Environmental Law or which may form the basis for
liability under any Environmental Law.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INDEMNIFIED PARTY" has the meaning set forth in Section 9(f) of
this Agreement.
"INDEMNIFYING PARTY" has the meaning set forth in Section 9(f) of
this Agreement.
"KNOWLEDGE" means actual knowledge and, in reference to DPI and/or Flare,
includes any of the current shareholders or members, officers, and directors of
DPI and Flare and also includes David Parsons, Melanie Walker, and George
Gillespie.
"LAWS" means any constitution, statute, code, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any
applicable Governmental Authority.
"LIABILITIES" means all debts, liabilities, obligations, losses, damages,
costs and expenses (including, without limitation, prejudgment interest and
postjudgment interest), penalties, fines, taxes, liens, court costs, judgments,
awards, settlements, assessments, and attorneys' and accountants' fees and
expenses (including, without limitation, those incurred in investigating and
defending any Claims indemnified and those incurred in enforcing any indemnity
obligation), but excluding any consequential damages or operating losses.
"LONG TERM DEBT" means all liabilities other than current liabilities, as
determined in accordance with GAAP.
"MERGER" has the meaning set forth in Section 2(a) of this Agreement.
"MERGER EFFECTIVE DATE" has the meaning set forth in Section 5 of
this Agreement.
"MIDCOAST" means Midcoast Energy Resources, Inc.
"MIDCOAST COMMON STOCK" means shares of common stock, par value $.01 per
share, of Midcoast Energy Resources, Inc.
"MIDCOAST SUB" means Magnolia Resources, Inc., a Mississippi
corporation.
"MIDCOAST'S VALUE" has the meaning set forth in Section 4 of this
Agreement.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with the affected Party's past custom and practice (including with
respect to quantity and frequency).
"PARTIES" and "PARTY" have the meanings set forth in the first
paragraph of this Agreement.
"PERMITTED ENCUMBRANCES" means any of the following: (i) any liens for
taxes and assessments not yet delinquent or, if delinquent, that are being
contested in good faith in the ordinary course of business; (ii) any obligations
or duties reserved to or vested in any municipality or other Governmental
Authority to regulate any of the Subject Assets in any manner, including all
applicable Laws; (iii) liens securing rental payments under capital lease
arrangements, and (iv) any Customary Post-Closing Consents.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, limited liability company, or a governmental entity (or any
department, agency, or political subdivision thereof).
"PRELIMINARY CASH CONSIDERATION" has the following meanings: (a) with
respect to DPI, the meaning set forth in Section 2(b)(2) of this Agreement; and
(b) with respect to Flare, the meaning set forth in Section 3(b)(2) of this
Agreement.
"PRELIMINARY STOCK CONSIDERATION" has the following meanings: (a)
with respect to DPI, the meaning set forth in Section 2(b)(1) of this
Agreement.
"RECORDS" has the meaning set forth in Section 8(b) of this
Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens; (b) liens for Taxes not yet due and payable or for Taxes that the
taxpayer is contesting in good faith through appropriate proceedings; (c)
purchase money liens and liens securing rental payments under capital lease
arrangements; and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"SELLERS' VALUE" has the meaning set forth in Section 4 of this
Agreement.
"TAX" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 59A), custom
duties, capital stock, franchise profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty
or addition thereto, whether disputed or not.
"TAX RETURN" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"THIRD PARTY CLAIM" means Claims asserted against a Party by a Person
other than a Party to this Agreement.
"WORKING CAPITAL" means the positive or negative difference between
current assets and current liabilities, as determined in accordance with GAAP.
2. THE TRANSACTION WITH THE DPI SHAREHOLDERS.
(a) THE MERGER. Subject to the terms and conditions of this Agreement, at
the Closing, DPI/Midcoast and DPI shall duly execute, and Midcoast shall
promptly file with the Secretary of State of Mississippi, Articles of Merger,
inclusive of a Plan of Merger, consistent with the provisions of this Agreement,
whereby DPI is merged with and into DPI/Midcoast, with DPI/Midcoast as the
surviving corporation of the Merger, and the separate existence of DPI shall
cease (the "Merger"). At the Closing, the effect of the Merger shall be as
provided by applicable statutes of the state of Mississippi. At the Closing, by
virtue of the Merger, and without any action on the part of
Midcoast,DPI/Midcoast, DPI or the DPI Shareholders, all of the issued and
outstanding shares of capital stock of DPI shall be converted into the right to
receive the Base Consideration provided for under Section 2(b) of this
Agreement, and the Contingent Deferred Consideration provided for under Section
2(d) of this Agreement. Without limiting the generality of the foregoing, as of
the Merger:
(1) all property, rights, privileges, policies and franchises of DPI
and DPI/Midcoast, together with all causes of action, proceedings and
claims of DPI and DPI/Midcoast, shall vest in DPI/Midcoast (and to the
extent any of the foregoing are not vested by operation of law the same
shall thereupon be deemed automatically assigned by DPI to DPI/Midcoast
without further act or deed) and all debts, liabilities and duties of DPI
and DPI/Midcoast shall become the debts, liabilities and duties of
DPI/Midcoast as the surviving corporation of the merger; and
(2) the Articles of Incorporation and Bylaws of DPI/Midcoast, as in
effect immediately prior to Closing, shall remain its Article of
Incorporation and Bylaws thereafter, unless and until amended in
accordance with their terms and as provided by law.
The Parties hereto acknowledge and agree that the merger contemplated hereby
shall be treated for tax purposes as a tax-free reorganization under Section 368
of the Code and agree to take all actions necessary to cause such treatment to
occur.
(b) BASE CONSIDERATION AND RELEASES. Subject to the terms and conditions
of this Agreement, at the Closing, as consideration for the merger, Midcoast, on
behalf of DPI/Midcoast, shall:
(1) issue and deliver collectively to the DPI Shareholders the
number of shares of Midcoast Common Stock which is valued at Two Million
Four Hundred Forty-Two Thousand Four Hundred Seventy-Eight Dollars
($2,442,478) based upon the average of the daily closing price on the
American Stock Exchange for Midcoast Common Stock over the five (5)
trading days immediately preceding the actual Closing Date, ("the
Preliminary Stock Consideration"), in the respective percentage amounts
set forth opposite their names on EXHIBIT A, subject, however, to the
post-closing adjustments provided for under Section 2(c) of this
Agreement;
(2) pay to the DPI Shareholders, in the respective percentage
amounts also set forth opposite their names on EXHIBIT A, the collective
sum in immediately available funds of Two Million Nine Hundred Eighty-Five
Thousand Two Hundred Fifty Dollars ($2,985,250) (the "Preliminary Cash
Consideration"), subject, however, to the post-closing adjustments
provided for under Section 2(c) of this Agreement; and
(3) secure releases of all personal guaranties of the DPI
Shareholders as to debt of DPI and Flare.
(The collective amounts of the Preliminary Stock Consideration and the
Preliminary Cash Consideration, after the respective adjustments made thereto
under Section 2(c) of this Agreement, are hereinafter sometimes referred to as
the "Base Consideration" with respect to the DPI Shareholders.) The Midcoast
Common Stock shall consist of stock issued pursuant to a previous registration
to the extent such stock exists in the treasury of Midcoast at the required time
of delivery to the DPI Shareholders and the balance of said stock, if any, shall
be previously unissued Midcoast Common Stock, for which no registration will be
made. Said Midcoast Common Stock issued to the DPI Shareholders and all Midcoast
Common Stock issued to the DPI Shareholders under this Agreement shall be
restricted as to sell or trade by DPI Shareholders for twelve (12) months after
delivery by Midcoast, except for by gift to donees who remain obligated to honor
said restriction on sale or trade. Midcoast agrees to enter into a separate
Registration Rights Agreement with the DPI Shareholders to "piggy-back" with the
registration and sale of Midcoast Common Stock the Midcoast Common Stock
transferred to the DPI Shareholders under this Agreement. The separate
Registration Rights Agreement shall executed and delivered by Midcoast and the
DPI Shareholders at the Closing.
(c) POST CLOSING ADJUSTMENTS TO THE PRELIMINARY STOCK CONSIDERATION AND
THE PRELIMINARY CASH CONSIDERATION. Following the Closing, the Preliminary Stock
Consideration and the Preliminary Cash Consideration payable to the DPI
Shareholders shall be adjusted according to the procedure set forth in Section 4
and in accordance with the following:
(1) Debt with respect to DPI:
(i) if the debt (current and long term) of DPI on the Closing
Date is less than $3,237,840, upward by an amount equal to one
hundred percent (100%) of such deficiency; or
(ii) if the debt (current and long term) of DPI on the Closing
Date is greater than $3,237,840, downward by an amount equal to one
hundred percent (100%) of such excess; and
(2) Debt with respect to Flare:
(i) if the debt (current and long term) of Flare on the
Closing Date is less than $2,268,039, upward by an amount equal to
eighty percent (80%) of such deficiency; or
(ii) if the debt (current and long term) of Flare on the
Closing Date is greater than $2,268,039, downward by an amount equal
to eighty percent (80%) of such excess; and
(3) The DPI Shareholders shall bear and pay all prepayment
penalties, attorneys' fees, and other costs incurred in Midcoast's
payment of the debt (excluding the leases) and obtaining of releases
of liens and security interests covering assets of DPI.
(4) Working Capital with respect to DPI:
(i) if the total of the Working Capital of DPI(excluding the
current portion of long term debt and any other debt for which
adjustment has otherwise been made under Section 2(c)(1) of this
Agreement on the Closing Date plus the sum of $120,000.00 is less
than one dollar ($1.00), downward by an amount equal to one hundred
percent (100%) of such deficiency; or
(ii) if the total of the Working Capital of DPI (excluding the
current portion of long term debt and any other debt for which
adjustment has otherwise been made under Section 2(c)(l)of this
Agreement on the Closing Date plus the sum of $120,000.00 is greater
than one dollar ($1.00), upward by an amount equal to one hundred
percent (100%) of such excess.
(5) Working Capital with respect to Flare:
(i) if the Working Capital of Flare (excluding the current
portion of long term debt, excluding any other debt for which
adjustment has otherwise been made pursuant to Section 2(c)(2)of
this Agreement, and excluding cash receipts and cash disbursements
pertaining to the Calumet and Stocker projects) of Flare on the
Closing Date is less than one dollar ($1.00), downward by an amount
equal to eighty percent (80%) of such deficiency; or
(ii) if the Working Capital of Flare (excluding the current
portion of long term debt, excluding any other debt for which
adjustment has otherwise been made under Section 2(c)(2) of this
Agreement, and excluding cash receipts and cash disbursements
pertaining to the Calumet and Stocker projects) of Flare on the
Closing Date is greater than one dollar ($1.00), upward by an amount
equal to eighty percent (80%) of such excess.
All such adjustments (whether positive or negative) shall be made forty-five
percent (45%) to the Preliminary Stock Consideration and fifty-five percent
(55%) to the Preliminary Cash Consideration. Adjustment to the Preliminary Cash
Consideration of this Agreement shall be paid in immediately available funds by
wire transfer or other means within three (3) business days after such that
determination has been made and such adjustment to the Preliminary Stock
Consideration shall be effected by the transfer of Midcoast Common Stock within
ten (10) days after such final determination has been made. The number of shares
of Midcoast Common Stock to be transferred shall be determined by the value
based upon the average of the daily closing price on the American Stock Exchange
(or New York Stock Exchange if then listed on such exchange) over the five (5)
trading days immediately preceding June 11, 1999.
(d) CONTINGENT DEFERRED CONSIDERATION.
(1) WITH RESPECT TO DPI. Subject to the terms and conditions of this
Agreement, Midcoast, on behalf of DPI/Midcoast, agrees to pay and deliver
to the DPI Shareholders, as set forth in Section 2(d)(3) and in the
respective percentage amounts set forth opposite their names on EXHIBIT A,
additional consideration for the Merger, consisting of fifty-five percent
(55%) cash and forty-five percent (45%) Midcoast Common Stock, as and when
DPI or its successor in interest, within three (3) years following
Closing, enters into the necessary contracts to commence a DPI Project(s)
and the DPI Project(s) is started-up, all as hereinafter more particularly
set forth. The number of shares of Midcoast Common Stock shall be
determined based upon the average of the daily closing price on the
American Stock Exchange (or New York Stock Exchange if then listed on such
exchange) for Midcoast Common Stock over the five (5) trading days
immediately preceding the date on which payment of Contingent Deferred
Consideration is due the DPI Shareholders. This Contingent Deferred
Consideration will be calculated with respect to each of the DPI Projects
which DPI elects to enter into and which are placed under contract and
started-up in each such year pursuant to the following formula:
EBITDA Projection times four (4), less Capital Cost of the
DPI Project.
It is understood by the Parties that consideration for the transportation
and margin relating to liquids purchased by Diversified in the Diversified
Chemical Project is included in the Base Consideration stated in Section
2(b) above. It is further understood that Midcoast and DPI/Midcoast shall
have no duty or obligation to the DPI Shareholders or the Flare Minority
Owners to enter into any DPI Project, at any time or times; it being
understood and agreed that any decision to enter into a DPI Project shall
be determined solely by the arrangement and/or the Board of Directors of
Midcoast based upon economic criteria, risk evaluation, profitability,
corporate goals and other factors which may vary from time-to-time. The
Parties agree that for purposes of calculating EBITDA under Section
2(d)(1), EBITDA shall not include any corporate general, administrative,
or overhead expense allocation for Midcoast, except those costs of
management personnel directly attributable to the operation of the DPI
Projects. Furthermore, if Midcoast, DPI/Midcoast or DPI pays off any or
all of the leases presently held by DPI, then the DPI threshold amounts
under (i),(ii) and/or (iii) hereinafter, as applicable, shall be increased
for such year in which the pay-off occurs by the amount of the lease
payments that would have been made during such year had the payoff not
occurred and for all subsequent years by the amount of the lease payments
that would have been made during each such subsequent year had the payoff
not occurred. None of the revenues and expenses pertaining to the DPI
Projects listed on EXHIBIT B hereto shall be taken into account in
determining DPI's EBITDA calculations for purposes of determining whether
DPI's threshold amounts have been met under (i),(ii) and (iii)
hereinafter. Notwithstanding the calculation and payment of Contingent
Deferred Consideration pursuant to the above formula:
(i) If it is determined that DPI or its successor did not
reach an annual EBITDA threshold of $1,651,397 ("Annual DPI
Threshold") for the first year of the Agreement (January 1, 1999
through December 31, 1999) and if Contingent Deferred Consideration
has been paid for said first year under Section 2(d) hereof, the DPI
Shareholders shall be required to repay to Midcoast, within fifteen
(15) days of said determination, the lesser of: (aa) the amount of
Contingent Deferred Consideration calculated and paid by Midcoast to
the DPI Shareholders under Section 2(d) for the first year of this
Agreement or (bb) the difference between the DPI EBITDA for the
first year and the Annual DPI Threshold;
(ii) If it is determined that DPI or its successor did not
reach a cumulative EBITDA threshold of $3,302,794 for the first year
(January 1, 1999 through December 31, 1999) and second year (January
1, 2000 through December 31, 2000) of the Agreement and if
Contingent Deferred Consideration has been paid for either or both
of the first year and said second year under Section 2(d), the DPI
Shareholders shall be required to repay to Midcoast, within fifteen
(15) days of said determination, the difference between the
cumulative EBITDA threshold of $3,302,794 and the cumulative actual
EBITDA for the first year and said second year, not to exceed,
however, the amount of the Retained Deferred Consideration (as
hereinafter defined in this Section 2(d)(1). However, if the
cumulative amount of actual EBITDA for the first year and said
second year exceeds the cumulative EBITDA threshold of $3,302,794
(the "Excess EBITDA"), then Midcoast shall repay to the DPI
Shareholders, on a nonrecourse basis solely out of the Contingent
Deferred Consideration repaid by the DPI shareholders to it, the
amount of the Excess EBITDA;
(iii) If it is determined that DPI or its successor did not
reach a cumulative EBITDA of $4,954,191 for the first year (January
1, 1999 through December 31, 1999), the second year (January 1, 2000
through December 31, 2000), and the third year (January 1, 2001 to
December 31, 2001) of the Agreement and if Contingent Deferred
Consideration has been paid for any of the first year, the second
year and said third year under Section 2(d), the DPI Shareholders
shall be required to repay to Midcoast, within fifteen (15) days of
said determination, the difference between the cumulative EBITDA
threshold of $4,954,191 and the cumulative actual EBITDA for the
first year, the second year and said third year not to exceed,
however, the amount of the Retained Contingent Deferred
Consideration. However, if the cumulative amount of the actual
EBITDA for the first year, the second year and said third year
exceeds the cumulative EBITDA threshold of $4,954,191 (the "Excess
EBITDA") then Midcoast shall repay to the DPI Shareholders, on a
nonrecourse basis solely out of the Contingent Deferred
Consideration repaid by the DPI Shareholders to it, the amount of
the Excess EBITDA.
In this Section 2(d)(1), the term "Retained Contingent Deferred Consideration"
shall mean the amount of Contingent Deferred Consideration that is paid by
Midcoast to the DPI Shareholders under Section 2(d) that has not been repaid to
Midcoast under the provisions of Sections 2(d)(1)(i), 2(d)(1)(ii), and
2(d)(1)(iii).
(2) WITH RESPECT TO FLARE.
(i) Subject to the terms and conditions of this Agreement, as
additional consideration for the merger, Midcoast, on behalf of
DPI/Midcoast, agrees to pay and/or deliver to the DPI Shareholders,
as set forth in Section 2(d)(3) and in the respective percentage
amounts set forth opposite their names on EXHIBIT A, additional
consideration, consisting of fifty-five percent (55%) cash and
forty-five percent (45%) Midcoast Common Stock, as and when Flare or
its successor in interest, within three (3) years following Closing,
enters into the necessary contracts to commence a Flare Project(s)
and the Flare Project(s) is started-up, all as hereinafter more
particularly set forth. The number of shares of Midcoast Common
Stock to be included in any such payment shall be determined based
upon the average of the daily closing price on the American Stock
Exchange (or New York Stock Exchange if then listed on such
exchange) for Midcoast Common Stock over the five (5) trading days
immediately preceding the date on which payment of Contingent
Deferred Consideration is due the DPI Shareholders. This Contingent
Deferred Consideration will be calculated with respect to each of
the Flare Projects for which Contingent Deferred Consideration is
due, pursuant to the following formula:
Eighty percent (80%) of EBITDA Projection times four (4), less
eighty percent (80%) of the Capital Cost of the Flare Project,
excluding the value of the Flare Equipment (if Flare Equipment
is used)
Midcoast and DPI/Midcoast shall have no duty or obligation to the
DPI Shareholders or the Flare Minority Owners to put any of the
Flare Equipment into service on any of the Flare Projects, or any
other projects, at any time or times; it being understood and agreed
that any decision to put any of the Flare Equipment into service in
connection with the Flare Projects, or any other projects, shall be
determined solely by the management and/or the Board of Directors of
Midcoast based upon economic criteria, risk evaluation,
profitability, corporate goals and other factors which may vary from
time-to-time.
(ii) Flare currently owns equipment ("Flare Equipment") that
is described on EXHIBIT E. For each item of Flare Equipment that is
placed into operation by Flare or its successor in interest, within
three (3) years following Closing, the DPI Shareholders will receive
additional consideration, under Section 2(d)(2)(i), payable as
described in that Section. For each item of Flare Equipment that is
sold by Flare or its successor in interest and purchase funds are
received by Flare or its successor, within three (3) years of
Closing, the DPI Shareholders will receive, as set forth in Section
2(d)(3) and in the respective percentage amounts set forth opposite
their names on Exhibit A, additional consideration, consisting of
fifty-five percent(55%) cash and forty-five percent (45%) Midcoast
Common Stock, calculated pursuant to the following formula:
Eighty percent (80%) of sales revenue from Flare Equipment,
less eighty percent (80%) of the cost to recondition (based
upon Flare's then current applicable published rate sheet) and
transport the Flare Equipment and less eighty percent (80%) of
related costs, times seventy-five percent (75%).
(iii) Midcoast, on behalf of DPI/Midcoast, agrees to pay
and/or deliver to the DPI Shareholders, as set forth in Section
2(d)(3) and in the respective percentage amounts set forth opposite
their names on Exhibit A, additional consideration for the Merger,
consisting of fifty-five percent (55%)cash and forty-five percent
(45%) Midcoast Common Stock, based upon the Flare Equipment that has
not been placed into service and for which no consideration has been
paid to the DPI Shareholders and the Flare Minority Owners under
Sections 2(d)(i) and Section 3(d)(i) and which has not been sold and
for which no consideration has been paid to the DPI Shareholders and
Flare Minority Owners under Sections 2(d)(ii) and Section 3(d)(ii),
said additional consideration to be determined by eighty percent
(80%) of the liquidation value of the equipment.
(iv) The additional consideration which may hereafter become
due by Midcoast to the DPI Shareholders and the Flare Minority
Owners shall be calculated and determined on the basis provided
above, but no payment shall be due by Midcoast to either the Flare
Minority Owners or the DPI Shareholders for the amounts calculated
unless and until the aggregate amounts calculated for both of them
under Sections 2(d) and 3(d) shall exceed the sum of one million
dollars ($1,000,000), said sum being that portion of the Base
Consideration which is deemed by the Parties to be an advance
payment made by Midcoast to the DPI Shareholders and the Flare
Minority Owners (of which sum, eighty percent (80%) was allocated to
the DPI Shareholders and included in the Base Consideration payable
to them and twenty percent (20%) was allocated to the Flare Minority
Owners and included in the Base Consideration payable to them)
toward the calculations for additional consideration under Sections
2(d) and 3(d) (the "Equipment Base Payment"). Midcoast's obligation
for additional consideration calculated under Sections 2(d) and 3(d)
collectively for the Flare Minority Owners and the DPI Shareholders
shall be limited, however, to two million five hundred dollars
($2,500,000), exclusive of the Equipment Base Payment.
(v) The Parties agree that for purposes of calculating actual
EBITDA under Section 2(d)(2), EBITDA shall not include any corporate
general, administrative, or overhead expense allocation for
Midcoast, except those costs of management personnel directly
attributable to the operation of the respective Flare Project.
Furthermore, if Midcoast or Flare pays off any or all of the leases
presently held by Flare, then the Flare threshold amounts under (i),
(ii) and/or (iii) hereinafter, as applicable, shall be increased for
such year in which the pay-off occurs by the amount of the lease
payments that would have been made during such year had the payoff
not occurred and for all subsequent years by the amount of the lease
payments that would have been made during each such subsequent year
had the payoff not occurred. None of the revenues and expenses
pertaining to the Calumet and Stocker projects, the Flare Projects
listed on EXHIBIT D hereto, or sales of Flare Equipment listed on
EXHIBIT E hereto, shall be taken into account in Flare's EBITDA
calculations for purposes of determining whether Flare's threshold
amounts under (aa), (bb) or (cc) hereinafter have been met.
Notwithstanding the calculation and payment of Contingent Deferred
Consideration pursuant to the above formulas:
(aa) If it is determined that Flare or its successor did
not reach an annual EBITDA threshold of $420,000 ("Annual
Flare Threshold") for the first year of the Agreement (January
1, 1999 through December 31, 1999) and if Contingent Deferred
Consideration has been paid for said first year under Section
2(d) hereof, the DPI Shareholders shall be required to repay
to Midcoast, within fifteen (15) days of said determination,
the lesser of: (aaa) the amount of Contingent Deferred
Consideration calculated and paid by Midcoast to the DPI
Shareholders for the first year of this Agreement or (bbb)
eighty percent (80%) of the difference between the Flare
EBITDA for the first year and the Annual Flare Threshold;
(bb) If it is determined that Flare did not reach a
cumulative EBITDA threshold of $840,000 for the first year
(January 1, 1999 through December 31, 1999) and second year
(January 1, 2000 through December 31, 2000) of the Agreement
and if Contingent Deferred Consideration has been paid for
said second year under Section 2(d), the DPI Shareholders
shall be required to repay to Midcoast, within fifteen (15)
days of said determination, eighty percent (80%) of the
difference between the cumulative EBITDA threshold of $840,000
and the cumulative actual EBITDA for the first year and said
second year, not to exceed, however eighty percent (80%) of
the amount of the Retained Deferred Consideration (as
hereinafter defined in this Section 2(d)(2)). However, if the
cumulative amount of the actual EBITDA for the first year and
said second year exceeds the cumulative EBITDA threshold of
$840,000 (the "Excess EBITDA"), then Midcoast shall repay to
the DPI Shareholders, on a nonrecourse basis solely out of the
Contingent Deferred Consideration repaid by the DPI
Shareholders to it, eighty percent (80%) of the amount of the
Excess EBITDA;
(cc) If it is determined that Flare did not reach a
cumulative EBITDA threshold of $1,260,000 for the first year
(January 1, 1999 through December 31, 1999), the second year
(January 1, 2000 through December 31, 2000), and the third
year (January 1, 2001 to December 31, 2001) of the Agreement
and if Contingent Deferred Consideration has been paid for
said third year under Section 2(d) and/or for the liquidation
value of the Equipment under Section 2(d), the DPI
Shareholders shall be required to repay to Midcoast, within
fifteen (15) days of said determination, eighty percent (80%)
of the difference between the cumulative EBITDA threshold of
$1,260,000 and the cumulative actual EBITDA for the first
year, the second year and said third year, not to exceed,
however, the amount of the Retained Deferred Consideration (as
hereinafter defined in this Section 2(d)(2). However, if the
cumulative amount of the actual EBITDA for the first year, the
second year and said third year exceeds the cumulative EBITDA
threshold of $1,260,000 (the "Excess EBITDA"), then Midcoast
shall repay to the DPI Shareholders, on a nonrecourse basis
solely out of the Contingent Deferred Consideration repaid by
the DPI Shareholders to it, eighty percent (80%) of the amount
of the Excess EBITDA.
In this Section 2(d)(2), the term "Retained Contingent Deferred Consideration"
shall mean the amount of Contingent Deferred Consideration that is paid by
Midcoast to the DPI Shareholders under Section 2(d) that has not been repaid to
Midcoast under the provisions of Sections 2(d)(2)(v)(aa), 2(d)(2)(v)(bb), and
2(d)(2)(v)(cc).
(3) On or before the expiration of sixty (60) days after the
execution of the necessary contracts to perform each of the respective DPI
Projects and/or Flare Projects and actual start-up of the respective
project [as described in Section 2(d)(1) and 2(d)(2)(i)] and/or within
sixty (60) days after receipt of sales proceeds for each piece of Flare
Equipment [as described in Section 2(d)(2)(ii)] and/or within fifteen (15)
days following three (3) years from Closing [as described in paragraph
2(d)(2)(iii)], as applicable, Midcoast shall prepare and deliver to the
DPI Shareholders and the Flare Minority Owners a proposed proforma
describing any additional consideration due the Flare Shareholders, if
any. The DPI Shareholders and the Flare Minority Owners shall have thirty
(30) days within which to accept or reject the draft proforma. If the DPI
Shareholders and the Flare Minority Owners accept the draft proforma, the
additional cash consideration for the merger will be paid within three (3)
business days after such acceptance and the additional stock consideration
shall be effected by the transfer of Midcoast Common Stock within ten (10)
days after such acceptance. If the DPI Shareholders and the Flare Minority
Owners reject the draft proforma, and, failing to reach agreement within
thirty (30) days from the date of rejection of said draft performa, the
parties shall submit the issue to binding arbitration pursuant to Section
12 of this Agreement.
(4) Within seventy-five (75) days following the end of each of the
first three (3) years of the Agreement, Midcoast shall prepare and deliver
to the DPI Shareholders a calculation of the DPI EBITDA and the Flare
EBITDA for the previous calendar year to be used by the parties in
determining EBITDA for the previous calendar year of the Agreement, and
Midcoast will simultaneously deliver to the Flare Minority Owners a copy
of the calculation of the Flare EBITDA for similar purposes. The DPI
Shareholders and Flare Minority Owners shall have thirty (30) days within
which to accept or reject the calculations of the DPI EBITDA and the Flare
EBITDA prepared by Midcoast. If the DPI Shareholders and Flare Minority
Owners accept the DPI EBITDA and/or the Flare EBITDA calculations, any
repayments pursuant to the accepted DPI EBITDA and/or the Flare EBITDA
calculation shall be made within fifteen (15) days of said acceptance. If
the DPI Shareholders and Flare Minority Owners reject the DPI EBITDA or
Flare EBITDA calculation, any dispute will be resolved in a similar manner
as the dispute resolution provisions stated in Section 4(d), 4(e), and
4(f).
3. THE TRANSACTION WITH THE FLARE MINORITY OWNERS.
(a) PURCHASE OF MEMBERSHIP INTERESTS. On and subject to the terms and
conditions of this Agreement, contempor-aneously with the consummation of the
Merger and expressly conditioned thereupon, Magnolia agrees to purchase and
acquire from the Flare Minority Owners, and the Flare Minority Owners
collectively agree to sell and convey to Magnolia, free and clear of all
Encumbrances, all of the issued and outstanding Company Membership Interests,
other than those owned by DPI, for the Base Consideration provided for under
Section 3(b) of this Agreement (subject to the adjustments provided for under
Section 3(c) of this Agreement) and the Contingent Deferred Consideration
provided for under Section 3(d) of this Agreement.
(b) BASE CONSIDERATION AND RELEASES. Subject to the terms of this
Agreement, at the Closing, as base consideration for the purchase of the Flare
membership interests owned by the Flare Minority Owners, Magnolia shall:
(1) pay, issue and/or deliver collectively to the Flare Minority
Owners, in the respective percentage share amounts set forth opposite
their names under Column B on Exhibit C-1, base consideration of One
Hundred Sixty Six Thousand Three Hundred Ninety-Two Dollars ($166,392),
said consideration to be paid in cash, as set forth on Exhibit C-2,
subject, however, to the post-closing adjustments provided for under
Section 3(c) of this Agreement; and
(2) secure releases of all personal guaranties of the Flare Minority
Owners as to debt of Flare.
(The collective amounts of the Preliminary Cash Consideration, after the
respective adjustments made thereto under Section 3(c) of this Agreement, are
hereinafter sometimes referred to as the "Base Consideration" with respect to
the Flare Minority Owners.)
(c) POST CLOSING ADJUSTMENTS TO THE PRELIMINARY CASH CONSIDERATION.
The Preliminary Cash Consideration payable to the Flare Minority Owners
shall be adjusted following the Closing as follows:
(1) Debt:
(i) if the Debt (current and long term) of Flare on the
Closing Date is less than $2,268,039, upward by an amount equal to
twenty percent (20%) of such deficiency; or
(ii) if the Debt (current and long term) of Flare on the
Closing Date is greater than $2,268,039, downward by an amount equal
to twenty percent (20%) of such excess; and
(2) The DPI Shareholders and Flare Minority Owners, in the
respective percentages of 80% and 20%, shall bear and pay all
prepayment penalties, attorneys' fees, and other costs incurred in
Midcoast's payment of the debt (including the leases) and obtaining
of releases of liens and security interests covering assets of
Flare.
(3) Working Capital:
(i) if the Working Capital of Flare (excluding the current
portion of long term debt, excluding any other debt for which
adjustment has otherwise been made under Section 3(c)(1) of this
Agreement, and excluding cash receipts and cash disbursements
pertaining to the Calumet and Stocker projects) on the Closing Date
is less than one dollar ($1.00), downward by an amount equal to
twenty percent (20%) of such deficiency; or
(ii) if the Working Capital of Flare (excluding the current
portion of long term debt, excluding and any other debt for which
adjustment has otherwise been made under Section 3(c)(1) of this
Agreement, and excluding cash receipts and cash disbursements
pertaining to the Calumet and Stocker projects) on the Closing Date
is greater than one dollar ($1.00), upward by an amount equal to
twenty percent (20%) of such excess.
All such adjustments shall be made to each individual Flare Minority Owner as
set forth on Exhibit C-2. Adjustment to the Preliminary Cash Consideration of
this Agreement shall be paid in immediately available funds by wire transfer or
other means within three (3) business days after such final determination has
been made.
(d) CONTINGENT DEFERRED CONSIDERATION.
(1) Subject to the terms and conditions of this Agreement, as
additional consideration for the purchase of the Flare membership
interests other than those owned by DPI, Midcoast, on behalf of Magnolia,
agrees to pay and/or deliver to the Flare Minority Owners, as set forth in
Section 3(d)(5) and in the respective percentage amounts set forth
opposite their names under Column B on EXHIBIT C-1, additional
consideration, consisting of cash as and when Flare or its successor in
interest, within three (3) years following Closing, enters into the
necessary contracts to commence a Flare Project(s) and the Flare Project
is started up, all as hereinafter more particularly set forth. The number
of shares of Midcoast Common Stock to be included in any such payment
shall be determined based upon the average of the daily closing price on
the American Stock Exchange (or New York Stock Exchange if then listed on
such exchange)for Midcoast Common Stock over the five (5) trading days
immediately preceding the date in which payment of Contingent Deferred
Consideration is due the Flare Minority Owners. This Contingent Deferred
Consideration will be calculated with respect to each of the Flare
Projects for which Contingent Deferred Consideration is due, pursuant to
the following formula:
Twenty percent (20%) of EBITDA Projection times four (4), less
twenty percent (20%) of the Capital Cost of the Flare Project,
excluding the value of the Flare Equipment (if Flare Equipment is
used).
Midcoast and Magnolia shall have no duty or obligation to the DPI
Shareholders or the Flare Minority Owners to put any of the Flare
Equipment into service on any of the Flare Projects, or any other
projects, at any time or times; it being understood and agreed that any
decision to put any of the Flare Equipment into service in connection with
the Flare Projects, or any other projects, shall be determined solely by
the management and/or the Board of Directors of Midcoast based upon
economic criteria, risk evaluation, profitability, corporate goals and
other factors which may vary from time-to-time.
(2) Flare currently owns equipment ("Flare Equipment") that is
described on EXHIBIT E. For each item of Flare Equipment that is placed
into operation by Flare or its successor in interest, within three (3)
years following the Closing, the Flare Minority Owners will receive
additional compensation under Subsection 3(d)(1). For each item of Flare
Equipment that is sold by Flare or its successor in interest and purchase
funds are received by Flare or its successor, within the next three (3)
years, the Flare Minority Owners will receive, as set forth in Section
3(d)(5) and in the respective percentage amounts set forth opposite their
names under Column B on EXHIBIT C-1, additional consideration, consisting
of cash in the manner set forth on EXHIBIT C-2, calculated pursuant to the
following formula:
Twenty percent (20%) of sales revenue from Flare Equipment, less
twenty percent (20%) of the cost to recondition (based upon Flare's
then current applicable published rate sheet) and transport the
Flare Equipment and less twenty percent (20%) of related costs,
times seventy-five percent (75%).
(3) Midcoast, on behalf of Magnolia, agrees to pay and/or deliver to
the Flare Minority Owners, as set forth in Section 3(d)(5) and in the
respective percentage amounts set forth opposite their names on EXHIBIT
C-1, additional consideration, consisting of cash, based upon the Flare
Equipment that has not been placed into service and for which no
consideration has not been paid to the DPI Shareholders and Flare Minority
Owners under Sections 2(d)(2) and 3(d)(1) and which has not been sold and
for which consideration has not been paid to the DPI Shareholders and
Flare Minority Owners under Section 2(d)(2) and 3(d)(2), said additional
consideration to be determined by twenty percent (20%) of the liquidation
value of the equipment.
(4) The additional consideration which may hereafter become due by Midcoast
to the DPI Shareholders and the Flare Minority Owners shall be calculated
and determined on the basis provided above, but no payment shall be due
by Midcoast to either the Flare Minority Owners or the DPI Shareholders
for the amounts calculated unless and until the aggregate amounts
calculated for both of them under Sections 2(d) and 3(d) shall exceed the
sum of one million dollars ($1,000,000), said sum being that portion of
the Base Consideration which is deemed by the Parties to be an advance
payment made by Midcoast to the DPI Shareholders and the Flare Minority
Owners (of which sum, eighty percent (80%) was allocated to the DPI
Shareholders and included in the Base Consideration payable to them and
twenty percent (20%) was allocated to the Flare Minority Owners and
included in the Base Consideration payable to them) toward the
calculations for additional consideration under this Section 3(d) (the
"Equipment Base Payment"). Midcoast's obligation for additional
consideration calculated under this Section 3(d) collectively for the
Flare Minority Owners and the DPI Shareholders shall be limited, however,
to two million five hundred dollars ($2,500,000) exclusive of the
Equipment Base Payment.
(5) On or before the expiration of sixty (60) days after the
execution of the necessary contracts to perform each of the Flare Projects
and actual start-up of the respective project [as described in Section
3(d)(1)] and/or within sixty (60) days after receipt of sales proceeds for
each piece of Flare Equipment [as described in Section 3(d)(2)] and/or
within fifteen (15) days following three (3) years from Closing [as
described in Section 3(d)(3)], as applicable, Midcoast shall prepare and
deliver to the DPI Shareholders and Flare Minority Owners a proposed
proforma describing any additional consideration due the DPI Shareholders
and the Flare Minority Owners, if any. The DPI Shareholders and the Flare
Minority Owners shall have thirty (30) days within which to accept or
reject the draft proforma. If the DPI Shareholders and the Flare Minority
Owners accept the draft proforma, the additional cash consideration for
the merger will be paid within three (3) business days after such
acceptance. If the DPI Shareholders and the Flare Minority Owners reject
the draft proforma, and, failing to reach agreement within thirty (30)
days from the date of rejection of said draft performa, the Parties shall
submit the issue to binding arbitration pursuant to Section 12 of this
Agreement.
4. DETERMINATION OF LONG TERM DEBT AND WORKING CAPITAL OF DPI AND FLARE.
(a) On or before the expiration of ninety (90) days after the Closing
Date, Midcoast shall prepare and deliver (i) to the DPI Shareholders a draft
balance sheet of DPI as of 12:00 midnight Texas time on February 28, 1999 (the
"DPI Draft Balance Sheet") and (ii) to the DPI Shareholders and the Flare
Minority Owners a draft balance sheet of Flare as of 12:00 midnight Texas time
on February 28, 1999 (the "Flare Draft Balance Sheet"). The DPI Draft Balance
Sheet and the Flare Draft Balance Sheet will both be prepared in accordance with
GAAP applied on a basis consistent with the preparation of the balance sheets of
DPI and Flare attached hereto as EXHIBIT F and EXHIBIT G, respectively, and
shall have a schedule calculating the Debt and the Working Capital ("Midcoast's
Value").
(b) In determining Working Capital of DPI on said balance sheets, there
shall be a calculation of the taxable income or loss of DPI for the period
beginning with the Effective Date and ending on the Closing Date. If there is
taxable income for such period, the income tax (federal and state as applicable)
on such income shall be calculated and the amount so calculated shall be treated
as a current liability in determining Working Capital. If there is a loss for
such period, the amount of tax refund which can be obtained by carrying back
such loss shall be treated as a current asset in determining Working Capital.
(c) In determining the Working Capital of Flare, all cash receipts and
cash disbursements associated with the Stocker and Calumet projects will not be
taken into account.
(d) If the DPI Shareholders and/or the Flare Minority Owners, as
applicable, have any objections to the DPI Draft Balance Sheet and/or the Flare
Draft Balance Sheet, or the Midcoast's Value calculations of Long Term Debt and
Working Capital, they shall deliver a detailed statement describing their
objections to Midcoast within fifteen (15) days after receiving Midcoast's Value
calculations (the "Sellers' Value"). Midcoast and the DPI Shareholders and/or
the Flare Minority Owners, as applicable, shall use reasonable efforts to
resolve any such objections themselves. If they do not resolve such objections
within thirty (30) days after Sellers' value has been delivered to Midcoast, the
DPI Shareholders and Midcoast shall select an accounting firm mutually
acceptable to them which shall resolve any remaining objections. If they are
unable to agree on the choice of an accounting firm, they shall select a
nationally-recognized accounting firm by lot (after excluding their respective
outside accounting firms), which such selection shall occur no later than ten
(10) days following the expiration of the foregoing fifteen (15) day time
period. The determinations made by the accounting firm so selected shall be set
forth in writing and shall be conclusive and binding upon the Parties (the
"Actual Value"). The Actual Value as determined by the accounting firm shall be
delivered to the applicable Parties by the selected accounting firm no later
than thirty (30) days following its selection.
(e) In the event Midcoast and the DPI Shareholders and/or the Flare
Minority Owners, as applicable, submit any unresolved objections to an
accounting firm for resolution as provided in for above, they shall share
responsibility for the fees and expenses of the accounting firm as follows:
(1) if the accounting firm resolves all of the unresolved objections
in favor of the Midcoast's Value, the DPI Shareholders and/or the Flare
Minority Owners, as applicable, shall be responsible for all of the fees
and expenses of the accounting firm;
(2) if the accounting firm resolves all of the unresolved
objections in favor Sellers' Value, Midcoast shall be responsible for all
of the fees and expenses of the accounting firm;
(3) if the accounting firm resolves some of the unresolved
objections in favor of the Midcoast's Value and the rest of the unresolved
objections in favor of the Sellers' Value, Midcoast shall be responsible
for the fraction of the fees and expenses of the accounting firm equal to
(1) the difference between the Actual Value and Midcoast's Value, divided
by (2) the difference between Sellers' Value and Midcoast's Value; and,
the DPI Shareholders and/or the Flare Minority Owners, as applicable,
shall be responsible for the remaining portion of the fees and expenses of
the accounting firm.
EXAMPLE #1:
If Midcoast's Value is 100, the Actual Value is 125, and the
Sellers' Value is 175, then Midcoast shall pay 25/75 or 1/3 of the
fees and expenses of the accounting firm, and the DPI Shareholders
and/or the Flare Minority Owners, as applicable, shall pay the
remaining 2/3.
125-100 = 25 or 1
------------ ----- -
175-100 75 3
EXAMPLE #2:
If Midcoast's Value is 50, the Actual Value is 150, and Sellers'
Value is 200, then Midcoast shall pay 100/150 or 2/3 of the fees and
expenses of the accounting firm, and the DPI Shareholders and/or the
Flare Minority Owners, as applicable, shall pay the remaining 1/3.
150-50 = 100 or 2
200-50 150 3
(f) Midcoast shall make the books and records of DPI and Flare available
for inspection, review and copying to the DPI Shareholders and the Flare
Minority Owners and their accountants and other representatives. Midcoast shall
cooperate with the DPI Shareholders and the Flare Minority Owners and will make
the work papers and backup materials used in preparing the DPI Draft Balance
Sheet and the Flare Draft Balance Sheet available to them and their accountants
and other representatives at all relevant times upon reasonable notice.
5. THE CLOSING. The closing of the Merger and the Acquisition (the
"Closing") shall occur contemporaneously with the execution and delivery of this
Agreement (approval of the transactions by the Federal Trade Commission and the
Department of Justice having previously been obtained) (the "Closing Date"). The
Merger shall be deemed to be effective as of January 1, 1999 (the "Merger
Effective Date"), notwithstanding that for legal purposes the Merger will not be
effective until the date of issuance of certificates of merger by the
secretaries of state of the respective states of incorporation of DPI/Midcoast
and DPI. The Acquisition shall be effective as of January 1, 1999 (the
"Acquisition Effective Date"). (The Merger Effective Date and the Acquisition
Effective Date are hereinafter collectively referred to as the "Effective
Date".)
6. REPRESENTATIONS AND WARRANTIES CONCERNING THE PARTIES.
(a) REPRESENTATIONS AND WARRANTIES CONCERNING THE DPI SHAREHOLDERS AND THE
FLARE MINORITY OWNERS. DPI and the DPI Shareholders represent and warrant to
Midcoast, Magnolia and DPI/Midcoast that the statements contained in this
Section 6(a) are correct and complete as of the date of this Agreement and will
be correct and complete as of the Closing Date (as though made then).
(1) AUTHORIZATION OF MERGER AND THE ACQUISITION. DPI, the DPI
Shareholders and the Flare Minority Owners have full power and authority
to execute and deliver this Agreement and to perform their obligations
hereunder. This Agreement constitutes a valid and legally binding
obligation of them, enforceable in accordance with its terms and
conditions, subject, however, to the effects of bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Except
for compliance with the HSR Act, to their Knowledge, they need not give
any notice to, make any filing with, or obtain any authorization, consent,
or approval of any government or governmental agency in order to
consummate the transactions contemplated by this Agreement.
(2) NONCONTRAVENTION. Except for requirements of the HSR Act, if
applicable, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will (i) violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which DPI, Flare, or either of them, are
subject or any provision of their charter or bylaws; or (ii), to their
Knowledge, conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any person the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to
which DPI, Flare, or either of them, are a party or by which they are
bound or to which any of their assets is subject, except for such
violations, defaults, breaches, or other occurrences that do not,
individually or in the aggregate, have a Material Adverse Effect on their
ability to consummate the transactions contemplated by this Agreement, and
except for Long Term Debt which may contain acceleration clauses.
(3) BROKERS' FEES. None of the DPI Shareholders, the Flare
Minority Owners, DPI or Flare have any liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which Midcoast, Magnolia,
or DPI/Midcoast could become liable or obligated.
(b) REPRESENTATIONS AND WARRANTIES CONCERNING MIDCOAST AND DPI/MIDCOAST.
Midcoast represents and warrants to the DPI Shareholders and the Flare Minority
Owners that the statements contained in this Section 6(b) are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then).
(1) ORGANIZATION OF MIDCOAST, MAGNOLIA AND DPI/MIDCOAST. Midcoast is
a corporation duly organized, validly existing, and in good standing under
the laws of the state of Nevada. Magnolia is a corporation duly organized,
validly existing, and in good standing under the laws of the State of
Mississippi. DPI/Midcoast is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Mississippi.
(2) AUTHORIZATION OF TRANSACTION. Midcoast, Magnolia and
DPI/Midcoast both have full power and authority (including full corporate
power and authority) to execute and deliver this Agreement and to perform
their obligations hereunder. This Agreement constitutes the valid and
legally binding obligation of Midcoast, Magnolia, and DPI/Midcoast,
enforceable in accordance with its terms and conditions, subject, however,
to the effects of bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting creditors' rights generally and to general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). Except for compliance
with the HSR Act by Midcoast with respect to its acquisition of DPI,
neither Midcoast or Magnolia need give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government
or governmental agency in order to consummate the transactions
contemplated by this Agreement
(3) NONCONTRAVENTION. Except for requirements of the HSR Act, if
applicable, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will (i) violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Midcoast, Magnolia, or DPI/Midcoast
is subject or any provision of their charter or bylaws; or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any person the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract,
lease, license, instrument, or other arrangement to which Midcoast,
Magnolia, or DPI/Midcoast is a party or by which either is bound or to
which any of their assets are subject, except for such violations,
defaults, breaches, or other occurrences that do not, individually or in
the aggregate, have a Material Adverse Affect on the ability of Midcoast,
Magnolia, or DPI/Midcoast to consummate the transactions contemplated by
this Agreement.
(4) BROKERS' FEES. Neither Midcoast, Magnolia, or DPI/Midcoast have
any liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement for which the DPI Shareholders or the Flare Minority Owners
could become liable or obligated.
(5) INVESTMENT. Midcoast is not acquiring DPI and Magnolia is not
acquiring membership interests in Flare with a view to or for sale in
connection with any distribution thereof within the meaning of the
Securities Act of 1933, as amended. All of Midcoast, Magnolia, and
DPI/Midcaost together with their directors and executive officers and
advisors, are familiar with investments of the nature of the transactions
contemplated by this Agreement, understand that this investment involves
substantial risks, and have adequately investigated DPI, Flare and their
respective assets, and have substantial knowledge and experience in
financial and business matters such that both are capable of evaluating,
and has evaluated, the merits and risks inherent with respect to the
Merger and the Acquisition, and are able to bear the economic risks of
such investment.
7. REPRESENTATIONS AND WARRANTIES CONCERNING THE MERGER AND THE
ACQUISITION.
(a) DPI and the DPI Shareholders represent and warrant to Midcoast,
Magnolia and DPI/Midcoast that the statements contained in this Section 7(a) are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then).
(1) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. DPI and Flare
(i) are both organizations duly organized and are validly existing under
the laws of the jurisdiction of their incorporation; (ii) are both duly
authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where the
lack of such qualification would not have a Material Adverse Effect; and
(iii) both have full power and authority to carry on their respective
businesses in which they are engaged and to own and use the properties
owned and used by them.
(2) NONCONTRAVENTION. Except for requirements of the HSR Act, if
applicable, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will (i) violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which DPI or Flare is subject or any
provision of the charter, bylaws or other organizing document of DPI or
Flare; or (ii), to their Knowledge, conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or require
any notice or trigger any rights to payment or other compensation under
any agreement, contract, lease, license, instrument, or other arrangement
to which DPI or Flare is a party or by which either of them is bound or to
which any of its assets is subject (or result in the imposition of any
Encumbrance upon any of their respective assets), except where the
violation, conflict, breach, default, acceleration, termination,
modification, cancellation, failure to give notice, right to payment or
other compensation, or Encumbrance would not have a Material Adverse
Effect, or materially adversely affect the ability of the Parties to
consummate the transactions contemplated by this Agreement. Neither DPI or
Flare needs to give notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental
agency in order for the Parties to consummate the transactions
contemplated by this Agreement, except where the failure to give notice,
to file, or to obtain any authorization, consent, or approval would not
have a Material Adverse Effect or materially adversely affect the ability
of the Parties to consummate the transactions contemplated by this
Agreement, and except for Long Term Debt which may contain acceleration
clauses.
(3) BROKERS' FEES. Neither DPI or Flare has any liability or
obligation to pay any fees or commissions to any broker, finder, or agent
with respect to the transactions contemplated by this Agreement.
(4) TITLE TO TANGIBLE ASSETS. Both DPI and Flare own good and
marketable title to all of their respective assets, free and clear of all
Encumbrances, except as to the Encumbrances set forth in Section 7(a)(4)
of the DISCLOSURE SCHEDULE.
(5) FINANCIAL STATEMENTS. EXHIBIT F and EXHIBIT G set forth the
respective unaudited balance sheets as of December 31, 1998 (the "Balance
Sheet Date") of DPI and Flare, and the respective unaudited statement of
income for DPI and Flare for the periods ended December 31, 1998
(collectively, the "Financial Statements"). The respective Financial
Statements, including the schedules thereto, have been prepared from the
books and records of DPI and Flare substantially in accordance with GAAP,
however certain information and footnote disclosures, including
significant accounting policies, normally included in financial statements
prepared in accordance with GAAP have been condensed or omitted. The
Financial Statements, including the schedules thereto, are true and
correct and present fairly the financial condition of DPI and Flare at the
date specified and the results of their operations for the period then
ended, except for certain reclassification entries that would not have a
negative financial impact upon Midcoast on a "going forward" basis. The
Financial Statements accurately and fairly reflect all the transactions
of, acquisitions and dispositions of assets by, and incurrence of
Liabilities by, DPI and Flare which are required to be reflected in
accordance with GAAP. There are no Liabilities and no assets of DPI and
Flare that are not reflected in their respective Financial Statements and
the schedules thereto which are required to be reflected in accordance
with GAAP.
(6) LEGAL COMPLIANCE. To their Knowledge, DPI and Flare have
complied with all applicable laws (including rules, regulations, codes,
plans, injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments (and all
agencies thereof), except where the failure to comply would not have a
Material Adverse Effect.
(7) TAX MATTERS. Except as expressly set forth in Section 7(a)(7) of
the DISCLOSURE SCHEDULE, (i) DPI and Flare have timely filed all Tax
Returns, (ii) DPI and Flare have timely paid all Taxes, and (iii) there
are no outstanding contests or disputes with respect to any Taxes relating
to either of them, their respective businesses, or their respective
property, whether paid, payable or asserted to be payable by a taxing
authority. Neither DPI or Flare has waived any law or regulation fixing,
or consented to the extension of, any period of time for assessment of any
Taxes which waiver or consent is currently in effect. No claim has been
made by a taxing authority in a jurisdiction in which either DPI or Flare
does not file Tax Returns that they or either of them are required to file
Tax Returns in such jurisdiction, and, to the DPI Shareholders' and the
Flare Minority Owners' Knowledge, no taxing authority could reasonably
make such a claim. Neither DPI or Flare has any obligation or liability
for the payment of Taxes of any other person arising as a result of any
obligation to indemnify another person or as a result of them, or either
of them, assuming or succeeding to the tax liability of any other entity
or person as a successor, transferee or otherwise. Neither DPI or Flare
will be required to include any amount in taxable income for any taxable
period (or portion thereof) ending after the Closing as a result of (i) a
change in method of accounting for a taxable period ending prior to the
Closing, (ii) any "closing agreement" as described in Section 7121 of the
Internal Revenue Code of 1986, as amended (the "Code") (or any
corresponding provision of state, local or foreign income tax laws)
entered into prior to the Closing, (iii) any sale reported on the
installment method that occurred prior to the Closing or (iv) any prepaid
amount received prior to the Closing.
(8) LITIGATION. Section 7(a)(8) of the DISCLOSURE SCHEDULE sets
forth each instance in which DPI, Flare or any of their respective assets
(i) is subject to any outstanding injunction, judgment, order, decree,
ruling, or charge; or (ii) is a party to any action, suit, proceeding,
hearing, or investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction, or is the subject of any pending or, to the Knowledge of the
DPI Shareholders, DPI, the Flare Minority Owners and Flare, threatened
claim, demand, or notice of violation or liability from any party, except
where any of the foregoing would not have a Material Adverse Effect.
(9) EMPLOYEE BENEFIT PLANS. Except as expressly set forth in Section
7(a)(9) of the DISCLOSURE SCHEDULE, neither DPI or Flare is a party to,
contributes to, sponsors, or maintains, or has any current or will have
any future obligation or liability with respect to, nor has either of them
been a party to, contributed to, sponsored, or maintained within the
preceding six (6) years, any pension, profit sharing, retirement, stock
purchase, stock option, bonus, incentive compensation or deferred
compensation plan, life, health, accident, disability, workers'
compensation or other insurance plan, severance or separation plan, or any
other employee benefit plan, practice, policy, program or arrangement of
any kind, whether written or oral.
(10) ENVIRONMENTAL MATTERS. Except as expressly set forth in Section
7(a)(10) of the DISCLOSURE SCHEDULE:
(i) To their Knowledge, DPI and Flare are and have been in
compliance with all applicable federal, state and local laws
(including common law), ordinances, orders, agreements, decisions,
orders, rules and regulations relating to protection or enhancement
of human health or the environment including, without limitation,
the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.,
the Resource Conservation and Recovery Act of 1976, as amended, 42
U.S.C. Section 6901, et seq., the Clean Air Act, as amended, 42
U.S.C. Section 7401, et seq., the Federal Water Pollution Control
Act, as amended, 33 U.S.C. Section 1251, et seq., and the Oil
Pollution Act of 1990, 33 U.S.C. Section 2701, et seq.
(collectively, the "Environmental Laws" and individually an
"Environmental Law"), except for such instances of noncompliance
that individually or in the aggregate do not have and will not have
a Material Adverse Effect.
(ii) To their Knowledge, DPI and Flare have obtained all
permits, licenses, franchises, authorities, consents, and approvals,
and have made all filings and maintained all material information,
documentation, and records, as necessary under applicable
Environmental Laws for operating its assets and business as it is
presently conducted, and all such permits, licenses, franchises,
authorities, consents, approvals, and filings remain in full force
and effect, except for such matters that individually or in the
aggregate would not have a Material Adverse Effect.
(iii) There are no pending or threatened claims, demands,
actions, administrative proceedings, lawsuits, or investigations
against DPI or Flare, and neither DPI or Flare, or any of their
respective assets are subject to any injunction, judgment, order,
decree or ruling under any Environmental Laws, except for such
matters that individually or in the aggregate do not have a Material
Adverse Effect.
(11) INSURANCE. DPI and Flare maintain in effect the respective
insurance coverages described in Section 7(a)(11) of the DISCLOSURE
SCHEDULE. Such insurance policies are in full force and effect on the date
hereof and will remain in effect on through the Closing Date. Neither DPI
nor Flare is in default with respect to any provision contained in any
insurance policy covering any portion of their respective assets, except
where such default would not prevent or impede the consummation of the
transactions contemplated hereby or have a Material Adverse Effect on the
operations, assets or financial condition of either of them.
(l2) PERMITS. To their Knowledge, except as expressly set forth in
Section 7(a)(12) of the DISCLOSURE SCHEDULE, DPI and Flare own or hold all
franchises, licenses, permits, consents, approvals, and authorizations of
all Governmental Authorities necessary for the conduct of their respective
businesses (collectively, the "Permits"), except for Permits whose absence
is not reasonably likely to have a Material Adverse Effect. Specifically,
to their Knowledge, (i) each Permit is in full force and effect, and DPI
or Flare, as applicable, are in compliance with all of their obligations
with respect to the Permit, except where the failure to be in full force
and effect or to be in compliance would not have a Material Adverse
Effect; and (ii) to the Knowledge of the DPI Shareholders and the Flare
Minority Owners, no event has occurred that permits, or upon the giving of
notice or the lapse of time or otherwise would permit, revocation or
termination of any Permit except such as in the aggregate would not have a
Material Adverse Effect.
(13) CUSTOMERS AND SUPPLIERS. To their Knowledge, the relationships
of DPI and Flare with their respective customers and suppliers are
satisfactory, and there are no unresolved disputes with any of such
customers or suppliers. None of the DPI Shareholders, DPI, the Flare
Minority Owners and Flare have Knowledge that any customers of DPI or
Flare will refuse to continue to do business with them after the
transactions contemplated by this Agreement.
(14) CONTRACTS AND COMMITMENTS. Section 7(a)(14) of the DISCLOSURE
SCHEDULE contains a true, complete and correct list (and the DPI
Shareholders have previously provided to Midcoast for review true,
complete and correct copies) of all of the following documents or
agreements, or summaries of oral agreements or understandings to which, on
the date of this Agreement, DPI and/or Flare is a party, or which relate
to or affects either or both of them and/or the respective business of
them or their respective assets or the transactions contemplated hereby,
and all documents or agreements which may require any action or consent in
connection with such transactions, as they may have been amended to the
date hereof (collectively, the "Contracts"):
(i) all contracts or other type commitments for the purchase,
sale, treating, processing, storing, gathering and/or transporting
of oil, gas and/or other liquid or gaseous hydrocarbons or products
or components thereof, together with all amendments thereto;
(ii) all rights-of-way, easements, leases, licenses and
permits;
(iii) any agreement or instrument relating to the borrowing of
money, or the direct or indirect guaranty of any obligation for, or
an agreement to service the repayment of, borrowed money or any
other contingent obligations in respect of indebtedness of any other
entity or party;
(iv) any agreement, contract or commitment relating to the
future disposition or acquisition of any investment in any entity or
party or of any interest in any business enterprise involving the
business of DPI and Flare or the Subject Assets;
(v) any contract or commitment for capital expenditures or the
acquisition or construction of fixed assets in an amount in excess
of $5,000;
(vi) any contract or commitment outside the Ordinary Course of
Business;
(vii) any contract with grants to any entity or person a
preferential right to purchase any of the assets of DPI or Flare;
(viii) any contract, agreement or commitment with respect to
environmental matters; and
(ix) any other agreement or instrument not made in the
Ordinary Course of Business.
Except expressly set forth in Section 7(a)(14) of the DISCLOSURE SCHEDULE, there
is no course of dealing, waiver, side agreement, arrangement or understanding
applicable to any Contracts of DPI or Flare. Except as set forth in the
DISCLOSURE SCHEDULE: (i) DPI and Flare have in all respects performed all
material obligations required to be performed by them to date under the
Contracts; (ii) neither has defaulted under any material obligation of the
Contracts; (iii) to the Knowledge of the DPI Shareholders, DPI, the Flare Owners
and Flare, no other party to any of the Contracts is in default thereunder; and
(iv) neither DPI or Flare has assigned to any Person any rights under the
Contracts or waived any rights of material value under the Contracts.
(15) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as expressly set
forth in Section 7(a)(15) of the DISCLOSURE SCHEDULE, there has not been,
occurred or arisen any of the following as they relate to DPI or Flare
since the Balance Sheet Date:
(i) any change in the assets or the operation of the
businesses of either of them, except for such matters that
individually or in the aggregate would not have a Material Adverse
Effect;
(ii) any destruction, damage, or loss suffered by either of
them, with respect to any of their respective assets (whether or not
covered by insurance), except for such destruction, damage or loss
that individually or in the aggregate does not have a Material
Adverse Effect;
(iii) any amendment or termination of any contract, agreement,
or license to which either of them is a party or to which any of
their respective assets are subject, except in the Ordinary Course
of Business;
(iv) any breach of the terms of any of the Contracts;
(v) any Liabilities that have not been disclosed in the
Financial Statements, other than those incurred in the Ordinary
Course of Business;
(vi) any waiver or release of any right or claim of either of
them;
(vii) any amendment to any national, federal, state,
municipal, local, foreign or other tax returns or reports that have
been filed by either of them in any jurisdiction;
(viii) any change by either of them in accounting methods or
principles that would be required to be disclosed under GAAP;
(ix) any borrowing of funds, agreement to borrow funds or
guaranty by either of them affecting them or their respective assets
or any termination or amendment of any evidence of indebtedness,
contract, agreement, deed, mortgage, lease, license or other
instrument to which either of them is bound or by which any of their
respective assets are bound or to which any of their respective
assets are subject, other than in the Ordinary Course of Business;
(x) to our Knowledge, any entry into any commitment of any
kind giving rise to any contingent liability of either of them not
covered by the foregoing; or
(xi) any contract, commitment or agreement to do any of the
foregoing.
(16) NO "TAKE OR PAY". Except as expressly set forth in Section
7(a)(16) of the DISCLOSURE SCHEDULE, there are currently no arrangements
or requirements under any of the Contracts or otherwise by which DPI or
Flare will be obligated by virtue of a prepayment arrangement, a
"take-or-pay" arrangement, a production payment, or any other arrangement
or obligation, to sell, transport or deliver hydrocarbons at some future
time without then or thereafter receiving full payment therefor, or to
make payment at some future time for hydrocarbons or the transportation or
the delivery of hydrocarbons previously purchased or transported.
(17) FACILITY RIGHTS-OF-WAY. Except as expressly set forth in
Section 7(a)(17) of the DISCLOSURE SCHEDULE, neither DPI or Flare has
Knowledge of any deficiency in any rights-of-way, easements, licenses,
leases, or permits with respect to the entire route of all pipelines owned
and used or held for use by DPI or Flare. Other than sales or assignments
to customers, DPI and Flare have not sold or assigned any rights-of-way,
easements, licenses, leases, or permits, in whole or in part, or any
undivided interest therein, to any persons whatsoever, except as expressly
disclosed in Section 7(a)(17) of the DISCLOSURE SCHEDULE.
(18) IMBALANCES. Except as expressly set forth in Section 7(a)(18)
of the DISCLOSURE SCHEDULE, there are no hydrocarbon imbalances for which
DPI, Flare, or DPI/Midcoast (as the survivor of the Merger) shall have any
liability or other obligation after the Closing Date.
(19) TARIFFS. Except as expressly set forth in Section 7(a)(19) of
the DISCLOSURE SCHEDULE, to the extent that the operations of DPI and/or
Flare are subject to a tariff approved by FERC, those operations are in
compliance with each such tariff, except where such noncompliance would
not, individually or in the aggregate, have a Material Adverse Effect.
Neither DPI nor Flare has Knowledge of any refund claim of any customers
or any refund obligation of them or either of them imposed under an order
issued by FERC and, except as expressly set forth in Section 7(a)(19) of
the DISCLOSURE SCHEDULE, has no Knowledge of any facts or circumstances
which would give rise to any such refund claim or refund obligation.
Except as expressly set forth in Section 7(a)(19) of the DISCLOSURE
SCHEDULE, there are no customer complaints pending or threatened against
DPI or Flare before FERC, which would, either individually or in the
aggregate, have a Material Adverse Effect.
(20) ASSETS OWNED. DPI and Flare own, or have rights-of-way,
easements, licenses, leases, or permits with respect to all of the
material assets used in the operation of their respective businesses and
assets held in storage for use in the operation of their respective
businesses or assets. Other than sales or assignments to its customers,
neither DPI or Flare has sold or assigned any rights-of-way, easements,
licenses, leases or permits, in whole or in part, or any undivided
interest therein, to any Person whatsoever, except as expressly disclosed
in Section 7(a)(20) of the Disclosure Schedule.
(21) NO JOINT OWNERSHIP. Neither DPI or Flare is a party to any
partnership or joint venture and owns no membership interest or capital
shares of any limited liability company, corporation or other entity
(other than DPI owns 80% of the membership interests of Flare and other
than DPI owns 20% of Claiborne Energy, LLC).
(22) NO CURTAILMENTS OR OTHER CHANGES. Except as expressly set forth
in Section 7(a)(22) of the DISCLOSURE SCHEDULE, neither DPI or Flare has
any Knowledge of any threatened or planned plant closings of customers of
DPI or Flare or reason to believe that there will likely be curtailment by
such customers of future purchases by such customers from DPI or Flare, or
any Knowledge of or reason to believe that there will be any change in the
business of DPI or Flare or of other persons that could affect the
presently existing economics of the respective businesses of DPI or Flare.
(23) REAL PROPERTY. Neither DPI or Flare has Knowledge of any
threatened termination or reduction of the current access to or from the
real property used by them in their respective businesses to existing
roads or the sewer or other utility services presently serving such real
property. Neither DPI or Flare has received any notice that its real
property is in violation of any zoning laws, statutes, ordinances or
building or use restrictions applicable to such real property or which
prohibit the use of such real property for its current use or uses.
(24) PATENTS, COPYRIGHTS, TRADEMARKS, ETC. Except as expressly set
forth in Section 7(a)(24) of the DISCLOSURE SCHEDULE, to the Knowledge of
DPI and Flare, the present conduct of the respective businesses of DPI and
Flare do not conflict with, infringe upon or violate the patents,
trademarks, servicemarks, trade names, copyrights or trade secrets or
other intangible assets of any other person or entity, and neither DPI or
Flare has received any notice of any infringement thereof, except where
such conflicts, infringements and violations would not, either
individually or in the aggregate, have a Material Adverse Effect.
(25) NO LEASES. Except as expressly set forth in Section 7(a)(25) of
the DISCLOSURE SCHEDULE, all the equipment and real property (other than
rights-of-way, easements, licenses and permits) which are material to the
operations of DPI and Flare are owned by DPI and Flare and not leased or
rented.
(26) ACCOUNTS AND NOTES RECEIVABLE. Set forth in Section 7(26) of
the DISCLOSURE SCHEDULE are a list of the accounts and notes receivable
for DPI and Flare. All of these accounts and notes receivable are
collectible in full in the ordinary course of business except as otherwise
expressly stated in Section (26) of the DISCLOSURE SCHEDULE.
(27) MATERIAL MISSTATEMENTS OR OMISSIONS. No statement,
representation, warranty or covenant made by DPI and the DPI Shareholders
in this Agreement or in any Exhibit or Schedule to this Agreement contains
or will contain any untrue statement of material fact or omits or will
omit to state any material fact necessary in order to make the statements
herein or therein, in the light of the circumstances under which they were
made, not misleading.
(b) Midcoast represents and warrants to the DPI Shareholders and the Flare
Minority Owners the following: Midcoast has provided to the DPI Shareholders or
their representatives a copy of its annual report on Form 10K for the year ended
1997 and its financial statements for the year ended December 31, 1998 (the
"Financial Statements") and its Form 10Q for the quarters ended September 30,
1998 and December 31, 1998 (such Form 10K and 10Q's are collectively called the
"SEC Reports"). The information contained in the SEC Reports is compiled, in all
material respects, in accord with all of the rules and regulations promulgated
by the Securities and Exchange Commission and does not contain an untrue
statement of a material fact or omit to state any material facts necessary to
make the statements set forth therein, in the light of the circumstances under
which they were made, not misleading. There has been no material adverse change
in any information contained in any such documents. The Financial Statements,
including the schedules thereto, have been prepared from the books and records
of Midcoast and its Affiliates in accordance with GAAP consistently applied
during the periods presented (except as noted therein, or, in the case of
unaudited statements, to normal adjustments). The Financial Statements,
including schedules thereto, present fairly the financial condition of Midcoast
and its Affiliates at the dates specified and the results of their operation for
the periods then ended. No representation or warranty made by Midcoast of its
Affiliates in this Agreement contains any untrue statement of material fact or
omits to state a material fact necessary in order to make the statements herein
not misleading. Except as disclosed on Schedule 7(b), there are no pending
lawsuits, arbitration proceedings, or other proceedings involving matters in
controversy in excess of $100,000 against Midcoast or its Affiliates, and
Midcoast has provided to the DPI Shareholders or their representatives copies of
all material correspondence pertaining to any such claims involving matters in
controversy in excess of $100,000. Except as disclosed on Schedule 7(b), there
are no pending SEC, Justice Department, Environmental Protection Agency, Federal
Trade Commission, or Internal Revenue Service inquiry, investigation, or
enforcement action. Except with respect to present pending litigation matter(s),
to the actual knowledge of the officers of Midcoast (without any duty of
inquiry), Midcoast has no legal liability for environmental damages or
remediation that would exceed $1,000,000 in exposure to Midcoast in excess of
available insurance coverage.
8. COVENANTS. The Parties agree as follows:
(a) GENERAL. In case at any time after the Closing any further action is
necessary to carry out the purposes of this Agreement, each of the Parties will
take such further action (including the execution and delivery of such further
instruments and documents) as the other Party reasonably may request, all at the
sole cost and expense of the requesting Party (unless the requesting Party is
entitled to indemnification therefor under Section 9 of this Agreement).
(b) DELIVERY AND RETENTION OF RECORDS. Within five (5) business days after
the Closing Date, the DPI Shareholders and the Flare Minority Owners will
deliver or cause to be delivered to Midcoast all files, records, information,
and data relating to DPI and Flare that are in the possession or control of any
of the DPI Shareholders and the Flare Minority Owners (together with all of the
their contractual rights to request other such files, records, information, and
data from any third party) (the "Records"). Midcoast agrees to (i) hold the
Records and not to destroy or dispose of any thereof for a period of three (3)
years from the Closing Date or such longer time as may be required by law,
provided that, if it desires to destroy or dispose of such Records during such
period, it will first offer in writing at least sixty (60) days before such
destruction or disposition to surrender them to the DPI Shareholders and/or the
Flare Minority Owners and if they do not accept such offer within twenty (20)
days after receipt of such offer, Midcoast may take such action; and (ii)
following the Closing Date to afford the DPI Shareholders and the Flare Minority
Owners, their accountants, and counsel, during normal business hours, upon
reasonable request, at any time, full access to the Records and to Midcoast
Sub's employees to the extent that such access may be requested for any
legitimate purpose at no cost to them (other than for reasonable out-of-pocket
expenses); provided, however, that such access will not be construed to require
the disclosure of Records that would cause the waiver of any attorney-client,
work product or like privilege; provided, further, that in the event of any
litigation nothing herein shall limit either Party's rights of discovery under
applicable law. Midcoast shall have the same rights, and the DPI Shareholders
and the Flare Minority Owners shall have the same obligations, as are set forth
in this Section with respect to any copies of the Records of the DPI
Shareholders and the Flare Minority Owners that are retained by them, with the
exception of Tax Returns retained by them, provided that such access will not be
construed to require the disclosure of Records that would cause the waiver of
any attorney-client, work product, or like privilege.
(c) CERTIFICATE OF NON-FOREIGN STATUS. On or prior to the Closing Date,
the DPI Shareholders and the Flare Minority Owners shall provide Midcoast with a
properly executed certificate of non-foreign status in accordance with Treas.
Reg. ss.1.1445-2(b) (a "FIRPTA Certificate") certifying under penalties of
perjury that DPI and Flare are not foreign persons within the meaning of section
1445(f) of the Code and Treas. Reg. ss.1.1445-2(b). Provided Midcoast is
otherwise entitled to rely on such Certificate, Midcoast shall not be obligated
to withhold a portion of the Base Consideration and the Contingent Deferred
Consideration under section 1445 of the Code. All Parties acknowledge that
unless Midcoast is provided with such FIRPTA Certificate in the time and manner
described above, Midcoast shall be obligated to withhold a portion of the Base
Consideration and the Contingent Deferred Consideration in the amount and manner
required under section 1445 of the Code and the applicable Treasury Regulations.
9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNI-TIES.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Parties contained in this Agreement shall survive the
Closing of this Agreement, any investigation by the Parties, and the execution
and delivery of documents contemplated by this Agreement, and shall continue in
force and effect for a period of two (2) years following the Closing. During
such period of time if no claim in writing has been brought by the Party to whom
such respective representations and warranties have been made, then such Party
shall be forever barred from bringing any claim or action for a breach thereof,
notwithstanding any longer period of limitation of actions which may otherwise
be available to such Party by statute or law.
(b) GENERAL INDEMNITY BY THE DPI SHAREHOLDERS. The DPI Shareholders,
jointly and severally, agree to protect, defend, indemnify and hold Midcoast,
Magnolia and DPI/Midcoast harmless from and against:
(1) one hundred percent (100%) of all Third Party Claims and all
Liabilities to Midcoast, Magnolia and DPI/Midcoast resulting from breaches
of any of the representations, warranties and/or covenants of the DPI
Shareholders contained in this Agreement; and
(2) one hundred percent (100%) of all Third Party Claims and all
Liabilities to Midcoast and DPI/Midcoast (whether arising out of contract,
tort, misrepresentation, strict liability, violations of environmental
laws, or any other laws or otherwise) relating to or arising from the
ownership, operation or control of the businesses and/or assets of DPI
and/or Flare prior to Closing Date, except the following:
(i) such Liabilities as disclosed by the December 31, 1998
balance sheets of DPI and Flare attached hereto as EXHIBIT F
and EXHIBIT G, respectively;
(ii) such Liabilities netted out in the working capital
adjustments provided for in Sections 2(c) and 3(c) of this
Agreement;
(iii) such Liabilities arising from contracts entered into with
good faith and in the ordinary course of business of DPI or
Flare prior to the Closing Date and not in default as of the
Closing Date;
(iv) such insured Third Party Claims and Liabilities, to the
extent covered by insurance which actually pays such losses
and which insurance has a contractual waiver of subrogation
in effect; and
(v) such Third Party Claims and Liabilities, if any, pertaining
to Claiborne Energy, LLC (such Third Party Claims and
Liabilities pertaining to Claiborne Energy, LLC that might
exist or arise being addressed in Section 9(d) of this
Agreement).
The indemnity obligations of the DPI Shareholders to Midcoast, Magnolia and
DPI/Midcoast under this Section 9(b) shall terminate and be of no further force
and effect upon the expiration of two (2) years following the Closing Date,
except as to matters which are the subject of a written claim made to the DPI
Shareholders prior thereto.
(c) GENERAL INDEMNITY BY MIDCOAST. Midcoast agrees to protect, defend,
indemnify, and hold the DPI Shareholders and Flare Minority Owners harmless from
and against:
(1) one hundred percent (100%) of all Third Party Claims and all
Liabilities to the DPI Shareholders resulting from breaches of any of
Midcoast's representations, warranties and/or covenants contained in this
Agreement; and
(2) one hundred percent (100%) of all Third Party Claims and all
Liabilities to the DPI Shareholders (whether arising out of contract,
tort, misrepresentation, strict liability, violations of environmental
laws or any other laws, or otherwise) relating to or arising from the
ownership, operation or control of the businesses and/or assets of DPI and
Flare following closing (other than relating to or affecting the Midcoast
Stock received or to be received by them or the Contingent Deferred
Consideration which may be received by them).
The indemnity obligations of Midcoast to the DPI Shareholders under this Section
9(c) shall terminate and be of no further force and effect upon the expiration
of two (2) years following the Closing Date, except as to matters which are the
subject of a written claim made to Midcoast prior thereto.
(d) SPECIAL INDEMNITY BY THE DPI SHAREHOLDERS. The DPI Shareholders agree
to protect, defend, indemnify and hold Midcoast, Magnolia and DPI/Midcoast (as
the surviving corporation of the Merger) harmless from and against one hundred
percent (100%) of all Third Party Claims and all Liabilities (whether arising
out of contract, tort, misrepresentation, strict liability, violations of any
environmental laws or any other laws, or otherwise) arising from or attributable
to the operation of the Claiborne Plant, the investment of DPI in Claiborne
Energy, LLC, the pending arbitration proceeding pertaining thereto and any
subsequent arbitration or judicial proceedings, for all periods of time both
prior to and subsequent to the Effective Date; provided, however, in no event
shall the DPI Shareholders' liability to make indemnification payments to
Midcoast, Magnolia and/or DPI/Midcoast pursuant to the foregoing provisions of
this Section 9(d): (i) extend to Liabilities against Midcoast, Magnolia and/or
DPI/Midcoast except to the extent that Midcoast, Magnolia and/or DPI/Midcoast is
legally required to make payment of monies or property and the payment of monies
and/or property is actually paid in satisfaction, settlement or compromise of
such Liabilities; (ii) extend to Third Party Claims and/or Liabilities incurred
by Midcoast, Magnolia or DPI/Midcoast which are actually paid or reimbursed to
them by insurance which has a contractual waiver of subrogation clause in effect
or by other parties liable to DPI, Midcoast, Magnolia or DPI/Midcoast (provided
that none of DPI, Midcoast, Magnolia or DPI/Midcoast have any duty or obligation
to collect or attempt to collect against any third parties); or (iii) extend to
Third Party Claims and Liabilities of DPI paid prior to the Closing Date and
included in the Long Term Debt and/or Working Capital adjustments of DPI, as
applicable, to be made pursuant to Section 2(c) of this Agreement; or (iv)
extend to Third Party Claims and/or Liabilities incurred by Midcoast, Magnolia
or DPI/Midcoast as a result of Midcoast's, Magnolia's or DPI/Midcoast's breach
of contractual obligations existing as of the Closing Date.
(e) MATTERS INVOLVING THIRD PARTIES.
(1) If any third party shall notify any Party (the "Indemnified
Party") with respect to any Third Party Claim that may give rise to a
claim for indemnification against any other Party (the "Indemnifying
Party") under this Section 9, then the Indemnified Party shall promptly
(and in any event within five (5) business days after receiving notice of
the Third Party Claim) notify the Indemnifying Party thereof in writing.
(2) The Indemnifying Party will have the right to assume and
thereafter conduct the defense of the Third Party Claim with counsel of
its choice reasonably satisfactory to the Indemnified Party; provided,
however, that the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnified Party (not to
be withheld unreasonably) unless the judgment or proposed settlement
involves only the payment of money damages and does not impose an
injunction or other equitable relief upon the Indemnified Party.
(3) Unless and until the Indemnifying Party assumes the defense of
the Third Party Claim as provided in subsection 9(e)(2) above, however,
the Indemnified Party may defend against the Third Party Claim in any
manner it reasonably may deem appropriate.
(4) In no event will the Indemnified Party consent to the entry of
any judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party which
consent shall not be withheld unreasonably.
(f) Notwithstanding anything herein to the contrary, in no event and under
no circumstances shall the DPI Shareholders be required to pay any moneys or
damages to Midcoast, under or in connection with the DPI Shareholders'
warranties, representations, covenants, and indemnification provisions of this
Agreement which, in the aggregate, exceed the value of the total consideration
received by the DPI Shareholders pursuant to this Agreement.
(g) Notwithstanding anything herein to the contrary, in no event and under
no circumstances shall Midcoast, Magnolia or DPI/Midcoast be required to pay any
money or damages to the DPI Shareholders and/or the Flare Minority Owners,
collectively, under or in connection with their warranties, representations,
covenants, and indemnification provisions of this Agreement which, in the
aggregate, exceeds the value of the total consideration received by the DPI
Shareholders pursuant to this Agreement.
10. TAX MATTERS.
(a) RETURNS FOR TAX PERIODS ENDING ON OR BEFORE THE EFFECTIVE DATE. The
DPI Shareholders shall prepare and file, or cause to be prepared and filed
(pursuant to a limited power of attorney), all Tax Returns for DPI and Flare for
all periods ending on or prior to the Effective Date. With respect to any such
Tax Returns filed after the Effective Date, the DPI Shareholders shall permit
Midcoast to review and comment on each such Tax Return. All Taxes shown as due
on Tax Returns required to be filed on DPI by operation of this section shall be
paid by the DPI Shareholders, and all Taxes shown as due on Tax Returns required
to be filed on Flare by operation of this section shall be paid eighty percent
(80%) by the DPI Shareholders and twenty percent (20%) by the Flare Minority
Owners. If said amount of tax due or refund due is known in adequate time, any
tax due and unpaid shall be considered as a negative adjustment to Working
Capital or any refund due shall be considered as a positive adjustment to
Working Capital.
(b) TAX CONSOLIDATED RETURNS FOR PERIODS ENDING ON THE EFFECTIVE DATE.
The DPI Shareholders and the Flare Minority Owners shall prepare and timely file
a federal income Tax Return and a State of Mississippi income Tax Return on DPI
and Flare for the period beginning October 1, 1998 and ending on December 31,
1998, and the DPI Shareholders and the Flare Minority Owners shall collectively
pay any income Taxes attributable to such income. The income of DPI and Flare
will be apportioned to the period up to and including the Effective Date and the
period after the Effective Date by closing their books of the end of the day
before the Effective Date. If said amount of tax due or refund due is known in
adequate time, any tax due and unpaid shall be considered as a negative
adjustment to Working Capital or any refund due shall be considered as a
positive adjustment to Working Capital.
(c) OTHER TAX RETURNS FOR PERIODS BEGINNING BEFORE AND ENDING AFTER THE
EFFECTIVE DATE. Midcoast shall prepare and file, or cause to be prepared and
filed, any Tax Returns of DPI and Flare for Tax periods which begin before the
Effective Date and end after the Effective Date. The DPI Shareholders and the
Flare Minority Owners shall pay to the Midcoast within fifteen (15) days after
the date on which Taxes are paid with respect to such periods an amount equal to
the portion of such Taxes which relates to the portion of such Taxable period
ending on the Effective Date. For purposes of this Section, in the case of any
Taxes that are imposed on a periodic basis and are payable for a Taxable period
that includes (but does not end on) the Effective Date, the portion of such tax
which relates to the portion of such Taxable period ending on the Effective Date
shall (1) in the case of any Taxes other than Taxes based upon or related to
income or receipts, be deemed to be the amount of such Tax for the entire
Taxable period multiplied by a fraction the numerator of which is the number of
days in the Taxable period ending on the Effective Date and the denominator of
which is the number of days in the entire Taxable period, and (2) in the case of
any Tax based upon or related to income or receipts be deemed equal to the
amount which would be payable if the relevant Taxable period ended on the
Effective Date.
(d) COOPERATION ON TAX MATTERS. All Parties shall cooperate fully, as and
to the extent reasonably requested by any other Party, in connection with the
filing of Tax Returns pursuant to this section and any audit, litigation or
other proceeding and making employees available on a mutually convenient basis
to provide additional information and explanation of any material provided
hereunder. DPI/Midcoast shall: (i) retain all books and records with respect to
Tax matters pertinent to DPI and Flare relating to any taxable period beginning
before the Effective Date until the expiration of the statute of limitations
(and, to the extent notified by the DPI Shareholders or the Flare Minority
Owners, any extensions thereof) of the respective taxable periods, and to abide
by all record retention agreements entered into with any taxing authority, and
(ii) give the DPI Shareholders and the Flare Minority Owners reasonable written
notice prior to transferring, destroying or discarding any such books and
records and, if they so request, shall allow them to take possession of such
books and records.
(e) CERTAIN TAXES. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) imposed by any state which are incurred in connection with this
Agreement, shall be paid by the DPI Shareholders and the Flare Minority Owners,
as applicable, when due, and they will, at their own expense, file all necessary
Tax Returns and other documentation with respect to all such transfer,
documentary, sales, use, stamp, registration and other Taxes and fees, and, if
required by applicable law, they will, and will cause their Affiliates to, join
in the execution of any such Tax Returns and other documentation.
11. PROHIBITED ACTIVITIES OF THE DPI SHAREHOLDERS AND MICHAEL E. HOWELL.
In order to protect the goodwill and business interests of DPI and Flare
following the Closing, the DPI Shareholders and Michael E. Howell covenant and
agree that they will not:
(a) directly or indirectly, for a period of five (5) years from the
Closing Date, request or advise any party to any contracts or commitments, now
or hereafter existing, with DPI, Magnolia or Flare, or their repsective
successors, to withdraw, curtail or cancel any service to or from such parties
under the terms of such contract or commitment;
(b) for a period of five (5) years from the Closing Date, aid, abet or
otherwise assist any person, firm or corporation seeking to interfere with DPI's
and Flare's or their successors'relationship with the parties to, or the term
of, any contract, now or hereafter existing, with it; or
(c) acting alone or in conjunction with others, directly or indirectly, in
Mississippi, Alabama, Louisiana, and Texas, for a period of five (5) years from
the Closing Date, engage in any businesses in competition with the respective
businesses presently conducted by DPI and Flare or their successors, whether for
their own account or for others.
It is recognized that Curtis J. Dufour, III owns an interest in Maurice Gas
Processing Co. (through DPI Gas Marketing and Gathering Co.) and El Mesquite
Plant, LC, two (2) companies that own natural gas processing plants.
Notwithstanding anything herein to the contrary, it is agreed that the covenants
contained in Section 11(a), (b), and (c) shall not pertain to Curtis J. Dufour,
III's ownership interest in Maurice Gas Processing Co. and El Mesquite Plant, LC
and the business of those entities.
12. MEDIATION AND ARBITRATION. The Parties acknowledge and agree that any
dispute, controversy or claim of any kind or nature which may arise between the
Parties, including any dispute, controversy or claim of any kind or nature which
may arise between the Parties with respect to this Agreement or the transactions
contemplated hereby (including any dispute, controversy or claim relating to the
validity of this dispute resolution clause) shall be settled by alternative
dispute resolution if said dispute cannot be settled through negotiation between
the Parties. The Parties agree first to try in good faith to settle each dispute
by mediation in Houston, Harris County, Texas. The mediation shall be conducted
by a professional mediator who is a licensed attorney in the state of Texas, who
is mutually agreeable to the Parties, and who is not affiliated, directly or
indirectly, with any of the Parties. If the Parties are unable to agree on a
mediator, then the mediator shall be selected under the rules of the American
Arbitration Association. If mediation is unsuccessful at resolving the dispute
between the Parties, the dispute shall be finally settled by binding arbitration
as provided below.
The Parties acknowledge and agree that this Agreement and the performance
of the transactions contemplated hereby evidence transactions contemplated
hereby which involve a substantial nexus with interstate commerce. Accordingly,
any dispute, controversy or claim of any kind or nature which may arise between
the Parties (including any dispute, controversy or claim relating to the
validity of this arbitration clause) with respect to this Agreement or the
transactions contemplated hereby, shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
and judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction thereof. Such arbitration proceedings shall be held in
Houston, Texas, and shall be heard by an arbitrator mutually agreeable to the
Parties and to the extent practicable, who is knowledgeable and experienced in
the type of matter that is the subject of the dispute. The Parties understand
and agree that the decision of the arbitrator shall be final and binding upon
both of them, and that the arbitrator shall have all powers provided by law, and
may award any legal or equitable relief, including, without limitation, money
damages, declaratory relief and injunctive relief. The arbitrator shall charge
all fees and expenses of the arbitration equally to the Parties, except that
each Party shall bear and pay all of its own attorneys' fees, accountants' fees,
expert witness fees and other fees and expenses incurred by it in connection
with its preparation for and participation in the arbitration.
13. BOARD SEAT. Prior to or at Closing, Midcoast shall appoint Curtis J.
Dufour, III, as interim director on Midcoast Energy Resources, Inc.'s board of
directors to serve until the 1999 Midcoast annual shareholder's meeting.
Thereafter, subject to fiduciary obligations under applicable law, Midcoast
shall use reasonable efforts to take the actions necessary to nominate, support
the election of, and elect Curtis J. Dufour, III, as a director of Midcoast
Energy Resources, Inc. for an additional term or terms aggregating two (2) years
from the 1999 Midcoast annual shareholders' meeting. In the event that the
aggregate number of shares of common stock of Midcoast Energy Resources, Inc.
held by Curtis J. Dufour, III, Donna M. Dufour, Bethanne Dufour, or any trust
for the benefit of Bethanne Dufour and/or other family members is ever less than
seventy-five percent (75%) from that initially issued to them pursuant to the
terms of this Agreement, then the Board of Directors of Midcoast Energy
Resources, Inc. may, at its option, request and shall receive the resignation of
Curtis J. Dufour, III, as a Director.
14. CONTRACTS OF EMPLOYMENT. Midcoast shall cause DPI/Midcoast to tender
to the following individuals reasonable contracts of employment for a minimum
two (2) year period with DPI/Midcoast, with duties comparable to their immediate
previous duties with DPI at salaries comparable to their immediate previous
salaries and shall make good faith efforts to continue the employment of said
individuals, provided said individuals perform their duties in a reasonable
manner:
Curtis J. Dufour, III
Michael E. Howell
15. NAME. Midcoast agrees to retain the name of DPI/Midcoast (into which
DPI is merged) for a minimum period of the lesser of (a) Curtis J. Dufour, III's
employment with DPI/Midcoast, or (b) Curtis J. Dufour, III's service on the
Board of Directors of Midcoast Energy Resources, Inc.
16. GENERAL.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. None of the DPI Shareholders,
DPI, the Flare Minority Owners and Flare shall issue any press release or make
any public announcement relating to the subject matter of this Agreement before
the Closing without the prior written approval of Midcoast.
(b) NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
heirs, devisees, legal representatives, successors and permitted assigns.
(c) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective heirs, devisees, legal
representatives, successors and permitted assigns. No Party may assign either
this Agreement or any of his, her, or its rights, interests, or obligations
hereunder without the prior written approval of the other Parties.
(d) COUNTERPARTS; FASCIMILIE SIGNATURES. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument. A fascimile or fax
signature on a counterpart of this Agreement shall be deemed for all purposes
the same as an original signature. The Parties agree that the signature pages
from each executed counterpart of this Agreement may be detached from each such
counterpart and reassembled and attached to another counterpart, and that the
same shall constitute for all purposes a fully executed original of this
Agreement. This Agreement shall be binding upon all Parties hereunto signing a
counterpart whether or not all named Parties execute a counterpart hereof or
not.
(e) NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given two (2) business
days after it is sent by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the intended recipient as set forth below:
IF TO DPI OR THE DPI SHAREHOLDERS:
Curtis J. Dufour, III
and wife, Donna M. Dufour
100 W. Canebrake Blvd.
Hattiesburg, MS 39402
IF TO THE FLARE MINORITY OWNERS:
James Drew Laughlin
5507 Valley Lark Court
Kingwood, Texas 77345
Michael E. Howell
181 Wildwood Trail
Petal, Mississippi 39465
Greg A. Haeusler
25 Stone's Throw
Hattiesburg, Mississippi 39402
Greg L. Robbins
947 Prospres
Columbia, Mississippi 39429
Deway Greene, Jr.
757 Bethel Church Road
Sumrall, Mississippi 39482
Ronald L. Lubritz
205 Pinehills Drive
Hattiesburg, Mississippi 39402
David I. Hirsch
100 Heatherwood Drive
Hattiesburg, Mississippi 39402
IF TO MIDCOAST:
Midcoast Energy Resources, Inc.
1100 Louisiana, Suite 2950
Houston, Texas 77002
Attn: I.J. "Chip" Berthelot, II
Contract Administration
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the addresses set forth above using any
other means (including personal delivery, expedited courier, messenger service,
facsimile, or ordinary mail), but no such notice, request, demand, claim, or
other communication shall be deemed to have been duly given unless and until it
actually is received by the intended recipient. Any Party may change the address
to which notices, requests, demands, claims, and other communications hereunder
are to be delivered by giving the other Party notice in the manner herein set
forth.
(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the state of Texas without giving effect to
any choice or conflict of law provision or rule (whether of the state of Texas
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the state of Texas.
(g) AMENDMENTS. No amendment of any provision of this Agreement shall be
valid unless the same shall be in writing and signed by all of the respective
Parties as to whom the amendment applies.
(h) SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(i) TRANSACTION EXPENSES. Each of the Parties will bear its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby, including, (i) in the case
of the DPI Shareholders, one hundred percent (100%) of DPI's costs and expenses
and eighty percent (80%) of Flare's costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby through Closing,
and, (ii) in the case of the Flare Minority Owners, twenty percent (20%) of
Flare's costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby through Closing.
(j) CONSTRUCTION. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
(k) INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
(l) WAIVER OF CONSUMER RIGHTS. IT IS THE INTENT OF THE PARTIES THAT
MIDCOAST'S RIGHTS AND REMEDIES WITH RESPECT TO THIS TRANSACTION AND WITH RESPECT
TO ALL ACTS OR PRACTICES OF THE DPI SHAREHOLDERS AND THE FLARE MINORITY OWNERS,
PAST, PRESENT OR FUTURE, IN CONNECTION WITH THIS TRANSACTION SHALL BE GOVERNED
BY LEGAL PRINCIPLES OTHER THAN THE TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER
PROTECTION ACT, TEX. BUS. & COM. CODE ANN. SECTION 17.41 ET SEQ. (VERNON 1987
AND SUPP. 1995) (THE "DTPA"). MIDCOAST ACKNOWLEDGES, REPRESENTS, AND WARRANTS
THAT IT IS NOT A CONSUMER AS DEFINED BY THE DTPA BECAUSE (I) IT IS A PARTNERSHIP
OR CORPORATION THAT SEEKS TO ACQUIRE THE COMPANY SHARES AND THE SUBJECT ASSETS
FOR COMMERCIAL OR BUSINESS USE; AND (II) IT HAS ASSETS OF $25 MILLION OR MORE OR
IS OWNED OR CONTROLLED BY A CORPORATION OR ENTITY WITH ASSETS OF $25 MILLION OR
MORE. IF MIDCOAST IS NONETHELESS DEEMED TO BE A CONSUMER AS DEFINED BY THE DTPA,
IT HEREBY WAIVES ITS RIGHTS UNDER THE DTPA, A LAW THAT GIVES CONSUMERS SPECIAL
RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF MIDCOAST'S OWN
SELECTION, MIDCOAST VOLUNTARILY CONSENTS TO THIS WAIVER. MIDCOAST ACKNOWLEDGES,
REPRESENTS AND WARRANTS THAT (I) IT IS NOT IN A SIGNIFICANTLY DISPARATE
BARGAINING POSITION WITH THE SELLERS; (II) IT WAS REPRESENTED BY LEGAL COUNSEL
IN THIS TRANSACTION; AND (III) IT SELECTED ITS OWN LEGAL COUNSEL, WHICH WAS NOT
DIRECTLY OR INDIRECTLY IDENTIFIED, SUGGESTED OR SELECTED BY SELLERS, A COMPANY
OR A SUBSIDIARY OR ANY AGENT THEREOF. MIDCOAST EXPRESSLY RECOGNIZES THAT THE
PRICE FOR WHICH THE SELLERS HAVE AGREED TO SELL THE COMPANY SHARES AND PERFORM
ITS OBLIGATIONS UNDER THIS AGREEMENT HAS BEEN PREDICATED UPON THE
INAPPLICABILITY OF THE DTPA AND THE EFFECTIVENESS OF THIS WAIVER OF THE DTPA.
MIDCOAST FURTHER RECOGNIZES THAT THE SELLERS, IN DETERMINING TO ENTER INTO THIS
AGREEMENT, HAVE EXPRESSLY RELIED ON THIS WAIVER AND THE INAPPLICABILITY OF THE
DTPA.
(m) WAIVER. No failure or delay by any Party in exercising any right,
power or privilege hereunder (and no course of dealing between or among any of
the Parties) shall operate as a waiver of any such right, power or privilege. No
waiver of any default on any one occasion shall constitute a waiver of any
subsequent or other default. No single or partial exercise of any such right,
power or privilege hereunder shall be enforceable unless in writing an executed
by the Party against whom such enforcement is sought. The waiver by any Party
hereto of any of the conditions precedent to its obligations under this
Agreement shall not preclude it from seeking redress for breach of this
Agreement other than with respect to the condition so waived.
(n) INCLUDING. Wherever terms such as "include" or "including" are used
in this Agreement, they shall mean include or including without limiting the
generality of any description or word preceding such term.
(o) GENDER. Throughout this Agreement, wherever the context so permits,
the masculine gender shall be deemed to include the feminine gender and
vice-versa, and both shall be deemed to include the neuter and vice-versa, and
the singular shall be deemed to include the plural and vice-versa.
(p) CAPTIONS. The captions or headings in this Agreement are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Agreement.
(q) ENTIRE AGREEMENT. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they have related in any way to the subject
matter hereof. There are no contemporaneous agreements, oral or written, by or
among the Parties regarding the subject matter hereof.
(r) ADDITIONAL DOCUMENTS. The Parties to this Agreement shall cause to
be delivered on the Closing Date, or at such other times and places as shall be
agreed upon, such additional documents as a Party may reasonably require for the
purpose of carrying out this Agreement. The Parties shall exert best efforts in
coordinating such requests, and shall direct officers, directors, employees and
representatives to furnish information, evidence, testimony, and other
assistance in connection with resolution of any disputes arising from this
Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in
multiple counterpart originals as of the date first above written.
(SIGNATURE PAGES FOLLOW.)
"MIDCOAST": "DPI":
MIDCOAST ENERGY RESOURCES, INC. DUFOUR PETROLEUM, INC.
By:_________________________ By:______________________
Dan C. Tutcher, Curtis J. Dufour, III,
President President
"MAGNOLIA" "DPI SHAREHOLDERS":
MAGNOLIA RESOURCES, INC.
By:_________________________ _________________________
Dan C. Tutcher, CURTIS J. DUFOUR, III
President
"DPI/MIDCOAST" _________________________
DONNA M. DUFOUR
DPI/MIDCOAST, INC.
By:_____________________ "FLARE MINORITY OWNERS:"
Michael E. Howell,
President
-------------------------
JAMES DREW LAUGHLIN
------------------------
MICHAEL E. HOWELL
-------------------------
GREG A. HAEUSLER
-------------------------
GREG L. ROBBINS
-------------------------
DEWAY GREENE
-------------------------
RONALD L. LUBRITZ
-------------------------
DAVID I. HIRSCH
MIDCOAST ENERGY RESOURCES, INC.
1996 INCENTIVE STOCK PLAN
(AS AMENDED MAY 15, 1998)
1. PURPOSE OF THE PLAN
This Midcoast Energy Resources, Inc. 1996 Incentive Stock Plan is intended
to provide a means through which the Company and its Subsidiaries may attract
able persons to enter into the employ of the Company or its Subsidiaries, and to
promote the interests of the Company by providing the employees and consultants
of the Company or of any Subsidiary corporation, who are largely responsible for
the management, growth and protection of the business of the Company, with a
proprietary interest in the Company, thereby strengthening their concern for the
welfare of the Company and their desire to remain in its employ. A further
purpose of the Plan is to provide such persons with additional incentive and
reward opportunities to enhance the profitable growth of the Company.
2. DEFINITIONS
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Board of Directors" shall mean the Board of Directors of Midcoast
Energy Resources, Inc.
(b) "Cause," when used in connection with the termination of a
Participant's employment with the Company, shall mean the termination of the
Participant's employment by the Company by reason of (i) the conviction of the
Participant by a court of competent jurisdiction as to which no further appeal
can be taken of a crime involving moral turpitude; (ii) the proven commission by
the Participant of an act of fraud upon the Company; (iii) the willful and
proven misappropriation of any funds or property of the Company by the
Participant; (iv) the willful, continued and unreasonable failure by the
Participant to perform duties assigned to him and agreed to by him; (v) the
knowing engagement by the Participant in any direct, material conflict of
interest with the Company without compliance with the Company's conflict of
interest policy, if any, then in effect; (vi) the knowing engagement by the
Participant, without the written approval of the Board of Directors of the
Company, in any activity which competes with the business of the Company or
which would result in a material injury to the Company; or (vii) the knowing
engagement in any activity which would constitute a material violation of the
provisions of the Company's Policies and Procedures Manual, if any, then in
effect.
(c) "Cash Bonus" shall mean an award of a bonus payable in cash pursuant
to Section 11 hereof.
(d) "Change in Control" shall mean:
(i) a "change in control" of the Company, as that term is
contemplated in the federal securities laws; or
(ii) the occurrence of any of the following events:
(1) any Person becomes, after the effective date of this Plan,
the "beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of securities
of the Company representing 20% or more of the combined voting
power of the Company's then outstanding securities; provided,
that the Board of Directors (as constituted immediately prior
to such person becoming such a beneficial owner) may
determine, in its sole discretion, that a Change in Control
has not occurred; and provided further, that the acquisition
of additional voting securities, after the effective date of
this Plan, by any Person who is, as of the effective date of
this Plan, the beneficial owner, directly or indirectly, of
20% or more of the combined voting power of the Company's then
outstanding securities, shall not constitute a "Change in
Control" of the Company for purposes of this Section 2(d).
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(2) a majority of individuals who are nominated by the Board
of Directors for election to the Board of Directors on any date,
fail to be elected to the Board of Directors as a direct or indirect
result of any proxy fight or contested election for positions on the
Board of Directors; or
(3) the Board of Directors determines in its sole and absolute
discretion that there has been a change in control of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time. Reference in the Plan to any Section of the Code shall be deemed
to include any amendments or successor provisions to any Section and any
treasury regulations thereunder.
(e) "Committee" shall mean the Compensation Committee of the Board of
Directors or such other committee as the Board of Directors shall appoint from
time to time to administer the Plan.
(f) "Common Stock" shall mean the Company's common stock, par value $.01
per share.
(g) "Company" shall mean Midcoast Energy Resources, Inc., a Nevada
corporation, and each of its Subsidiaries, and its successors.
(h) "Consultant" shall mean any person who is engaged by the Company or
any Subsidiary to render consulting services and is compensated for such
services.
(i) "Employee" shall mean any person who is an employee of the Company or
any Subsidiary within the meaning of Section 3401(c) of the Code and the
applicable interpretive authority thereunder.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(k) the "Fair Market Value" of a share of Common Stock on any date shall
be (i) the closing sales price on the immediately preceding business day of a
share of Common Stock as reported on the principal securities exchange on which
shares of Common Stock are then listed or admitted to trading or (ii) if not so
reported, the average of the closing bid and asked prices for a share of Common
Stock on the immediately preceding business day as quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") or (iii)
if not quoted on NASDAQ, the average of the closing bid and asked prices for a
share of Common Stock as quoted by the National Quotation Bureau's "Pink Sheets"
or the National Association of Securities Dealers' OTC Bulletin Board System. If
the price of a share of Common Stock shall not be so reported, the Fair Market
Value of a share of Common Stock shall be determined by the Committee in its
absolute discretion.
(l) "Incentive Award" shall mean an Option, a share of Restricted Stock, a
Performance Award, a share of Phantom Stock, a Stock Bonus or Cash Bonus granted
pursuant to the terms of the Plan.
(m) "Incentive Stock Option" shall mean an Option which is an "incentive
stock option" within the meaning of Section 422 of the Code and which is
identified as an Incentive Stock Option in the agreement by which it is
evidenced.
(n) "Issue Date" shall mean the date established by the Committee on which
certificates representing shares of Restricted Stock shall be issued by the
Company pursuant to the terms of Section 7(d) hereof.
(o) "Non-Qualified Stock Option" shall mean an Option which is not an
Incentive Stock Option and which is identified as a Non-Qualified Stock Option
in the agreement by which it is evidenced.
(p) "Option" shall mean an option to purchase shares of Common Stock of
the Company granted pursuant to Section 6 hereof. Each Option shall be
identified as either an Incentive Stock Option or a Non-Qualified Stock Option
in the agreement by which it is evidenced.
(q) "Parent" shall mean a "parent corporation" of the Company, whether now
or hereafter existing, as defined in Section 424(e) of the Code.
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(r) "Participant" shall mean an Employee or Consultant who is eligible to
participate in the Plan and to whom an Incentive Award is granted pursuant to
the Plan, and, upon his death, his successors, heirs, executors and
administrators, as the case may be, to the extent permitted hereby.
(s) "Performance Award" shall mean an award payable in cash or Common
Stock, which award is granted pursuant to Section 8 hereof and subject to the
terms and conditions contained therein.
(t) "Person" shall mean a "person," as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, and the rules and regulations in effect from time
to time thereunder.
(u) a share of "Phantom Stock" shall represent the right to receive in
cash the Fair Market Value of a share of Common Stock of the Company, which
right is granted pursuant to Section 9 hereof and subject to the terms and
conditions contained therein.
(v) "Plan" shall mean the Midcoast Energy Resources, Inc. 1996 Incentive
Stock Plan, as it may be amended from time to time.
(w) a share of "Restricted Stock" shall mean a share of Common Stock which
is granted pursuant to the terms of Section 7 hereof and which is subject to the
restrictions set forth in Section 7(c) hereof for so long as such restrictions
continue to apply to such share.
(x) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
(y) "Stock Bonus" shall mean a grant of a bonus payable in shares of
Common Stock pursuant to Section 10 hereof.
(z) "Subsidiary" or "Subsidiaries" shall mean any and all corporations in
which at the pertinent time the Company owns, directly or indirectly, stock
vested with more than 50% of the total combined voting power of all classes of
stock of such corporations within the meaning of Section 424(f) of the Code.
(aa) "Vesting Date" shall mean the date established by the Committee on
which a share of Restricted Stock or Phantom Stock may vest.
3. STOCK SUBJECT TO THE PLAN
Under the Plan, the Committee may grant to Participants: (i) Options; (ii)
shares of Restricted Stock; (iii) Performance Awards; (iv) shares of Phantom
Stock; (v) Stock Bonuses; and (vi) Cash Bonuses.
The Committee may grant Options, shares of Restricted Stock, Performance
Awards, shares of Phantom Stock and Stock Bonuses under the Plan with respect to
a number of shares of Common Stock that in the aggregate at any time does not
exceed 425,000 shares of Common Stock, subject to adjustment pursuant to Section
12 hereof. The grant of a Cash Bonus shall not reduce the number of shares of
Common Stock with respect to which Options, shares of Restricted Stock,
Performance Awards, shares of Phantom Stock or Stock Bonuses may be granted
pursuant to the Plan. Notwithstanding any provision in the Plan to the contrary,
the maximum number of shares of Common Stock that may be subject to Incentive
Awards granted to any one individual during any calendar year shall be 50,000
shares of Common Stock, subject to adjustment under Section 12 hereof. The
limitation set forth in the preceding sentence shall be applied in a manner
which will permit compensation generated in connection with the exercise of
Options and the payment of Performance Awards to constitute "qualified
performance-based compensation" for purposes of Section 162(m) of the Code,
including, without limitation, counting against such maximum number of shares,
to the extent required under Section 162(m) of the Code and applicable
interpretive authority thereunder, any shares subject to Options that are
canceled or repriced.
If any outstanding Option expires, terminates or is canceled for any
reason, the shares of Common Stock subject to the unexercised portion of such
Option shall again be available for grant under the Plan. If any shares of
Restricted Stock or Phantom Stock, or any shares of Common Stock granted as a
Performance Award or a Stock Bonus are forfeited or canceled for any reason,
such shares shall again be available for grant under the Plan.
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<PAGE>
Shares of Common Stock issued under the Plan may be either newly issued or
treasury shares, at the discretion of the Committee.
4.. ADMINISTRATION OF THE PLAN
The Plan shall be administered by a Committee of the Board of Directors
consisting of two or more persons, each of whom shall be both (i) a
"non-employee director" within the meaning of Rule 16b-3(b)(3)(i) promulgated
under Section 16 of the Exchange Act and (ii) an "outside director" within the
meaning of Section 162(m) of the Code and applicable interpretive authority
thereunder. The Committee shall from time to time designate the key Employees
and Consultants of the Company who shall be granted Incentive Awards and the
amount and type of such Incentive Awards.
The Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan and the terms of
any Incentive Award issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.
The Committee may, in its absolute discretion (i) accelerate the date on
which any Option granted under the Plan becomes exercisable, (ii) extend the
date on which any Option granted under the Plan ceases to be exercisable, (iii)
accelerate the Vesting Date or Issue Date, or waive any condition imposed
pursuant to Section 7(b) hereof, with respect to any share of Restricted Stock
granted under the Plan and (iv) accelerate the Vesting Date or waive any
condition imposed pursuant to Section 9 hereof, with respect to any share of
Phantom Stock granted under the Plan.
In addition, the Committee may, in its absolute discretion, grant
Incentive Awards to Participants on the condition that such Participants
surrender to the Committee for cancellation such other Incentive Awards
(including, without limitation, Incentive Awards with higher exercise prices) as
the Committee specifies. Notwithstanding Section 3 hereof, Incentive Awards
granted on the condition of surrender of outstanding Incentive Awards shall not
count against the limits set forth in such Section 3 until such time as such
Incentive Awards are surrendered.
Except as provided in Section 6(e)(4) hereof, whether an authorized leave
of absence, or absence in military or government service, shall constitute
termination of employment shall be determined by the Committee in its absolute
discretion.
No member of the Committee shall be liable for any action, omission, or
determination relating to the Plan, and the Company shall indemnify and hold
harmless each member of the Committee and each other director or employee of the
Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated from and against any cost or
expense (including attorneys' fees) or liability (including any sum paid in
settlement of a claim with the approval of the Committee) arising out of any
action, omission or determination relating to the Plan, unless, in either case,
such action, omission or determination was taken or made by such member,
director or employee in bad faith and without reasonable belief that it was in
the best interests of the Company.
5. ELIGIBILITY
The persons who shall be eligible to receive Incentive Awards pursuant to
the Plan shall be those Employees who are largely responsible for the
management, growth and protection of the business of the Company or any
Subsidiary (including officers of the Company, whether or not they are directors
of the Company) or (ii) any Consultant, as the Committee, in its absolute
discretion, shall select from time to time; PROVIDED, HOWEVER, Incentive Stock
Options may only be granted to Employees.
6. OPTIONS
The Committee may grant Options pursuant to the Plan, which Options shall
be evidenced by agreements in such form as the Committee shall from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:
(a) IDENTIFICATION OF OPTIONS
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<PAGE>
All Options granted under the Plan shall be clearly identified in the
agreement evidencing such Options as either Incentive Stock Options or as
Non-Qualified Stock Options.
(b) EXERCISE PRICE
The exercise price of any Option granted under the Plan shall be such
price as the Committee shall determine on the date on which such Option is
granted; PROVIDED, that such price shall be not less than 100% of the Fair
Market Value of a share of Common Stock on the date on which such Option is
granted, subject to (i) the restrictions provided in Section 6(d) hereof and
(ii) the adjustments provided in Section 12 hereof.
(c) TERM AND EXERCISE OF OPTIONS
(1) Each Option shall be exercisable on such date or dates, during
such period and for such number of shares of Common Stock as shall be
determined by the Committee on the day on which such Option is granted and
set forth in the agreement evidencing the Option; PROVIDED, HOWEVER, that
(A) subject to the restrictions provided in Section 6(d) hereof, no Option
shall be exercisable after the expiration of ten years from the date such
Option was granted and (B) no Option shall be exercisable until six months
after the date of grant; and, PROVIDED, FURTHER, that each Option shall be
subject to earlier termination, expiration or cancellation as provided in
the Plan.
(2) Each Option shall be exercisable in whole or in part with
respect to whole shares of Common Stock. The partial exercise of an Option
shall not cause the expiration, termination or cancellation of the
remaining portion thereof. Upon the partial exercise of an Option, the
agreement evidencing such Option shall be returned to the Participant
exercising such Option together with the delivery of the certificates
described in Section 6(c)(5) hereof.
(3) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no fewer
than five business days in advance of the effective date of the proposed
exercise. Such notice shall be accompanied by the agreement evidencing the
Option, shall specify the number of shares of Common Stock with respect to
which the Option is being exercised and the effective date of the proposed
exercise, and shall be signed by the Participant. The Participant may
withdraw such notice at any time prior to the close of business on the
business day immediately preceding the effective date of the proposed
exercise, in which case such agreement shall be returned to the
Participant. Payment for shares of Common Stock purchased upon the
exercise of an Option shall be made on the effective date of such exercise
either (i) in cash, by certified check, bank cashier's check or wire
transfer, (ii) subject to the approval of the Committee, in shares of
Common Stock owned by the Participant and valued at their Fair Market
Value on the effective date of such exercise, (iii) subject to the
approval of the Committee, in the form of a "cashless exercise" (as
described below) or (iv) subject to the approval of the Committee, in any
combination of the foregoing. Any payment in shares of Common Stock shall
be effected by the delivery of such shares to the Secretary of the
Company, duly endorsed in blank or accompanied by stock powers duly
executed in blank, together with any other documents and evidences as the
Secretary of the Company shall require from time to time.
The cashless exercise of an Option shall be pursuant to procedures
whereby the Participant by written notice, directs (i) an immediate market
sale or margin loan respecting all or a part of the shares of Common Stock
to which he is entitled upon exercise pursuant to an extension of credit
by the Company to the Participant of the exercise price, (ii) the delivery
of the shares of Common Stock directly from the Company to a brokerage
firm and (iii) delivery of the exercise price from the sale or the margin
loan proceeds from the brokerage firm directly to the Company.
(4) Any Option granted under the Plan may be exercised by a
broker-dealer acting on behalf of a Participant if (i) the broker-dealer
has received from the Participant or the Company a duly endorsed agreement
evidencing such Option and instructions signed by the Participant
requesting the Company to deliver the shares of Common Stock subject to
such Option to the broker-dealer on behalf of the Participant and
specifying the account into which such shares should be deposited, (ii)
adequate provision has been made with respect to the payment of any
withholding taxes due upon such exercise and (iii) the broker-dealer and
the Participant have otherwise complied with Section 220.3(e)(4) of
Regulation T, 12 CFR Part 220.
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<PAGE>
(5) Certificates for shares of Common Stock purchased upon the
exercise of an Option shall be issued in the name of the Participant and
delivered to the Participant as soon as practicable following the
effective date on which the Option is exercised; PROVIDED, HOWEVER, that
such delivery shall be effected for all purposes when a stock transfer
agent of the Company shall have deposited such certificates in the United
States mail, addressed to the Participant.
(6) During the lifetime of a Participant each Option granted to him
shall be exercisable only by him or a broker-dealer acting on behalf of
such Participant pursuant to Section 6(c)(4) hereof. No Option shall be
assignable or transferable otherwise than by will or by the laws of
descent and distribution.
(d) LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS
(1) The aggregate Fair Market Value of shares of Common Stock with
respect to which "incentive stock options" (within the meaning of Section
422 without regard to Section 422(d) of the Code) are exercisable for the
first time by a Participant during any calendar year under the Plan (and
any other stock option plan of the Company, or of its Parent or any
Subsidiary) shall not exceed $100,000. Such Fair Market Value shall be
determined as of the date on which each such Incentive Stock Option is
granted. If such aggregate Fair Market Value of shares of Common Stock
underlying such Incentive Stock Options exceeds $100,000, then Incentive
Stock Options granted hereunder to such Participant shall, to the extent
and in the order required by regulations promulgated under the Code (or
any other authority having the force of such regulations), automatically
be deemed to be Non-Qualified Stock Options, but all other terms and
provisions of such Incentive Stock Options shall remain unchanged. In the
absence of such regulations promulgated under the Code (and authority), or
if such regulations (or authority) require or permit a designation of the
options which shall cease to constitute Incentive Stock Options, Incentive
Stock Options shall, to the extent of such excess and in the order in
which they were granted, automatically be deemed to be Non-Qualified Stock
Options, but all other terms and provisions of such Incentive Stock
Options shall remain unchanged.
(2) No Incentive Stock Option may be granted to an individual if, at
the time of the proposed grant, such individual owns stock possessing more
than ten percent of the total combined voting power of all classes of
stock of the Company or of its Parent or any Subsidiary, unless (i) the
exercise price of such Incentive Stock Option is at least 110% of the Fair
Market Value of a share of Common Stock at the time such Incentive Stock
Option is granted and (ii) such Incentive Stock Option is not exercisable
after the expiration of five years from the date such Incentive Stock
Option is granted.
(e) EFFECT OF TERMINATION OF EMPLOYMENT
(1) If the employment of a Participant with the Company shall
terminate for any reason other than Cause, "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) or the
death of the Participant (i) Options granted to such Participant, to the
extent that they were exercisable at the time of such termination, shall
remain exercisable until the expiration of one month after such
termination, on which date they shall expire, and (ii) Options granted to
such Participant, to the extent that they were not exercisable at the time
of such termination, shall expire at the close of business on the date of
such termination; PROVIDED, HOWEVER, that no Option shall be exercisable
after the expiration of its term.
(2) If the employment of a Participant with the Company shall
terminate as a result of the "permanent and total disability" (within the
meaning of Section 22(e)(3) of the Code) or the death of the Participant
(i) Options granted to such Participant, to the extent that they were
exercisable at the time of such termination, shall remain exercisable
until the expiration of one year after such termination, on which date
they shall expire, and (ii) Options granted to such Participant, to the
extent that they were not exercisable at the time of such termination,
shall expire at the close of business on the date of such termination;
PROVIDED, HOWEVER, that no Option shall be exercisable after the
expiration of its term.
(3) In the event of the termination of a Participant's employment
for Cause, all outstanding Options granted to such Participant shall
expire at the commencement of business on the date of such termination.
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<PAGE>
(4) A Participant's employment with the Company shall be deemed
terminated if the Participant's leave of absence (including military or
such leave or other bona fide leave of absence) extends for more than 90
days and the Participant's continued employment with the Company is not
guaranteed by contract or statute.
(f) ACCELERATION OF EXERCISE DATE UPON CHANGE IN CONTROL
Upon the occurrence of a Change in Control, each Option granted under the
Plan and outstanding at such time shall become fully and immediately exercisable
and shall remain exercisable until its expiration, termination or cancellation
pursuant to the terms of the Plan.
7. RESTRICTED STOCK
The Committee may grant shares of Restricted Stock pursuant to the Plan.
Each grant of shares of Restricted Stock shall be evidenced by an agreement in
such form as the Committee shall from time to time approve. Each grant of shares
of Restricted Stock shall comply with and be subject to the following terms and
conditions:
(a) ISSUE DATE AND VESTING DATE
At the time of the grant of shares of Restricted Stock, the Committee
shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates
with respect to such shares. The Committee may divide such shares into classes
and assign a different Issue Date and/or Vesting Date for each class. Except as
provided in Sections 7(c) and 7(f) hereof, upon the occurrence of the Issue Date
with respect to a share of Restricted Stock, a share of Restricted Stock shall
be issued in accordance with the provisions of Section 7(d) hereof. Provided
that all conditions to the vesting of a share of Restricted Stock imposed
pursuant to Section 7(b) hereof are satisfied, and except as provided in
Sections 7(c) and 7(f) hereof, upon the occurrence of the Vesting Date with
respect to a share of Restricted Stock, such share shall vest and the
restrictions of Section 7(c) hereof shall cease to apply to such share.
(b) CONDITIONS TO VESTING
At the time of the grant of shares of Restricted Stock, the Committee may
impose such restrictions or conditions, not inconsistent with the provisions
hereof, to the vesting of such shares as it in its absolute discretion deems
appropriate. By way of example and not by way of limitation, the Committee may
require, as a condition to the vesting of any class or classes of shares of
Restricted Stock, that (i) the Participant or the Company achieve certain
performance criteria, such criteria to be specified by the Committee at the time
of the grant of such shares and (ii) prohibiting an election by the Participant
under Section 83(b) of the Code.
(c) RESTRICTIONS ON TRANSFER PRIOR TO VESTING
Prior to the vesting of a share of Restricted Stock, no transfer of a
Participant's rights with respect to such share, whether voluntary or
involuntary, by operation of law or otherwise, shall vest the transferee with
any interest or right in or with respect to such share, but immediately upon any
attempt to transfer such rights, such share, and all of the rights related
thereto, shall be forfeited by the Participant and the transfer shall be of no
force or effect.
(d) ISSUANCE OF CERTIFICATES
(1) Except as provided in Sections 7(c) or 7(f) hereof, reasonably
promptly after the Issue Date with respect to shares of Restricted Stock,
the Company shall cause to be issued a stock certificate, registered in
the name of the Participant to whom such shares were granted, evidencing
such shares; PROVIDED, that the Company shall not cause to be issued such
a stock certificates unless it has received a stock power duly endorsed in
blank with respect to such shares. Each such stock certificate shall bear
the following legend:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK
REPRESENTED HEREBY ARE SUBJECT TO THE RESTRICTIONS, TERMS AND
CONDITIONS (INCLUDING FORFEITURE AND RESTRICTIONS AGAINST TRANSFER)
CONTAINED IN THE MIDCOAST ENERGY RESOURCES, INC. 1996 INCENTIVE
STOCK PLAN AND AN AGREEMENT ENTERED INTO BETWEEN THE REGISTERED
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OWNER OF SUCH SHARES AND MIDCOAST ENERGY RESOURCES, INC. A COPY OF
THE PLAN AND AGREEMENT IS ON FILE IN THE OFFICE OF THE SECRETARY OF
MIDCOAST ENERGY RESOURCES, INC., 1100 LOUISIANA, SUITE 2950,
HOUSTON, TEXAS 77002.
Such legend shall not be removed from the certificate evidencing such
shares until such shares vest pursuant to the terms hereof.
(2) Each certificate issued pursuant to Paragraph 7(d)(1) hereof,
together with the stock powers relating to the shares of Restricted Stock
evidenced by such certificate, shall be held by the Company. The Company
shall issue to the Participant a receipt evidencing the certificates held
by it which are registered in the name of the Participant.
(e) CONSEQUENCES UPON VESTING
Upon the vesting of a share of Restricted Stock pursuant to the terms
hereof, the restrictions of Section 7(c) hereof shall cease to apply to such
share. Reasonably promptly after a share of Restricted Stock vests pursuant to
the terms hereof, the Company shall cause to be issued and delivered to the
Participant to whom such shares were granted, a certificate evidencing such
share, free of the legend set forth in Paragraph 7(d)(1) hereof, together with
any other property of the Participant held by Company pursuant to Section 12(a)
hereof; PROVIDED, HOWEVER, that such delivery shall be effected for all purposes
when the Company shall have deposited such certificate and other property in the
United States mail, addressed to the Participant.
(f) EFFECT OF TERMINATION OF EMPLOYMENT
(1) If the employment of a Participant with the Company shall
terminate for any reason other than Cause prior to the vesting of shares
of Restricted Stock granted to such Participant, a portion of such shares,
to the extent not forfeited or canceled on or prior to such termination
pursuant to any provision hereof, shall vest on the date of such
termination. The portion referred to in the preceding sentence shall be
determined by the Committee at the time of the grant of such shares of
Restricted Stock and may be based on the achievement of any conditions
imposed by the Committee with respect to such shares pursuant to Section
7(b) hereof. Such portion may equal zero.
(2) In the event of the termination of a Participant's employment
for Cause, all shares of Restricted Stock granted to such Participant
which have not vested as of the commencement of business on the date of
such termination shall immediately be forfeited.
(g) EFFECT OF CHANGE IN CONTROL
Upon the occurrence of a Change in Control, all shares of Restricted Stock
which have not theretofore vested (including those with respect to which the
Issue Date has not yet occurred) shall immediately vest.
8. PERFORMANCE AWARDS
The Committee may grant Performance Awards pursuant to the Plan. Each
grant of Performance Awards shall be evidenced by an agreement in such form as
the Committee shall from time to time approve. Each grant of Performance Awards
shall comply with and be subject to the following terms and conditions:
(a) PERFORMANCE PERIOD AND PERFORMANCE AWARD
(1) With respect to each grant of a Performance Award, the Committee
shall establish a performance period over which the performance of the
applicable Participant shall be measured.
(2) In determining the amount of the Performance Award to be granted
to a particular Participant, the Committee may take into account such
factors as the Participant's responsibility level and growth potential,
the amount of other Incentive Awards granted or received by such
Participant, and such other considerations as the Committee deems
appropriate. Each Performance Award shall be subject to a maximum
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value as established by the Committee at the time of grant of such award;
PROVIDED, HOWEVER, the maximum value that can be granted as a Performance
Award to any one individual during any calendar year is $1,000,000.
(b) PERFORMANCE MEASURES
A Performance Award shall be awarded to a Participant contingent upon
future performance of the Company (or any Subsidiary, division or department
thereof) by or in which the Participant is employed or responsible during the
performance period. The Committee shall establish, in writing, the performance
measures applicable to such performance within 90 days after the commencement of
the performance period, to which such measures relate, and at a time when the
outcome of such performance measures are substantially uncertain within the
meaning of Section 162(m) of the Code, subject to such later revisions as the
Committee shall deem appropriate to reflect significant unforeseen events or
changes.
(c) PAYMENT
Upon the expiration of the performance period relating to a Performance
Award granted to a Participant, such Participant shall be entitled to receive
payment of an amount not exceeding the maximum value of the Performance Award,
based on the achievement of the performance measures for such performance
period, as determined by the Committee. The Committee shall certify in writing
prior to the payment of a Performance Award that the applicable performance
measures and any other material terms of the grant have been satisfied. Subject
to Section 3 hereof, payment of a Performance Award may be made in cash, Common
Stock or a combination thereof, as determined by the Committee. Payment shall be
made in a lump sum or in installments as prescribed by the Committee. Any
payment to be made in Common Stock shall be based on the Fair Market Value of
the Common Stock on the payment date.
(d) EFFECT OF TERMINATION OF EMPLOYMENT
If the employment of a Participant shall terminate for any reason prior to
the expiration of the applicable performance period, the Performance Awards
relating to such performance period, shall immediately be forfeited as of the
commencement of business on the date of such termination, except as may be
determined by the Committee in its sole and absolute discretion, or as may be
otherwise provided in the agreement evidencing such Performance Award.
(e) EFFECT OF CHANGE IN CONTROL
Upon the occurrence of a Change in Control, the Committee (as constituted
immediately prior to such Change in Control) shall determine, in its sole
discretion, whether Performance Awards, which have not theretofore satisfied the
requisite performance measure or for which the performance period has not
expired, shall immediately be paid or whether such Performance Awards shall
remain outstanding according to its respective terms.
9. PHANTOM STOCK
The Committee may grant shares of Phantom Stock pursuant to the Plan. Each
grant of shares of Phantom Stock shall be evidenced by an agreement in such form
as the Committee shall from time to time approve. Each grant of shares of
Phantom Stock shall comply with and be subject to the following terms and
conditions:
(a) VESTING DATE
At the time of the grant of shares of Phantom Stock, the Committee shall
establish a Vesting Date or Vesting Dates with respect to such shares. The
Committee may divide such shares into classes and assign a different Vesting
Date for each class. Provided that all conditions to the vesting of a share of
Phantom Stock imposed pursuant to Section 9(c) hereof are satisfied, and except
as provided in Section 9(d) hereof, upon the occurrence of the Vesting Date with
respect to a share of Phantom Stock, such share shall vest.
(b) BENEFIT UPON VESTING
Upon the vesting of a share of Phantom Stock, a Participant shall be
entitled to receive in cash, within 90 days of the date on which such share
vests, an amount in cash in a lump sum equal to the sum of (i) the Fair Market
Value of a share of Common Stock of the Company on the date on which such share
of Phantom Stock vests and (ii) the aggregate amount of cash dividends paid with
respect to a share of Common Stock of the Company during the period commencing
on the date on which the share of Phantom Stock was granted and terminating on
the date on which such share vests.
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(c) CONDITIONS TO VESTING
At the time of the grant of shares of Phantom Stock, the Committee may
impose such restrictions or conditions, not inconsistent with the provisions
hereof, to the vesting of such shares as it, in its absolute discretion deems
appropriate. By way of example and not by way of limitation, the Committee may
require, as a condition to the vesting of any class or classes of shares of
Phantom Stock, that the Participant or the Company achieve certain performance
criteria, such criteria to be specified by the Committee at the time of the
grant of such shares.
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(d) EFFECT OF TERMINATION OF EMPLOYMENT
(1) If the employment of a Participant with the Company shall
terminate for any reason other than Cause prior to the vesting of shares
of Phantom Stock granted to such Participant a portion of such shares, to
the extent not forfeited or canceled on or prior to such termination
pursuant to any provision hereof, shall vest on the date of such
termination. The portion referred to in the preceding sentence shall be
determined by the Committee at the time of the grant of such shares of
Phantom Stock and may be based on the achievement of any conditions
imposed by the Committee with respect to such shares pursuant to Section
9(c) hereof. Such portion may equal zero.
(2) In the event of the termination of a Participant's employment
for Cause, all shares of Phantom Stock granted to such Participant which
have not vested as of the date of such termination shall immediately be
forfeited.
(e) EFFECT OF CHANGE IN CONTROL
Upon the occurrence of a Change in Control, all shares of Phantom Stock
which have not theretofore vested shall immediately vest.
10. STOCK BONUSES
The Committee may, in its absolute discretion, grant Stock Bonuses in such
amounts as it shall determine from time to time. A Stock Bonus shall be paid at
such time and subject to such conditions as the Committee shall determine at the
time of the grant of such Stock Bonus. Certificates for shares of Common Stock
granted as a Stock Bonus shall be issued in the name of the Participant to whom
such grant was made and delivered to such Participant as soon as practicable
after the date on which such Stock Bonus is required to be paid.
11. CASH BONUSES
The Committee may, in its absolute discretion, grant in connection with
any grant of Restricted Stock or shares of Common Stock granted as a Performance
Award or Stock Bonus or at any time thereafter, a cash bonus, payable promptly
after the date on which the Participant is required to recognize income for
federal income tax purposes in connection with such Restricted Stock,
Performance Award or Stock Bonus, in such amounts as the Committee shall
determine from time to time; PROVIDED, HOWEVER, that in no event shall the
amount of a Cash Bonus exceed the Fair Market Value of the related shares of
Restricted Stock or shares of Common Stock granted pursuant to a Performance
Award or Stock Bonus on such date. A Cash Bonus shall be subject to such
conditions as the Committee shall determine at the time of the grant of such
Cash Bonus.
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12. ADJUSTMENT UPON CHANGES IN COMMON STOCK
(a) OUTSTANDING RESTRICTED STOCK, PERFORMANCE AWARDS, AND PHANTOM
STOCK
Unless the Committee in its absolute discretion otherwise determines, if a
Participant receives any securities or other property (including dividends paid
in cash) with respect to a share of Restricted Stock, the Issue Date with
respect to which occurs prior to such event, but which has not vested as of the
date of such event, as a result of any dividend, stock split recapitalization,
merger, consolidation, combination, exchange of shares or otherwise, such
securities or other property will not vest until such share of Restricted Stock
vests, and shall be held by the Company pursuant to Paragraph 7(d)(2) hereof as
if such securities or other property were unvested shares of Restricted Stock.
The Committee may, in its absolute discretion, adjust any grant of shares
of Restricted Stock, the Issue Date with respect to which has not occurred as of
the date of the occurrence of any of the following events, any shares of Common
Stock upon the grant of a Performance Award or any grant of shares of Phantom
Stock, to reflect any dividend, stock split, recapitalization, merger,
consolidation, combination, exchange of shares or similar corporate change as
the Committee may deem appropriate to prevent the enlargement or dilution of
rights of Participants under the grant.
(b) STOCK SUBJECT TO PLAN, OUTSTANDING OPTIONS, INCREASE
OR DECREASE IN ISSUED SHARES WITHOUT CONSIDERATION
Subject to any required action by the stockholders of the Company, in the
event of any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of a stock dividend (but only on the shares of Common Stock), or any
other increase or decrease in the number of such shares effected without receipt
of consideration by the Company, the Committee shall proportionally adjust (i)
the number of shares of Common Stock for which Incentive Awards may be granted
under the Plan and (ii) the number of shares and the exercise price per share of
Common Stock subject to each outstanding Option.
(c) OUTSTANDING OPTIONS, CERTAIN MERGERS
Subject to any required action by the stockholders of the Company, if the
Company shall be the surviving corporation in any merger or consolidation
(except a merger or consolidation as a result of which the holders of shares of
Common Stock receive securities of another corporation), each Option outstanding
on the date of such merger or consolidation shall entitle the Participant to
acquire upon exercise the securities which a holder of the number of shares of
Common Stock subject to such Option would have received in such merger or
consolidation.
(d) OUTSTANDING OPTIONS, CERTAIN OTHER TRANSACTIONS
In the event of a dissolution or liquidation of the Company, a sale of all
or substantially all of the Company's assets, a merger or consolidation
involving the Company in which the Company is not the surviving corporation or a
merger or consolidation involving the Company in which the Company is the
surviving corporation but the holders of shares of Common Stock receive
securities of another corporation and/or other property, including cash, the
Committee shall, in its absolute discretion, have the power to:
(i) cancel, effective immediately prior to the occurrence of such
event, each Option outstanding immediately prior to such event (whether or
not then exercisable), and, in full consideration of such cancellation,
pay to the Participant to whom such Option was granted an amount in cash,
for each share of Common Stock subject to such Option equal to the excess
of (A) the value, as determined by the Committee in its absolute
discretion, of the property (including cash) received by the holder of a
share of Common Stock as a result of such event over (B) the exercise
price of such Option; or
(ii) provide for the exchange of each Option outstanding immediately
prior to such event (whether or not then exercisable) for an option on
some or all of the property for which such Option is exchanged and,
incident thereto, make an equitable adjustment as determined by the
Committee in its absolute discretion in the exercise price of the option,
or the number of shares or amount of property subject to the option or, if
appropriate, provide for a cash payment to the Participant to whom such
Option was granted in partial consideration for the exchange of the
Option.
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(e) OUTSTANDING OPTIONS, OTHER CHANGES
In the event of any change in the capitalization of the Company or
corporate change other than those specifically referred to in Sections 12(b),
(c) or (d) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options outstanding on
the date on which such change occurs and in the per share exercise price of each
such Option as the Committee may consider appropriate to prevent dilution or
enlargement of rights.
(f) NO OTHER RIGHTS
Except as expressly provided in the Plan, no Participant shall have any
rights by reason of any subdivision or consolidation of shares of stock of any
class, the payment of any dividend, any increase or decrease in the number of
shares of stock of any class or any dissolution, liquidation, merger or
consolidation of the Company or any other corporation. Except as expressly
provided in the Plan, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Common Stock subject to an Incentive Award or the exercise
price of any Option.
13a RIGHTS AS A STOCKHOLDER
No person shall have any rights as a stockholder with respect to any
shares of Common Stock covered by or relating to any Incentive Award granted
pursuant to this Plan until the date of the issuance of a stock certificate with
respect to such shares. Except as otherwise expressly provided in Section 12
hereof, no adjustment to any Incentive Award shall be made for dividends or
other rights for which the record date occurs prior to the date such stock
certificate is issued.
14a NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO INCENTIVE AWARD
Nothing contained in the Plan or any Incentive Award shall confer upon any
Participant any right with respect to the continuation of his employment by the
Company or interfere in any way with the right of the Company, subject to the
terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
Participant from the rate in existence at the time of the grant of an Incentive
Award.
No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee's granting of an Incentive Award to a Participant at
any time shall neither require the Committee to grant an Incentive Award to such
Participant or any other Participant or other person at any time nor preclude
the Committee from making subsequent grants to such Participant or any other
Participant or other person.
15a SECURITIES MATTERS
(a) The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any shares of Common Stock to be issued
hereunder or to effect similar compliance under any state laws. Notwithstanding
anything herein to the contrary, the Company shall not be obligated to cause to
be issued or delivered any certificates evidencing shares of Common Stock
pursuant to the Plan unless and until the Company is advised by its counsel that
the issuance and delivery of such certificates is in compliance with all
applicable laws, regulations of governmental authority and the requirements of
any securities exchange on which shares of Common Stock are traded. The
Committee may require, as a condition of the issuance and delivery of
certificates evidencing shares of Common Stock pursuant to the terms hereof,
that the recipient of such shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the Committee,
in its sole discretion, deems necessary or desirable.
(b) The exercise of any Option granted hereunder shall only be effective
at such time as counsel to the Company shall have determined that the issuance
and delivery of shares of Common Stock pursuant to such exercise is in
compliance with all applicable laws, regulations of governmental authorities and
the requirements of any securities exchange on which shares of Common Stock are
traded. The Company may, in its sole discretion, defer the effectiveness of any
exercise of an Option granted hereunder in order to allow the issuance of shares
of Common Stock pursuant thereto to be made pursuant to registration or an
exemption from registration or other methods for compliance available under
federal or state securities laws. The Company shall inform the Participant in
writing of its decision to defer the effectiveness of the exercise of an Option
granted hereunder. During the period that the effectiveness of the exercise of
an Option has been deferred, the Participant may, by written notice, withdraw
such exercise and obtain the refund of any amount paid with respect thereto.
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(c) It is intended that the Plan and any grant of an Incentive Award made
to a person subject to Section 16 of the Exchange Act meet all of the
requirements of Rule 16b-3 promulgated thereunder. If any provision of the Plan
or any such Incentive Award would disqualify the Plan or such Incentive Award
under, or would otherwise not comply with, Rule 16b-3, such provision or
Incentive Award shall be construed or deemed amended to conform to Rule 16b-3 to
the extent permitted by applicable law and deemed advisable by the Board of
Directors.
16a QUALIFIED PERFORMANCE-BASED COMPENSATION
It is intended that the Plan comply fully with and meet all the
requirements of Section 162(m) of the Code so that (i) Options granted hereunder
with an exercise price not less than Fair Market Value of a share of Common
Stock on the date of grant and (ii) the payment of a Performance Award granted
hereunder, shall constitute "qualified performance based compensation" within
the meaning of such Section and the interpretive authority thereunder. If any
provision of the Plan would disqualify the Plan or would not otherwise permit
the Plan to comply with Section 162(m) as so intended, such provision shall be
construed or deemed amended to conform to the requirements or provisions of
Section 162(m) to the extent permitted by applicable law and deemed advisable by
the Board of Directors; provided that no such construction or amendment shall
have an adverse effect on the economic value to a Participant of any Incentive
Award previously granted hereunder.
17a WITHHOLDING TAXES
Whenever shares of Common Stock are to be issued upon the exercise of an
Option, the occurrence of the Issue Date or Vesting Date with respect to a share
of Restricted Stock, the payment of a Performance Award in shares of Common
Stock or the payment of a Stock Bonus, the Company shall have the right to
require the Participant to remit to the Company in cash an amount sufficient to
satisfy federal, state and local withholding tax requirements, if any,
attributable to such exercise, occurrence or payment prior to the delivery of
any certificate or certificates for such shares. In addition, upon the grant of
a Cash Bonus, the payment of a Performance Award or the making of a payment with
respect to a share of Phantom Stock, the Company shall have the right to
withhold from any cash payment required to be made pursuant thereto an amount
sufficient to satisfy the federal, state and local withholding tax requirements,
if any, attributable to such exercise or grant.
18a. AMENDMENT OF THE PLAN
The Board of Directors may at any time suspend or discontinue the Plan or
revise or amend it in any respect whatsoever, PROVIDED, HOWEVER, that without
approval of the stockholders no revision or amendment shall (i) except as
provided in Section 12 hereof, increase the number of shares of Common Stock
that may be issued under the Plan, (ii) except as provided in Section 12 hereof,
increase the maximum number of shares of Common Stock that may be subject to an
Incentive Award granted to any one individual for any calendar year, (iii)
increase the maximum value that can be awarded as a Performance Award, (iv)
materially increase the benefits accruing to individuals holding Incentive
Awards granted pursuant to the Plan, (v) materially modify the requirements as
to eligibility for participation in the Plan, (vi) extend the term of the Plan
or (vii) decrease any authority granted to the Committee under the Plan in
contravention of Rule 16b-3 under the Exchange Act.
19a NO OBLIGATION TO EXERCISE
The grant to a Participant of an Option shall impose no obligation upon
such Participant to exercise such Option.
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20a TRANSFERS UPON DEATH
Upon the death of a Participant, outstanding Incentive Awards granted to
such Participant may be exercised only by the executors or administrators of the
Participant's estate or by any person or persons who shall have acquired such
right to exercise by will or by the laws of descent and distribution. No
transfer by will or the laws of descent and distribution of any Incentive Award,
or the right to exercise any Incentive Award, shall be effective to bind the
Company unless the Committee shall have been furnished with (a) written notice
thereof and with a copy of the will and/or such evidence as the Committee may
deem necessary to establish the validity of the transfer and (b) an agreement by
the transferee to comply with all the terms and conditions of the Incentive
Award that are or would have been applicable to the Participant and to be bound
by the acknowledgments made by the Participant in connection with the grant of
the Incentive Award.
21a EXPENSES AND RECEIPTS
The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Incentive Award will be used for
general corporate purposes.
22a FAILURE TO COMPLY
In addition to the remedies of the Company elsewhere provided for herein,
failure by a Participant to comply with any of the terms and conditions of the
Plan or the agreement executed by such Participant evidencing an Incentive
Award, unless such failure is remedied by such Participant within ten days after
having been notified of such failure by the Committee, shall be grounds for the
cancellation and forfeiture of such Incentive Award, in whole or in part as the
Committee, in its absolute discretion, may determine.
23a EFFECTIVE DATE AND TERM OF PLAN
The Plan was adopted by the Board of Directors on May 13, 1996, subject to
approval by the stockholders of the Company in accordance with applicable law
and the requirements of Sections 422 and 162(m) of the Code. No Incentive Award
may be granted under the Plan after May 12, 2006. Incentive Awards may be
granted under the Plan at any time prior to the receipt of such stockholder
approval; PROVIDED, HOWEVER, that each such grant shall be subject to such
approval. Without limitation on the foregoing, no Option may be exercised prior
to the receipt of such approval, no share certificate shall be issued pursuant
to a grant of Restricted Stock, Performance Award or Stock Bonus prior to the
receipt of such approval and no Cash Bonus or payment with respect to a
Performance Award or a share of Phantom Stock shall be paid prior to the receipt
of such approval. If the Plan is not so approved prior to May 13, 1997, then the
Plan and all Incentive Awards then outstanding hereunder shall forthwith
automatically terminate and be of no force and effect.
FIRST AMENDMENT
dated as of March 15, 1999
to
Amended and Restated Credit Agreement
dated as of August 31, 1998
and Notes dated August 31, 1998
This FIRST AMENDMENT dated as of March 15, 1999 is among Midcoast Energy
Resources, Inc., a Nevada corporation (the "Borrower"), the subsidiaries of the
Borrower listed on the signature pages hereof under the caption "Guarantors",
CIBC, Inc., individually as a Lender and as syndication agent, NationsBank,
N.A., individually as a Lender and as documentation agent, and Bank One, Texas,
National Association, individually and as administrative agent.
R E C I T A L S
A. The Borrower, the subsidiaries of the Borrower party thereto as
guarantors, CIBC, Inc., NationsBank, N.A. and Bank One, Texas, National
Association, individually and as administrative agent, are parties to that
certain Amended and Restated Credit Agreement dated as of August 31, 1998 (the
"Existing Agreement").
B. The Borrower has requested that the Aggregate Initial Commitment be
increased to $125,000,000.
C. The Borrower has also requested that the Lenders agree to make Canadian
Dollar loans and various other amendments to the Existing Agreement in
connection with its pending acquisition of certain Canadian assets.
D. The Lenders are willing to agree to the requested amendments to the
Existing Agreement.
NOW THEREFORE, the parties hereto agree as follows:
Section 1. DEFINITIONS. Unless the context otherwise requires, each
term used herein which is defined in the Existing Agreement shall have the
meaning assigned to it therein.
Section 2. AGGREGATE INITIAL COMMITMENT INCREASE. Pursuant to Section 2.4
of the Existing Agreement, but effective only when the conditions precedent set
forth in Section 7 of this First Amendment are satisfied, the parties hereto
agree that for all purposes of the Existing Agreement as amended hereby and the
other Loan Documents:
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(i) On and as of the date hereof, a $125,000,000 Aggregate Increased
Commitment will be effective under the Existing Agreement as amended
hereby, and
(ii) On and as of the date hereof, an Increased Commitment will be
effective under the Existing Agreement as amended hereby for each Lender
in the amount set forth below opposite the name of such Lender:
LENDER INCREASED COMMITMENT
Bank One, Texas, $41,666,666.67
National Association
CIBC, Inc. $41,666,666.67
NationsBank, N.A. $41,666,666.66
Section 3. AMENDMENTS TO THE EXISTING AGREEMENT. Upon satisfaction of the
conditions precedent set forth in Section 7 of this First Amendment, but
effective as of the date of this First Amendment, the Existing Agreement shall
be amended as follows:
(i) Section 1.2 of the Existing Agreement is hereby amended by
deleting therefrom in their entirety the existing definitions of
"Available Commitment", "Borrowing Request", "Business Day", "Default
Rate", "Insolvency Proceeding", "Interest Period", "L/C Exposure", "Loan"
and "Subsidiary", and substituting in lieu thereof the following new
definitions of "Available Commitment", "Borrowing Request", "Business
Day", "Default Rate", "Insolvency Proceeding", "Interest Period", "L/C
Exposure", "Loan" and "Subsidiary":
"'AVAILABLE COMMITMENT' shall mean, at any time, an amount
equal to (a) the Aggregate Initial Commitment or the Aggregate
Increased Commitment, as the case may be, less (b) the sum of (i)
the Dollar Equivalent of the total Loan Balance, plus (ii) the L/C
Exposure at such time."
"'BORROWING REQUEST' shall mean each written request, in
substantially the form attached hereto as EXHIBIT II, by the
Borrower to the Administrative Agent for a borrowing, conversion, or
prepayment pursuant to SECTIONS 2.1 or 2.9, each of which shall:
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(a) be signed by a Responsible Officer of the Borrower;
(b) specify the amount and type of Loan requested, and, as
applicable, the Loan to be converted or prepaid and the
date of the borrowing, conversion, or prepayment (which
shall be a Business Day);
(c) when requesting a Floating Rate Loan or a Canadian
Floating Rate Loan , be delivered to the Administrative
Agent no later than 10:00 a.m., Central Standard or
Daylight Savings Time, as the case may be, on the
Business Day of the requested borrowing, conversion, or
prepayment; and
(d) when requesting a LIBO Rate Loan or a Canadian LIBO Rate
Loan, be delivered to the Administrative Agent no later
than 10:00 a.m., Central Standard or Daylight Savings
Time, as the case may be, three (3) Business Days
preceding the requested borrowing, conversion, or
prepayment and designate the Interest Period requested
with respect to such Loan."
"'BUSINESS DAY' shall mean (a) for all purposes other than as
covered by clause (b) of this definition, a day other than a
Saturday, Sunday, legal holiday for commercial banks under the laws
of the State of Texas, or any other day when banking is suspended in
the State of Texas, and (b) with respect to all requests, notices,
and determinations in connection with, and payments of principal and
interest on, Canadian Floating Rate Loans, LIBO Rate Loans or
Canadian LIBO Rate Loans, a day which is (i) a Business Day
described in clause (a) of this definition, (ii) a day (other than a
Saturday or Sunday) on which banks generally are open in Chicago and
New York for the conduct of substantially all of their commercial
lending activities, (iii) in the case of LIBO Rate Loans, a day for
trading by and between banks for Dollar deposits in the London
interbank market, and (iv) in the case of Canadian Floating Rate
Loans and Canadian LIBO Rate Loans, a day for trading by and between
banks for Canadian Dollar deposits in the London interbank market."
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"'DEFAULT RATE' shall mean (i) with respect to any Loan or any
portion of the Loan Balance denominated in Dollars, a per annum
interest rate equal to the Base Rate plus five percent (5%), but in
no event exceeding the Highest Lawful Rate, and (ii) with respect to
any Loan or any portion of the Loan Balance denominated in Canadian
Dollars, a per annum interest rate equal to the Canadian Base Rate
plus five percent (5%), but in no event exceeding the Highest Lawful
Rate."
"'INSOLVENCY PROCEEDING' shall mean application (whether
voluntary or instituted by another Person) for, or the consent to
the appointment of, a receiver, trustee, conservator, custodian, or
liquidator of any Person or of all or a substantial part of the
Property of such Person, or the filing of a petition (whether
voluntary or instituted by another Person) commencing a case under
Title 11 of the United States Code, the Bankruptcy and Insolvency
Act (Canada) or any similar law, seeking liquidation,
reorganization, or rearrangement or taking advantage of any
bankruptcy, insolvency, debtor's relief, or other similar law of
Canada, the United States, the State of Texas, or any other
jurisdiction, or the commission of an act of bankruptcy as such term
is defined in Section 42 of the Bankruptcy and Insolvency Act
(Canada)."
"'INTEREST PERIOD' shall mean, subject to the limitations set
forth in SECTION 2.21, with respect to any LIBO Rate Loan or
Canadian LIBO Rate Loan, a period commencing on the date such Loan
is made or converted from a Loan of another type pursuant to this
Agreement or the last day of the next preceding Interest Period with
respect to such Loan and ending on the numerically corresponding day
in the calendar month that is one, two, three, or six months
thereafter, as the Borrower may request in the Borrowing Request for
such Loan."
"'L/C EXPOSURE' shall mean, at any time, the SUM of (a) the
Dollar Equivalent of the total face amount of all issued, undrawn
and uncancelled Letters of Credit, PLUS (b) the Dollar Equivalent of
the total unpaid reimbursement obligations of the Borrower under
drawings under any Letter of Credit."
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<PAGE>
"'LOAN' individually shall mean any loan made in either
Dollars or Canadian Dollars by any Lender to or for the benefit of
the Borrower pursuant to this Agreement up to the Dollar Equivalent
of $150,000,000 which shall include up to the Dollar Equivalent of
$15,000,000 of Letters of Credit issued in Dollars or Canadian
Dollars and any payment made by the Issuing Lender under a Letter of
Credit, and "LOANS" collectively shall mean all loans made in either
Dollars or Canadian Dollars by the Lenders to or for the benefit of
the Borrower pursuant to this Agreement and all payments made by
Issuing Lender under all Letters of Credit issued in either Dollars
or Canadian Dollars."
"'SUBSIDIARY' shall mean, as to any Person, (i) any
corporation more than 50% of the outstanding securities having
ordinary voting power of which shall at the time be owned or
controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its
Subsidiaries, or (ii) any partnership, limited liability company,
association, joint venture or similar business organization more
than 50% of the ownership interests having ordinary voting power of
which shall at the time be so owned or controlled. Unless otherwise
expressly provided, all references herein to a `Subsidiary' shall
mean a Subsidiary of the Borrower."
(i) Section 1.2 of the Existing Agreement is hereby amended by
inserting therein in the appropriate alphabetical order the following new
definitions:
"CANADIAN ADJUSTED LIBO RATE" shall mean, for any Canadian
LIBO Rate Loan, an interest rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of l%) to be equal to the sum of the
Canadian LIBO Rate for such Loan plus the Applicable Margin, but in
no event exceeding the Highest Lawful Rate."
"'CANADIAN BASE RATE' shall mean the interest rate per annum
announced from time to time by First Chicago NBD Bank, Canada as its
"Canadian Prime Rate", which rate shall change upon any change in
such "Canadian Prime Rate" and which rate may not be the lowest
interest rate charged by First Chicago NBD Bank, Canada."
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<PAGE>
"'CANADIAN DOLLARS' and "C$" shall mean the lawful currency
of Canada."
"'CANADIAN DOLLAR EQUIVALENT' of any amount of any currency at
any date shall mean (i) if such currency is Canadian Dollars, the
amount of such currency, or (ii) if such currency is Dollars, the
equivalent in Canadian Dollars of such amount of such currency,
calculated on the basis of the arithmetical mean of the buy and sell
spot rates of exchange of The First National Bank of Chicago for
Canadian dollars on the London market at approximately 11:00 a.m.,
London time, on the date on or as of which such amount is to be
determined."
"'CANADIAN FLOATING RATE' shall mean the Canadian Base
Rate, but in no event exceeding the Highest Lawful Rate."
"'CANADIAN FLOATING RATE LOAN' shall mean any Loan and any
portion of the Loan Balance which the Borrower has requested, in the
initial Borrowing Request for such Loan or a subsequent Borrowing
Request for such portion of the Loan Balance, be made in or
converted to Canadian Dollars and bear interest at the Canadian Base
Rate, or which pursuant to the terms hereof is denominated in
Canadian Dollars and otherwise required to bear interest at the
Canadian Base Rate."
"'CANADIAN LIBO RATE' shall mean, with respect to any Interest
Period for any Canadian LIBO Rate Loan, the lesser of (a) the rate
per annum (rounded upwards, if necessary, to the nearest 1/16th of
1%) equal to the average of the offered quotations for Canadian
Dollars appearing on Telerate Page 3740 (or if such Telerate Page
shall not be available, any successor or similar service selected by
the Administrative Agent and the Borrower) as the London interbank
offered rate as of approximately 11:00 a.m., Central Standard or
Daylight Savings Time, as the case may be, on the day two Business
Days prior to the first day of such Interest Period for Dollar
deposits in an amount comparable to the principal amount of such
Canadian LIBO Rate Loan and having a term comparable to the Interest
Period for such Canadian LIBO Rate Loan, or (b) the Highest Lawful
Rate. If neither such Telerate Page 3740 nor any successor or
similar service is available, the term "CANADIAN LIBO RATE" shall
mean, with respect to any Interest Period for any Canadian LIBO Rate
Loan, the lesser of (a) the rate per annum (rounded upwards if
necessary, to the nearest 1/16th of 1%) determined by the
Administrative Agent at approximately 11:00 a.m., London time (or as
soon thereafter as practicable) two Business Days prior to the first
day of the Interest Period for such Canadian LIBO Rate Loan to be
the rate quoted by The First National Bank of Chicago for the
offering by The First National Bank of Chicago to leading banks in
the London interbank market of Canadian Dollar deposits in an amount
comparable to the principal amount of such Canadian LIBO Rate Loan
and having a term comparable to the Interest Period for such
Canadian LIBO Rate Loan, or (b) the Highest Lawful Rate."
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"'CANADIAN LIBO RATE LOAN' shall mean any Loan and any portion
of the Loan Balance which the Borrower has requested, in the initial
Borrowing Request for such Loan or a subsequent Borrowing Request
for such portion of the Loan Balance, be made in or converted to
Canadian Dollars and bear interest at the Canadian Adjusted LIBO
Rate and which is permitted by the terms hereof to bear interest at
the Canadian Adjusted LIBO Rate."
"'CANADIAN SUBSIDIARY' shall mean MCCI or MCOC."
"'DOLLAR EQUIVALENT' of any amount of any currency at any date
shall mean (i) if such currency is Dollars, the amount of such
currency, or (ii) if such currency is any currency other than
Dollars, the equivalent in Dollars of such amount of such currency,
calculated on the basis of the arithmetical mean of the buy and sell
spot rates of exchange of The First National Bank of Chicago for
such currency on the London market at approximately 11:00 a.m.,
London time, on the date on or as of which such amount is to be
determined."
"'DOMESTIC SUBSIDIARY' shall mean any Subsidiary of the
Borrower other than a Canadian Subsidiary."
"'EXCLUDED TAXES' means, in the case of each Lender or
Applicable Lending Office and the Administrative the Agent, taxes
imposed on its overall net income, and franchise taxes imposed on
it, by (i) the jurisdiction under the laws of which such Lender or
the Administrative Agent is incorporated or organized or (ii) the
jurisdiction in which the Administrative Agent's or such Lender's
principal executive office or such Lender's Applicable Lending
Office is located."
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<PAGE>
"'MCCI' shall mean Midcoast Canada Capital, Inc., a
corporation formed under the Business Corporation Act of the
Province of Alberta, Canada."
"'MCOC' shall mean Midcoast Canada Operating Corporation, a
corporation formed under the Business Corporation Act of the
Province of Alberta, Canada."
"'MCOC BANK DEBT' shall mean Indebtedness for borrowed money
of MCOC incurred by MCOC in Canadian Dollars for the purpose of
financing or refinancing the acquisition of assets located in Canada
and payable to a Lender or an affiliate of a Lender."
"'PRO RATA SHARE' shall mean, with respect to each Lender, a
portion equal to a fraction the numerator of which is such Lender's
Initial Commitment and the denominator of which is the Aggregate
Initial Commitment."
"'TAXES' means any and all present or future taxes, duties,
levies, imposts, deductions, charges or withholdings, and any and
all liabilities with respect to the foregoing, but EXCLUDING
Excluded Taxes."
"'TYPE' means, with respect to any Loan, its nature as a
Floating Rate Loan, a LIBO Rate Loan, a Canadian Floating Rate Loan
or a Canadian LIBO Rate Loan."
(iii) The first sentence of Section 2.1(a) of the Existing Agreement
is hereby amended by deleting it in its entirety and substituting in lieu
thereof the following new sentence:
"Upon the terms and conditions (including, without limitation, the
right of the Lenders to decline to make any Loan so long as any
Default or Event of Default exists) and relying on the
representations and warranties contained in this Agreement, each
Lender severally agrees, during the Commitment Period, to make Loans
to the Borrower from time to time in an aggregate principal amount
that will not result in (a) the sum of the Dollar Equivalent of such
Lender's Loans, plus such Lender's Pro Rata Share of the Dollar
Equivalent of the aggregate outstanding principal amount of the MCOC
Bank Debt (after giving effect to any reduction of such aggregate
8
<PAGE>
outstanding principal amount to be effected with the proceeds of the
Loans being made by the Lenders), exceeding such Lender's Initial
Commitment (or, if the Initial Commitment of such Lender has been
increased pursuant to SECTION 2.4, such Lender's Increased
Commitment), (b) the sum of the Dollar Equivalent of the total Loans
plus the L/C Exposure, plus the Dollar Equivalent of the aggregate
outstanding principal amount of the MCOC Bank Debt (after giving
effect to any reduction of such aggregate outstanding principal
amount to be effected with the proceeds of the Loans being made by
the Lenders) exceeding the Aggregate Initial Commitment (or, if the
Aggregate Initial Commitment has been increased pursuant to SECTION
2.4, the Aggregate Increased Commitment), or (c) the aggregate
outstanding principal amount of the Canadian Floating Rate Loans and
the Canadian LIBO Rate Loans exceeding an amount equal to (A) Fifty
Million Canadian Dollars (C$50,000,000), minus (B) the aggregate
outstanding principal amount of the MCOC Bank Debt (after giving
effect to any reduction of the MCOC Bank Debt to be effected with
the proceeds of the Loans being made by the Lenders)."
(iv) Section 2.1(c) of the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the following
new Section 2.1(c):
"(c) Subject to the terms of this Agreement, during the
Commitment Period, the Borrower may borrow, repay, and reborrow and
convert Loans of one type or with one Interest Period into Loans of
another type or with a different Interest Period. If any Floating
Rate Loan or LIBO Rate Loan is converted into a Canadian Floating
Rate Loan or a Canadian LIBO Rate Loan, the amount of the resulting
Loan shall be equal to the Canadian Dollar Equivalent of such
converted Floating Rate Loan or LIBO Rate Loan; and, if any Canadian
Floating Rate Loan or Canadian LIBO Rate Loan is converted into a
Floating Rate Loan or LIBO Rate Loan, the amount of the resulting
Loan shall be equal to the Dollar Equivalent of such converted
Canadian Floating Rate Loan or Canadian LIBO Rate Loan. Each
borrowing, conversion, and prepayment of principal of Loans shall be
in an amount the Dollar Equivalent of which is at least equal to
$1,000,000. Each borrowing, prepayment, or conversion of or into a
Loan of a different type or, in the case of a LIBO Rate Loan or a
Canadian LIBO Rate Loan, having a different Interest Period, shall
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<PAGE>
be deemed a separate borrowing, conversion, and prepayment for
purposes of the foregoing, one for each type of Loan or Interest
Period. Anything in this Agreement to the contrary notwithstanding,
(i) the aggregate principal amount of LIBO Rate Loans having the
same Interest Period shall be at least equal to $1,000,000, (ii) if
any LIBO Rate Loan would otherwise be in a lesser principal amount
for any period, such Loan shall be a Floating Rate Loan during such
period, (iii) the aggregate principal amount of Canadian LIBO Rate
Loans having the same Interest Period shall be at least equal to
$1,000,000, and (iv) if any Canadian LIBO Rate Loan would otherwise
be in a lesser principal amount for any period, such Loan shall be a
Canadian Floating Rate Loan during such period."
(v) Clause (b) of the PROVISO that appears at the end of Section
2.2(a) of the Existing Agreement is hereby amended by deleting it in its
entirety and substituting in lieu thereof the following new clause (b):
"(b) the Issuing Lender shall not be obligated to issue any Letter
of Credit in any currency other than Dollars or Canadian Dollars, or
if (i) the Dollar Equivalent of the face amount thereof plus the
Dollar Equivalent of the aggregate outstanding principal amount of
the MCOC Bank Debt would exceed the Available Commitment, or (ii)
after giving effect to the issuance thereof, (A) the L/C Exposure,
when added to the sum of the Dollar Equivalent of the Loan Balance
then outstanding, plus the Dollar Equivalent of the aggregate
outstanding principal amount of the MCOC Bank Debt, would exceed the
Aggregate Initial Commitment (or, if the Aggregate Initial
Commitment has been increased pursuant to SECTION 2.4, the Aggregate
Increased Commitment), or (B) the L/C Exposure would exceed Fifteen
Million Dollars ($15,000,000)."
(vi) Section 2.5 of the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the following
new Section 2.5:
"'2.5 INTEREST. Subject to the terms of this Agreement
(including, without limitation, SECTION 2.17), interest on the Loans
shall accrue and be payable at a rate per annum equal to the
Floating Rate for each Floating Rate Loan, the Adjusted LIBO Rate
for each LIBO Rate Loan, the Canadian Floating Rate for each
10
<PAGE>
Canadian Floating Rate Loan and the Canadian Adjusted LIBO Rate for
each Canadian LIBO Rate Loan. Interest on all Floating Rate Loans
and all Canadian Floating Rate Loans shall be computed on the basis
of a year of 365 or 366 days, as the case may be, and actual days
elapsed (including the first day but excluding the last day) during
the period for which payable. Interest on all LIBO Rate Loans and
all Canadian LIBO Rate Loans shall be computed on the basis of a
year of 360 days, and actual days elapsed (including the first day
but excluding the last day) during the period for which payable.
Notwithstanding the foregoing, interest on past due principal and,
to the extent permitted by applicable law, past due interest, shall
accrue at the Default Rate, computed on the basis of a year of 365
or 366 days, as the case may be, and actual days elapsed (including
the first day but excluding the last day) during the period for
which payable, and shall be payable upon demand by a Lender at any
time as to all or any portion of such interest. In the event that
the Borrower fails to select the duration of any Interest Period for
any LIBO Rate Loan within the time period and otherwise as provided
herein, such Loan (if outstanding as a LIBO Rate Loan) will be
automatically converted into a Floating Rate Loan on the last day of
the then current Interest Period for such Loan or (if outstanding as
a Floating Rate Loan) will remain as, or (if not then outstanding)
will be made as, a Floating Rate Loan. In the event that the
Borrower fails to select the duration of any Interest Period for any
Canadian LIBO Rate Loan within the time period and otherwise as
provided herein, such Loan (if outstanding as a Canadian LIBO Rate
Loan) will be automatically converted into a Canadian Floating Rate
Loan on the last day of the then current Interest Period for such
Loan or (if outstanding as a Canadian Floating Rate Loan) will
remain as, or (if not then outstanding) will be made as, a Canadian
Floating Rate Loan. Interest provided for herein shall be calculated
on unpaid sums actually advanced and outstanding pursuant to the
terms of this Agreement and only for the period from the date or
dates of such advances until repayment."
(vii) Section 2.6 of the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the following
new Section 2.6:
"2.6 REPAYMENT OF LOANS AND INTEREST. Accrued and unpaid
interest on each outstanding Floating Rate Loan and each outstanding
Canadian Floating Rate Loan shall be due and payable monthly
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<PAGE>
commencing on the first day of October, 1998, and continuing on the
first day of each calendar month thereafter while any Floating Rate
Loan or Canadian Floating Rate Loan remains outstanding, the payment
in each instance to be the amount of interest which has accrued and
remains unpaid in respect of the relevant Loan. Accrued and unpaid
interest on each outstanding LIBO Rate Loan and each outstanding
Canadian LIBO Rate Loan shall be due and payable on the last day of
the Interest Period for such LIBO Rate Loan or Canadian LIBO Rate
Loan, as the case may be, and, in the case of any Interest Period in
excess of three months, on the day of the third calendar month
following the commencement of such Interest Period corresponding to
the day of the calendar month on which such Interest Period
commenced, the payment in each instance to be the amount of interest
which has accrued and remains unpaid in respect of the relevant
Loan. The Loan Balance together with all accrued and unpaid interest
thereon, shall be due and payable at Final Maturity. At the time of
making each payment hereunder or under the Notes, the Borrower shall
specify to the Administrative Agent the Loans or other amounts
payable by the Borrower hereunder to which such payment is to be
applied. In the event the Borrower fails to so specify, or if an
Event of Default has occurred and is continuing, the Administrative
Agent may apply such payment as it may elect in its sole discretion;
PROVIDED, HOWEVER, the Administrative Agent will apply the payments
to the Loans in the descending order of interest costs.
"(b) If at any time the sum of the Dollar Equivalent of the
Loan Balance then outstanding, plus the L/C Exposure, plus the
Dollar Equivalent of the aggregate outstanding principal amount of
the MCOC Bank Debt, would exceed the Aggregate Initial Commitment
(or, if the Aggregate Initial Commitment has been increased pursuant
to SECTION 2.4, the Aggregate Increased Commitment), the Borrower
shall immediately prepay the Loans, ratably among the Lenders, by
the amount of such excess."
(viii) Sections 2.8 and 2.9 of the Existing Agreement are hereby
amended by deleting each of them in its entirety and substituting in lieu
thereof the following new Sections 2.8 and 2.9:
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<PAGE>
"2.8 TIME, PLACE AND METHOD OF PAYMENT. All payments required
pursuant to this Agreement or the Notes shall be deemed received by
the Administrative Agent on the next Business Day following receipt
if such receipt is after 2:00 p.m., Central Standard or Daylight
Savings Time, as the case may be, on any Business Day, and shall be
made at the Principal Office. All payments of principal or interest
required pursuant to this Agreement or the Notes on or with respect
to Canadian Floating Rate Loans or Canadian LIBO Rate Loans shall be
made in Canadian Dollars and in such funds as may then be customary
for the settlement of international transactions in Canadian
Dollars, and all other payments required pursuant to this Agreement
or the Notes shall be made in Dollars and in immediately available
funds. Except as provided to the contrary herein, if the due date of
any payment hereunder or under the Notes would otherwise fall on a
day which is not a Business Day, such date shall be extended to the
next succeeding Business Day, and interest shall be payable for any
principal so extended for the period of such extension.
Notwithstanding the foregoing provisions of this Section 2.8, if,
after the making of any Loan in Canadian Dollars, currency control
or exchange regulations are imposed in Canada with the result that
Canadian Dollars no longer exist or the Borrower is not able to make
payment to the Administrative Agent for the account of the Lenders
in Canadian Dollars, then all payments to be made by the Borrower
hereunder in Canadian Dollars shall instead be made when due in
Dollars in an amount equal to the Dollar Equivalent (as of the date
of repayment) of such payment due, it being the intention of the
parties hereto that the Borrower takes all risks of the imposition
of any such currency control or exchange regulations.
"2.9 VOLUNTARY PREPAYMENTS AND CONVERSIONS OF LOANS. (a)
Subject to applicable provisions of this Agreement, the Borrower
shall have the right at any time or from time to time to prepay
Loans and to convert Loans of one type or with one Interest Period
into Loans of another type or with a different Interest Period;
PROVIDED, HOWEVER, that (i) the Borrower shall give the
Administrative Agent notice of each such prepayment or conversion of
all or any portion of a LIBO Rate Loan or Canadian LIBO Rate Loan no
less than three (3) Business Days prior to prepayment or conversion,
(ii) any LIBO Rate Loan or Canadian LIBO Rate Loan may be prepaid or
converted only on the last day of an Interest Period for such Loan,
(iii) the Borrower shall pay all accrued and unpaid interest on the
amounts prepaid or converted, and (iv) no such prepayment or
conversion shall serve to postpone the repayment when due of any
Obligation.
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<PAGE>
"(b) The Borrower may prepay all or any portion of the
principal amount of a Loan bearing interest at a LIBO Rate or a
Canadian LIBO Rate, provided that if the Borrower makes any such
prepayment other than on the last day of the applicable Interest
Period, the Borrower (i) with such prepayment, shall pay all accrued
interest on the principal amount prepaid (unless less than all of
the principal amount of the Loan is being prepaid, in which case
such interest shall be due and payable on the next scheduled
interest payment date), and (ii) on demand, shall reimburse the
Lenders and hold the Lenders harmless from all losses and expenses
incurred by the Lenders as a result of such prepayment, including,
without limitation, any losses and expenses arising from the
liquidation or reemployment of deposits acquired to fund or maintain
the principal amount prepaid. Such reimbursement with respect to the
prepayment of LIBO Rate Loans shall be calculated as though the
Lenders funded the principal amount prepaid through the purchase of
Dollar deposits in the London, England interbank market having a
maturity corresponding to such Interest Period and bearing an
interest rate equal to the LIBO Rate for such Interest Period,
whether in fact that is the case or not. Such reimbursement with
respect to the prepayment of Canadian LIBO Rate Loans shall be
calculated as though the Lenders funded the principal amount prepaid
through the purchase of Canadian Dollar deposits in the London,
England interbank market having a maturity corresponding to such
Interest Period and bearing an interest rate equal to the Canadian
LIBO Rate for such Interest Period, whether in fact that is the case
or not. Each Lender's determination of the amount of any such
reimbursement shall be conclusive in the absence of manifest error."
(ix) Section 2.14 of the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the following
new Section 2.14:
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<PAGE>
"LETTER OF CREDIT FEES. The Borrower agrees to pay to the
Issuing Lender, on the date of issuance of each Letter of Credit, a
fee equal to the greater of (i) $400 and (ii) one percent (1%) per
annum, calculated on the basis of a year of 365 or 366 days, as the
case may be, and actual days elapsed (including the first day but
excluding the last day), on the Dollar Equivalent of the face amount
of such Letter of Credit during the period for which such Letter of
Credit is issued; PROVIDED, HOWEVER, in the event such Letter of
Credit is canceled prior to its original expiry date or a payment is
made by the Issuing Lender with respect to such Letter of Credit,
the Issuing Lender shall, within ten days after such cancellation or
the making of such payment, rebate to the Borrower the unearned
portion (calculated in the case of any Letter of Credit denominated
in Canadian Dollars by taking into account the daily fluctuations in
the Dollar Equivalent of the face amount of such Letter of Credit)
of such fee. The Borrower also agrees to pay to the Issuing Lender
on demand its customary letter of credit transactional fees,
including, without limitation, amendment fees, payable with respect
to each Letter of Credit."
(x) Sections 2.18 and 2.19 of the Existing Agreement are hereby
amended by deleting each of them in its entirety and substituting in lieu
thereof the following new Sections 2.18 and 2.19:
"2.18 LIMITATION ON TYPES OF LOANS. (a) Anything herein to the
contrary notwithstanding, no more than eight (8) separate Loans
shall be outstanding at any one time, with, for purposes of this
Section, all Floating Rate Loans constituting one Loan, all Canadian
Floating Rate Loans constituting one Loan, each borrowing consisting
of LIBO Rate Loans made by the Lenders at one time and for a
particular Interest Period constituting one Loan and each borrowing
consisting of Canadian LIBO Rate Loans made by the Lenders at one
time and for a particular Interest Period constituting one Loan.
"(b) Anything herein to the contrary notwithstanding, if, on
or prior to the determination of any interest rate for any LIBO Rate
Loan for any Interest Period therefor:
(i) any Lender determines (which determination shall be
conclusive) that quotations of interest rates for the deposits
referred to in the definition of "LIBO RATE" in SECTION 1.2
are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining the rate of
interest for such Loan as provided in this Agreement; or
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<PAGE>
(ii) any Lender determines (which determination shall be
conclusive) that the rates of interest referred to in the
definition of "LIBO RATE" in SECTION 1.2 upon the basis of
which the rate of interest for such Loan for such Interest
Period is to be determined do not accurately reflect the cost
to such Lender of making or maintaining such Loan for such
Interest Period,
then such Lender shall give the Administrative Agent and the
Borrower prompt notice thereof; and so long as such condition
remains in effect, such Lender shall be under no obligation to make
LIBO Rate Loans or to convert Loans of any other type into LIBO Rate
Loans, and the Borrower shall, on the last day of the then current
Interest Period for each outstanding LIBO Rate Loan, either prepay
such LIBO Rate Loan or convert such Loan into another type of Loan
in accordance with SECTION 2.9. Before giving such notice pursuant
to this Section, the affected Lender will designate a different
available Applicable Lending Office for LIBO Rate Loans or take such
other action as the Borrower may request if such designation or
action will avoid the need to suspend the obligation of such Lender
to make LIBO Rate Loans hereunder and will not, in the opinion of
such affected Lender, be disadvantageous to such Lender.
"(c) Anything herein to the contrary notwithstanding, if, on
or prior to the determination of any interest rate for any Canadian
LIBO Rate Loan for any Interest Period therefor:
(i) any Lender determines (which determination shall be
conclusive) that quotations of interest rates for the deposits
referred to in the definition of "CANADIAN LIBO RATE" in
SECTION 1.2 are not being provided in the relevant amounts or
for the relevant maturities for purposes of determining the
rate of interest for such Loan as provided in this Agreement;
or
(ii) any Lender determines (which determination shall be
conclusive) that the rates of interest referred to in the
definition of "CANADIAN LIBO RATE" in SECTION 1.2 upon the
basis of which the rate of interest for such Loan for such
Interest Period is to be determined do not accurately reflect
the cost to such Lender of making or maintaining such Loan for
such Interest Period,
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<PAGE>
then such Lender shall give the Administrative Agent and the
Borrower prompt notice thereof; and so long as such condition
remains in effect, such Lender shall be under no obligation to make
Canadian LIBO Rate Loans or to convert Loans of any other type into
Canadian LIBO Rate Loans, and the Borrower shall, on the last day of
the then current Interest Period for each outstanding Canadian LIBO
Rate Loan, either prepay such Canadian LIBO Rate Loan or convert
such Loan into another type of Loan in accordance with SECTION 2.9.
Before giving such notice pursuant to this Section, the affected
Lender will designate a different available Applicable Lending
Office for Canadian LIBO Rate Loans or take such other action as the
Borrower may request if such designation or action will avoid the
need to suspend the obligation of such Lender to make Canadian LIBO
Rate Loans hereunder and will not, in the opinion of such affected
Lender, be disadvantageous to such Lender."
"2.19 ILLEGALITY. (a) Notwithstanding any other provision of
this Agreement, in the event that it becomes unlawful for any Lender
or its Applicable Lending Office to (a) honor its obligation to make
LIBO Rate Loans hereunder, or (b) maintain LIBO Rate Loans
hereunder, then such Lender shall promptly notify the Administrative
Agent and the Borrower thereof; and the obligation of such Lender
hereunder to make LIBO Rate Loans and to convert other types of
Loans into LIBO Rate Loans shall be suspended until such time as
such Lender may again make and maintain LIBO Rate Loans, and the
outstanding LIBO Rate Loans of such Lender shall be converted into
Floating Rate Loans in accordance with SECTION 2.9. Before giving
such notice pursuant to this Section, such Lender will designate a
different available Applicable Lending Office for its LIBO Rate
Loans or take such other action as the Borrower may request if such
designation or action will avoid the need to suspend the obligation
of such Lender to make LIBO Rate Loans and will not, in the opinion
of the affected Lender, be disadvantageous to such Lender.
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"(b) Notwithstanding any other provision of this Agreement, in
the event that it becomes unlawful for any Lender or its Applicable
Lending Office to (a) honor its obligation to make Canadian Floating
Rate Loans or Canadian LIBO Rate Loans hereunder, or (b) maintain
Canadian Floating Rate Loans or Canadian LIBO Rate Loans hereunder,
then such Lender shall promptly notify the Administrative Agent and
the Borrower thereof; and the obligation of such Lender hereunder to
make Canadian Floating Rate Loans or Canadian LIBO Rate Loans, as
the case may be, and to convert other types of Loans into Canadian
Floating Rate Loans or Canadian LIBO Rate Loans, as the case may be,
shall be suspended until such time as such Lender may again make and
maintain Canadian Floating Rate Loans or Canadian LIBO Rate Loans,
as the case may be, and, in the case of a Lender's notice pursuant
to this Section 2.19(b) with respect to its Canadian LIBO Rate
Loans, the Canadian LIBO Rate Loans of such Lender shall be
converted into Canadian Floating Rate Loans in accordance with
SECTION 2.9. Before giving such notice pursuant to this Section,
such Lender will designate a different available Applicable Lending
Office for Canadian Floating Rate Loans or Canadian LIBO Rate Loans,
as the case may be, or take such other action as the Borrower may
request if such designation or action will avoid the need to suspend
the obligation of such Lender to make Canadian Floating Rate Loans
or Canadian LIBO Rate Loans, as the case may be, and will not, in
the opinion of the affected Lender, be disadvantageous to such
Lender."
(xi) Section 2.21 of the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the following
new Section 2.21:
"2.21 LIMITATIONS ON INTEREST PERIODS. Each Interest Period
selected by the Borrower (a) which commences on the last Business
Day of a calendar month (or, with respect to any LIBO Rate Loan or
Canadian LIBO Rate Loan, any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent
calendar month, (b) which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day (or, if
such next succeeding Business Day falls in the next succeeding
calendar month, on the next preceding Business Day), (c) which would
otherwise commence before and end after Final Maturity shall end on
Final Maturity, and (d) shall have an Interest Period no shorter
than one month, and if shorter than one month, the relevant Loan
shall be (i) a Floating Rate Loan during such period if it is
denominated in Dollars and (ii) a Canadian Floating Rate Loan during
such period if it is denominated in Canadian Dollars."
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(xii) Article II of the Existing Agreement is hereby amended by
adding at the end thereof the following new Sections 2.22, 2,23, 2.24,
2.35, 2.26 and 2.27:
"2.22 MARKET DISRUPTION. Notwithstanding the satisfaction of
all conditions referred to in Article II and Article IV with respect
to any Loans to be made in Canadian Dollars, if there shall occur on
or prior to the date of such Loans any change in national or
international financial, political or economic conditions or
exchange controls which would in the reasonable opinion of the
Administrative Agent or the Majority Lenders make it impracticable
for such Loans to be denominated in Canadian Dollars, then the
Administrative Agent shall forthwith give notice thereof to the
Borrower and the Lenders, and such Loans shall not be denominated in
Canadian Dollars but shall be made in Dollars, in an aggregate
principal amount equal to the Dollar Equivalent of the aggregate
principal amount of Canadian Dollars specified in the related
Borrowing Request, as Floating Rate Loans, unless the Borrower
notifies the Administrative Agent at least one Business Day before
such date that it elects not to borrow on such date.
"2.23. JUDGMENT CURRENCY. If for the purpose of obtaining
judgment in any court it is necessary to convert a sum due from the
Borrower or any Guarantor hereunder in Canadian Dollars into
Dollars, the parties hereto agree, to the fullest extent that they
may effectively do so, that the rate of exchange used shall be that
at which in accordance with normal banking procedures the
Administrative Agent could purchase Canadian Dollars with Dollars at
the Administrative Agent's main Chicago office on the Business Day
preceding that on which final, non-appealable judgment is given. The
obligations of the Borrower and each Guarantor in respect of any sum
due to any Lender or the Administrative Agent hereunder in Canadian
Dollars shall, notwithstanding any judgment in Dollars, be
discharged only to the extent that on the Business Day following
receipt by such Lender or the Administrative Agent (as the case may
be) of any sum adjudged to be so due in Dollars such Lender or the
Administrative Agent (as the case may be) may in accordance with
normal, reasonable banking procedures purchase Canadian Dollars with
Dollars. If the amount of Canadian Dollars so purchased is less than
the sum originally due to such Lender or the Administrative Agent,
as the case may be, in Canadian dollars, the Borrower and each
Guarantor agrees, to the fullest extent that it may effectively do
so, as a separate obligation and notwithstanding any such judgment,
to indemnify such Lender or the Administrative Agent, as the case
may be, against such loss, and if the amount of Canadian Dollars so
purchased exceeds (a) the sum originally due to any Lender or the
Administrative Agent, as the case may be, in Canadian Dollars, and
(b) any amounts shared with other Lenders as a result of allocations
of such excess as a disproportionate payment to such Lender under
Section 11.14, such Lender or the Administrative Agent, as the case
may be, agrees to remit such excess to the Borrower or the
applicable Guarantor.
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"2.24 YIELD PROTECTION. If, on or after the date of this
Agreement, the adoption of any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive
(whether or not having the force of law), or any change in the
interpretation or administration thereof by any governmental or
quasi-governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or
compliance by any Lender or Applicable Lending Office with any
request or directive (whether or not having the force of law) of any
such authority, central bank or comparable agency:
(i) subjects any Lender or any Applicable Lending Office to
any Taxes, or changes the basis of taxation of payments (other
than with respect to Excluded Taxes) to any Lender in respect
of its LIBO Rate Loans, its Canadian Floating Rate Loans or
its Canadian LIBO Rate Loans, or
(ii) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar
requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender or any
Applicable Lending Office, or
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(iii) imposes any other condition the result of which is to
increase the cost to any Lender or any Applicable Lending
Office of making, funding or maintaining its LIBO Rate Loans,
its Canadian Floating Rate Loans or its Canadian LIBO Rate
Loans or reduces any amount receivable by any Lender or any
Applicable Lending Office in connection with its LIBO Rate
Loans, its Canadian Floating Rate Loans or its Canadian LIBO
Rate Loans, or requires any Lender or any Applicable Lending
Office to make any payment calculated by reference to the
amount of LIBO Rate Loans, Canadian Floating Rate Loans or
Canadian LIBO Rate Loans held or interest received by it, by
an amount deemed material by such Lender,
and the result of any of the foregoing is to increase the cost to
such Lender or Applicable Lending Office of making or maintaining
its LIBO Rate Loans, its Canadian Floating Rate Loans or its
Canadian LIBO Rate Loans or its commitment to make LIBO Rate Loans,
Canadian Floating Rate Loans or Canadian LIBO Rate Loans or to
reduce the return received by such Lender or Applicable Lending
Office in connection with its LIBO Rate Loans, its Canadian Floating
Rate Loans or its Canadian LIBO Rate Loans or commitment to make
LIBO Rate Loans, Canadian Floating Rate Loans or Canadian LIBO Rate
Loans, then, within 15 days of demand by such Lender, the Borrower
shall pay such Lender such additional amount or amounts as will
compensate such Lender for such increased cost or reduction in
amount received.
"2.25 CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender
determines the amount of capital required or expected to be
maintained by such Lender, any Applicable Lending Office of such
Lender or any corporation controlling such Lender is increased as a
result of a Change, then, within 15 days of demand by such Lender,
the Borrower shall pay such Lender the amount necessary to
compensate for any shortfall in the rate of return on the portion of
such increased capital which such Lender determines is attributable
to this Agreement, its LIBO Rate Loans, its Canadian Floating Rate
Loans, its Canadian LIBO Rate Loans or its commitment to make LIBO
Rate Loans, Canadian Floating Rate Loans or Canadian LIBO Rate Loans
hereunder (after taking into account such Lender's policies as to
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capital adequacy). "Change" means (i) any change after the date of
this Agreement in the Risk-Based Capital Guidelines, or (ii) any
adoption of or change in any other law, governmental or
quasi-governmental rule, regulation, policy, guideline,
interpretation, or directive (whether or not having the force of
law) after the date of this Agreement which affects the amount of
capital required or expected to be maintained by any Lender or any
Applicable Lending Office or any corporation controlling any Lender.
"Risk-Based Capital Guidelines" means (i) the risk-based capital
guidelines in effect in the United States on the date of this
Agreement, including transition rules, and (ii) the corresponding
capital regulations promulgated by regulatory authorities outside
the United States implementing the July 1988 report of the Basle
Committee on Banking Regulation and Supervisory Practices Entitled
"International Convergence of Capital Measurements and Capital
Standards," including transition rules, and any amendments to such
regulations adopted prior to the date of this Agreement.
"2.26 TAXES. (a) All payments by the Borrower to or for the
account of any Lender or the Administrative Agent hereunder or under
any Note shall be made free and clear of and without deduction for
any and all Taxes. If the Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder to
any Lender or the Administrative Agent, (i) the sum payable shall be
increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under
this Section 2.26) such Lender or the Administrative Agent (as the
case may be) receives an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower shall
make such deductions, (iii) the Borrower shall pay the full amount
deducted to the relevant authority in accordance with applicable
law, and (iv) the Borrower shall furnish to the Administrative Agent
the original copy of a receipt evidencing payment thereof within 30
days after such payment is made.
"(b) In addition, the Borrower hereby agrees to pay any
present or future stamp or documentary taxes and any other excise or
property taxes, charges or similar levies which arise from any
payment made hereunder or under any Note or from the execution or
delivery of, or otherwise with respect to, this Agreement or any
Note ("Other Taxes").
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"(c) The Borrower hereby agrees to indemnify the
Administrative Agent and each Lender for the full amount of Taxes or
Other Taxes (including, without limitation, any Taxes or Other Taxes
imposed on amounts payable under this Section 2.26) paid by the
Administrative Agent or such Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect
thereto. Payments due under this indemnification shall be made
within 30 days of the date the Administrative Agent or such Lender
makes demand therefor pursuant to Section 2.27.
"(d) Any Lender that is entitled to an exemption from or
reduction of withholding tax with respect to payments under this
Agreement or any Note pursuant to the law of any relevant
jurisdiction or any treaty shall deliver to the Borrower (with a
copy to the Administrative Agent), at the time or times prescribed
by applicable law, such properly completed and executed
documentation prescribed by applicable law as will permit such
payments to be made without withholding or at a reduced rate.
"(e) If the U.S. Internal Revenue Service or any other
governmental authority of the United States or any other country or
any political subdivision thereof asserts a claim that the
Administrative Agent did not properly withhold tax from amounts paid
to or for the account of any Lender (because the appropriate form
was not delivered or properly completed, because such Lender failed
to notify the Administrative Agent of a change in circumstances
which rendered its exemption from withholding ineffective, or for
any other reason), such Lender shall indemnify the Administrative
Agent fully for all amounts paid, directly or indirectly, by the
Administrative Agent as tax, withholding therefor, or otherwise,
including penalties and interest, and including taxes imposed by any
jurisdiction on amounts payable to the Administrative Agent under
this subsection, together with all costs and expenses related
thereto (including attorneys fees and time charges of attorneys for
the Administrative Agent, which attorneys may be employees of the
Administrative Agent). The obligations of the Lenders under this
Section 2.26 shall survive the payment of the Obligations and
termination of this Agreement.
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"2.27 LENDER STATEMENTS; SURVIVAL OF INDEMNITY. Each Lender
shall deliver a written statement of such Lender to the Borrower
(with a copy to the Administrative Agent) as to the amount due, if
any, under Section 2.24, 2.25 or 2.26. Such written statement shall
set forth in reasonable detail the calculations upon which such
Lender determined such amount and shall be final, conclusive and
binding on the Borrower in the absence of manifest error.
Determination of amounts payable under such Sections in connection
with a Canadian LIBO Rate Loan shall be calculated as though each
Lender funded its Canadian LIBO Rate Loan through the purchase of a
deposit of the type and maturity corresponding to the deposit used
as a reference in determining the Canadian LIBO Rate applicable to
such Loan, whether in fact that is the case or not. Unless otherwise
provided herein, the amount specified in the written statement of
any Lender shall be payable on demand after receipt by the Borrower
of such written statement. The obligations of the Borrower under
Sections 2.24, 2.25 or 2.26 shall survive payment of the Obligations
and termination of this Agreement."
(xiii) Section 6.17 of the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the following
new Section 6.17:
"6.17 ADDITIONAL SUBSIDIARIES. The Borrower will immediately
cause any Person that becomes a Subsidiary of the Borrower
subsequent to the Closing Date to (i) execute a Subsidiary Guarantor
Counterpart and to deliver same to the Administrative Agent and (ii)
deliver such other Security Instruments as the Administrative Agent
requests; PROVIDED, HOWEVER, that the Borrower shall not be
obligated to comply with the terms of this Section 6.17 with respect
to any such Subsidiary until the Dollar Equivalent of the aggregate
book value of the assets of such Subsidiary equals $500,000) or
more."
(xiv) Section 7.1 of the Existing Agreement is hereby amended by
deleting everything after the words "Administrative Agent" that appear at
the end of clause (e) thereof and substituting in lieu thereof the
following:
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", (f) inter-company Indebtedness (i) incurred by the Borrower or
any Guarantor and payable to the Borrower or another Guarantor, or
(ii) incurred by a Canadian Subsidiary and payable to the Borrower,
a Guarantor or another Canadian Subsidiary, including any
extensions, renewals and replacements of any thereof, and (g) MCOC
Bank Debt, PROVIDED that, after giving effect to the incurrence of
any MCOC Bank Debt, the sum of (i) the Canadian Dollar Equivalent of
the aggregate outstanding principal amount of all loans and advances
made by the Borrower and the Guarantors to the Canadian
Subsidiaries, plus (ii) the Canadian Dollar Equivalent of the
aggregate amount of all equity Investments made by the Borrower and
the Guarantors in the Canadian Subsidiaries, plus (iii) the
aggregate outstanding principal amount of the MCOC Bank Debt, does
not exceed Fifty Million Canadian Dollars (C$50,000,000), including
any extensions, renewals and replacements of any thereof."
(xv) Section 7.2 of the Existing Agreement is hereby amended by
deleting everything after the comma that appears at the end of clause (c)
thereof and substituting in lieu thereof the following new clauses (d) and
(e):
"(d) guaranties by the Borrower of Indebtedness of its Domestic
Subsidiaries permitted under SECTION 7.1, or (e) guaranties of, or
commitments to buy, MCOC Bank Debt entered into by the Borrower."
(xvi) Section 7.6 of the Existing Agreement is hereby amended by
deleting everything after the comma that appears at the end of clause (c)
thereof and substituting in lieu thereof the following new clauses (d),
(e) and (f):
"(d) loans or advances to joint ventures in amounts not to exceed
Ten Million Dollars ($10,000,000) in the aggregate PROVIDED that
within three (3) Business Days of the making of such a loan or
advance, the Borrower provides the Administrative Agent with written
notice thereof which shall include a detailed explanation of the
business purpose for such loan or advance, (e) loans or advances
made by one Canadian Subsidiary to another Canadian Subsidiary, or
(f) loans or advances made by the Borrower or a Guarantor to a
Canadian Subsidiary PROVIDED that, after giving effect to the making
by the Borrower or a Guarantor of any loan or advance to a Canadian
Subsidiary, the sum of (i) the Canadian Dollar Equivalent of the
aggregate outstanding principal amount of all loans and advances
made by the Borrower and the Guarantors to the Canadian
Subsidiaries, plus (ii) the Canadian Dollar Equivalent of the
aggregate amount of all equity Investments made by the Borrower and
the Guarantors in the Canadian Subsidiaries, plus (iii) the
aggregate outstanding principal amount of the MCOC Bank Debt, does
not exceed Fifty Million Canadian Dollars (C$50,000,000)."
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(xvii) Section 7.7 of the Existing Agreement is hereby amended by
deleting clause (a) thereof and substituting in lieu thereof the following
new clause (a):
"(a) assets of hydrocarbon trucking operations, pipelines,
processing plants, gathering lines or oil and gas properties
(PROVIDED that all such assets and properties acquired by the
Borrower or a Guarantor are located in the United States of
America), the stock of any Canadian Subsidiary owning any such
assets or properties located in Canada, and the stock of any other
Person owning any such assets or properties located in the United
States of America,"
(xviii) Section 7.7 of the Existing Agreement is hereby further
amended by deleting everything after the comma that appears at the end of
clause (e) thereof and substituting in lieu thereof the following new
clauses (f), (g), (h) and (i):
"(f) interests in joint ventures doing business solely in the United
States of America as to which the Borrower or any of its
Subsidiaries is a venturer, so long as such joint venture is engaged
in the same line of business as the Borrower (or such Subsidiary) as
of the date hereof, (g) equity Investments by a Canadian Subsidiary
in another Canadian Subsidiary, (h) MCOC Bank Debt by MCCI, or (i)
equity Investments by the Borrower or a Guarantor in a Canadian
Subsidiary PROVIDED that, after giving effect to the making by the
Borrower or any Guarantor of any equity Investment in a Canadian
Subsidiary, the sum of (i) the Canadian Dollar Equivalent of the
aggregate outstanding principal amount of all loans and advances
made by the Borrower and the Guarantors to the Canadian
Subsidiaries, plus (ii) the Canadian Dollar Equivalent of the
aggregate amount of all equity Investments made by the Borrower and
the Guarantors in the Canadian Subsidiaries, plus (iii) the
aggregate outstanding principal amount of the MCOC Bank Debt, does
not exceed Fifty Million Canadian Dollars (C$50,000,000)."
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(xix) Section 7.13 of the Existing Agreement is hereby amended by
deleting the first sentence thereof and substituting in lieu thereof the
following new sentence):
"Permit Cash Flow for any four consecutive fiscal quarters (plus the
Cash Flow of any acquired Company for such period) to be less than
1.25 times the sum of (i) the Borrower's consolidated interest
expense for such period, plus (ii) the greater of (A) current
maturities of funded long term bank debt, or (B) 1/10th of the sum
of (1) the aggregate outstanding principal balance of the Loans,
plus (2) the Dollar Equivalent of the aggregate outstanding
principal balance of the MCOC Bank Debt."
(xx) Section 9.1(d) of the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the following
new Section 9.1(d):
"(d) the Borrower or any of its Subsidiaries shall fail to pay
when due any of its Indebtedness; or the Borrower or any of its
Subsidiaries shall default in the performance (beyond the applicable
grace period with respect thereto, if any) of any term, provision or
condition contained in any bond, debenture, note, instrument, credit
agreement, loan agreement, indenture or other agreement under which
any such Indebtedness was created or is governed, or any other event
shall occur or condition exist, the effect of which default or event
is to cause, or to permit the holder or holders of any such
Indebtedness to cause, such Indebtedness to become due prior to its
stated maturity; or any Indebtedness of the Borrower or any of its
Subsidiaries shall be declared to be due and payable or required to
be prepaid or repurchased (other than by a regularly scheduled
payment) prior to the stated maturity thereof; or the Borrower or
any of its Subsidiaries shall not pay, or admit in writing its
inability to pay, its debts generally as they become due."
(xxi) Section 9.1 of the Existing Agreement is hereby amended by (A)
deleting the word "and" that appears at the end of subsection 9.1(l)
thereof, (B) deleting the period that appears at the end of subsection
9.1(m) thereof and substituting in lieu thereof a semi-colon, and (C)
adding at the end thereof the following new subsections (n) and (o):
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"(n) The Borrower shall fail to comply with any of the terms
or conditions of any agreement pursuant to which it has committed or
agreed to purchase, guaranty or otherwise assure any holder of any
of the MCOC Bank Debt against loss with respect to any of the MCOC
Bank Debt; and
"(o) MCOC shall fail to pay when due any amount payable on or
with respect to any MCOC Bank Debt; or MCOC shall default in the
performance of any term, provision or condition contained in any
note or agreement under which any MCOC Bank Debt was created or is
governed, or any other event shall occur or condition exist, the
effect of which default or event is to cause, or to permit the
holder or holders of any MCOC Bank Debt to cause, any part or all of
the MCOC Bank Debt to become due prior to its stated maturity; or
any part or all of the MCOC Bank Debt shall be declared to be due
and payable or required to be prepaid or repurchased (other than by
a regularly scheduled payment) prior to the stated maturity
thereof."
(xxii) Exhibit II to the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the form of
Borrowing Request attached hereto as Exhibit II.
(xxiii) Exhibit V to the Existing Agreement is hereby amended by
deleting it in its entirety and substituting in lieu thereof the list of
Disclosures attached hereto as Exhibit V.
Section 4. AMENDMENTS TO NOTES. Upon satisfaction of the conditions
precedent set forth in Section 7 of this First Amendment, but effective as of
the date of this First Amendment, each of the Notes shall be amended by (i)
deleting the reference to "$50,000,000.00" which appears at the upper left of
each of the Notes, and (ii) deleting the words "the sum of FIFTY MILLION AND
NO/100 DOLLARS ($50,000,000.00) or so much thereof as may be advanced against
this Note" which appear in the paragraph of each of the Notes which begins with
the words "FOR VALUE RECEIVED" and substituting in lieu thereof the words "the
aggregate unpaid principal amount of all Loans made in either Dollars or
Canadian Dollars by the Payee to the Borrower". The foregoing constitutes an
amendment and modification, but not a novation of the Notes.
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Section 5. WAIVERS WITH RESPECT TO SECTIONS 6.17 AND 7.3. Notwithstanding
anything to the contrary set forth in Section 6.17 or Section 7.3 of the
Existing Agreement as amended hereby, the Borrower, the Guarantors, the
Administrative Agent and the Lenders hereby agree as follows:
(a) Each of the Lenders hereby specifically waives any violation of
Section 6.17 of the Existing Agreement or the Existing Agreement as amended
hereby and any Default or Event of Default caused thereby to the extent such
violation or Default or Event of Default is caused by the failure to satisfy at
any time before or after the date hereof any of the requirements of said Section
6.17 with respect to DPI/Midcoast, Inc. ("DPI"), SeaCrest Company, L.L.C.
("SeaCrest"), MCCI or MCOC; PROVIDED, HOWEVER, that the Borrower, DPI and
SeaCrest fully comply with all of the terms and conditions of Sections 5(b) and
5(c) of this First Amendment.
(b) Promptly after the date hereof, but in any event on or before March
31, 1999, the Borrower will satisfy all of the requirements of Section 6.17 of
the Existing Agreement as amended hereby with respect to each of DPI and
SeaCrest (collectively, the "New Domestic Subsidiaries") and will cause each of
the New Domestic Subsidiaries to satisfy all of the requirements of Section 6.17
of the Existing Agreement as amended hereby.
(c) Promptly after the date hereof, but in any event on or before March
31, 1999, the Borrower will pledge 66% of the capital stock of both MCCI and
MCOC to the Administrative Agent to secure the Obligations pursuant to such
Security Instruments as the Administrative Agent requests.
(d) Each of the Lenders hereby specifically waives any violation of
Section 7.3 of the Existing Agreement or the Existing Agreement as amended
hereby and any Default or Event of Default caused thereby to the extent such
violation or Default or Event of Default is caused by SeaCrest granting a Lien
on any or all of its assets to Mid Louisiana Gas Transmission Company ("Mid
Louisiana") to secure up to $3,500,000 of loans made to SeaCrest by Mid
Louisiana; PROVIDED, HOWEVER, that Mid Louisiana fully complies with all of the
terms and conditions of Section 5(e) of this First Amendment.
(e) Promptly after the date hereof, but in any event on or before March
31, 1999, Mid Louisiana will pledge all loans made by it to SeaCrest and all
collateral securing any of them to the Administrative Agent to secure the
Obligations pursuant to such Security Instruments as the Administrative Agent
requests.
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(f) Any violation of any of the foregoing provisions of this Section 5
shall constitute an Event of Default under the Existing Agreement as amended
hereby.
(g) The specific waivers set forth in Sections 5(a) and 5(d) of this First
Amendment are limited to the express circumstances described therein and shall
not be construed to constitute (i) a waiver of any other event, circumstance or
condition or of any other right or remedy available to the Administrative Agent
or any Lender pursuant to the Existing Agreement or the Existing Agreement as
amended hereby, or (ii) a consent to any departure by the Borrower or any
Guarantor from any other term or requirement under the Existing Agreement or the
Existing Agreement as amended hereby.
Section 6. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders
to execute and deliver this First Amendment, the Borrower hereby confirms,
reaffirms and restates as of the date hereof the representations and warranties
set forth in Article V of the Existing Agreement provided that such
representations and warranties shall be and hereby are amended as follows: each
reference therein to "this Agreement", including, without limitation, such a
reference included in the term "Loan Documents", shall be deemed to be a
collective reference to the Existing Agreement, this First Amendment and the
Existing Agreement as amended by this First Amendment. An Event of Default under
and as defined in the Existing Agreement as amended by this First Amendment
shall be deemed to have occurred if any representation or warranty made pursuant
to the foregoing sentence of this Section 6 shall be materially false as of the
date on which made.
Section 7. CONDITIONS PRECEDENT. This First Amendment, the Increased
Commitments provided for herein and the amendments to the Existing Agreement and
the Notes provided for herein shall become effective as of the date (the "First
Amendment Closing Date") on which all of the following conditions precedent
shall have been satisfied:
(i) This First Amendment shall have been duly executed and delivered
by the Administrative Agent, the Borrower and the Guarantors on one
counterpart and all of the Lenders shall have signed a counterpart or
counterparts hereof and notified the Administrative Agent by telex or
telephone that such action has been taken and that such executed
counterpart or counterparts will be mailed or otherwise delivered to the
Administrative Agent.
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(ii) The Administrative Agent shall have received $37,500 from the
Borrower in payment of the additional facility fees payable to the Lenders
pursuant to Section 2.13(b) of the Credit Agreement in connection with the
Increased Commitments provided for in Section 2 of this First Amendment.
(iii) Each of the representations and warranties of the Borrower
contained in the Credit Agreement shall be true and correct on and as of
the First Amendment Closing Date as if made on and as of the First
Amendment Closing Date.
(iv) No Default or Event of Default shall exist.
(v) Each of DPI/Midcoast, Inc. and SeaCrest Company, L.L.C.
shall have executed and delivered to the Administrative Agent a
Subsidiary Guarantor Counterpart.
Section 8. EFFECT ON THE EXISTING AGREEMENT. Except as expressly amended
hereby, all of the representations, warranties, terms, covenants and conditions
of the Existing Agreement and the other Loan Documents (a) shall remain
unaltered, (b) shall continue to be, and shall remain, in full force and effect
in accordance with their respective terms, and (c) are hereby ratified and
confirmed in all respects. Upon the effectiveness of this First Amendment, all
references in the Existing Agreement (including references in the Existing
Agreement as amended by this First Amendment) to "this Agreement" (and all
indirect references such as "hereby", "herein", "hereof" and "hereunder") shall
be deemed to be references to the Existing Agreement as amended by this First
Amendment.
SECTION 9. ENTIRE AGREEMENT. THIS FIRST AMENDMENT, THE EXISTING AGREEMENT
AS AMENDED BY THIS FIRST AMENDMENT AND THE OTHER LOAN DOCUMENTS EMBODY THE
ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND SUPERSEDE ANY
AND ALL PRIOR AGREEMENTS AND UNDERSTANDINGS BETWEEN THE PARTIES HERETO RELATING
TO THE SUBJECT MATTER HEREOF.
SECTION 10. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF
RELATING TO CONFLICTS OF LAW; EXCEPT THAT, (A) CHAPTER 346 OF THE TEXAS FINANCE
CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING
TRIPARTY ACCOUNTS) SHALL NOT APPLY AND (B) IF AT ANY TIME THE LAWS OF THE UNTIED
STATES OF AMERICA OR ANY STATE THEREOF APPLICABLE TO A LENDER PERMIT SUCH LENDER
TO CONTRACT FOR, TAKE, RESERVE, CHARGE OR RECEIVE A HIGHER RATE OF INTEREST THAN
IS ALLOWED BY THE LAWS OF THE STATE OF TEXAS, THEN SUCH OTHER LAWS SHALL TO SUCH
EXTENT GOVERN AS TO THE RATE OF INTEREST WHICH SUCH LENDER IS ALLOWED TO
CONTRACT FOR, TAKE, RESERVE, CHARGE OR RECEIVE UNDER THIS FIRST AMENDMENT AND
THE AGREEMENT AS AMENDED HEREBY AND SUCH LENDER'S NOTE.
31
<PAGE>
Section 11. HEADINGS. The headings, captions, and arrangements used
in this First Amendment are for convenience only and shall not affect the
interpretation of this First Amendment.
Section 12. COUNTERPARTS. This First Amendment may be executed in any
number of counterparts, all of which taken together shall constitute one
agreement, and any of the parties hereto may execute this First Amendment by
signing any such counterpart.
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed as of the date first above written.
BORROWER: MIDCOAST ENERGY RESOURCES, INC.
By:________________________________
Richard A. Robert
Chief Financial Officer
and Treasurer
ADMINISTRATIVE AGENT
AND LENDERS: BANK ONE, TEXAS,
NATIONAL ASSOCIATION,
individually and as Administrative Agent
By:________________________________
Title:____________________________
CIBC, INC.,
individually and as Syndication Agent
By:________________________________
Title:____________________________
NATIONSBANK, N.A.,
individually and as Documentation Agent
By:________________________________
Title:____________________________
23
<PAGE>
GUARANTORS:
MAGNOLIA PIPELINE CORPORATION H&W PIPELINE CORPORATION
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
MAGNOLIA RESOURCES, INC. MAGNOLIA GATHERING, INC.
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
MIDCOAST HOLDINGS NO. ONE, INC. MIDCOAST GAS PIPELINE, INC.,
a Texas corporation
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
NUGGET DRILLING CORPORATION MIDCOAST MARKETING, INC.
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
MIDCOAST GAS PIPELINE, INC., TENNESSEE RIVER INTRASTATE
a Delaware corporation GAS COMPANY, INC.
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
34
<PAGE>
MID LOUISIANA GAS COMPANY CREOLE GAS PIPELINE CORPORATION
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
MID LOUISIANA GAS TRANSMISSION MIDCOAST INTERSTATE
COMPANY TRANSMISSION, INC.
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
MIDCOAST GAS SERVICES, INC. MIDCOAST ENERGY MARKETING, INC.
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
SEACREST COMPANY, L.L.C. DPI/MIDCOAST, INC.
By:____________________________ By:___________________________
Richard A. Robert Richard A. Robert
Treasurer Treasurer
35
<PAGE>
EXHIBIT II
[FORM OF BORROWING REQUEST]
Bank One, Texas, National Association,
Administrative Agent
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Amended and Restated Credit Agreement dated as of August 31, 1998,
by and among Midcoast Energy Resources, Inc. ("BORROWER"), Bank One,
Texas, National Association, individually and as administrative
agent, and the lenders party thereto (as amended, restated, or
supplemented from time to time, the "CREDIT Agreement")
Ladies and Gentlemen:
Pursuant to the Credit Agreement, the Borrower hereby makes the requests
indicated below:
1. Dollar Loans
(a) Amount of new Loan: $
(b) Requested funding date: _______________, 19___
(c) $_________ of such Loan is to be a Floating Rate Loan;
(d) $_________ of such Loan is to be a LIBO Rate Loan;
and
(e) Requested Interest Period for LIBO Rate Loan: __ months;
2. Canadian Dollar Loans
(a) Amount of new Loan: C$
(b) Requested funding date: _______________, 19___
(c) C$_________ of such Loan is to be a Canadian Floating Rate Loan;
(d) C$_________ of such Loan is to be a Canadian LIBO Rate Loan;
and
<PAGE>
(e) Requested Interest Period for Canadian LIBO Rate Loan: __
months;
? 3. $_______________ of such Loan is to be a LIBO Rate Loan maturing
on ________________:
(a) Amount to be continued as a LIBO Rate Loan is
$_________________, with an Interest Period of ___ months;
(b) Amount to be converted to a Floating Rate Loan is $_________;
? 4. C$_______________ of such Loan is to be a Canadian LIBO Rate Loan
maturing on ________________:
(a) Amount to be continued as a Canadian LIBO Rate Loan is
C$_________________, with an Interest Period of ___ months;
(b) Amount to be converted to a Canadian Floating Rate Loan is
C$________;
5. Conversion of Floating Rate Loan:
(a) Requested conversion date: __________________, 19___.
(b) Amount to be converted to a LIBO Rate Loan is $______________
with an Interest Period of ____ months.
? 6. Conversion of Canadian Floating Rate Loan:
(a) Requested conversion date: __________________, 19___.
(b) Amount to be converted to a Canadian LIBO Rate Loan is
C$______________ with an Interest Period of ____ months.
The undersigned certifies that [s]he is the [_________________] of the
Borrower, has obtained all consents necessary, and as such [s]he is authorized
to execute this request on behalf of the Borrower. The undersigned further
certifies, represents, and warrants on behalf of the Borrower that the Borrower
is entitled to receive the requested borrowing, continuation, or conversion
under the terms and conditions of the Credit Agreement.
Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.
Very truly yours,
MIDCOAST ENERGY RESOURCES, INC.
By:_________________________________
Printed Name:_______________________
Title:______________________________
2
<PAGE>
EXHIBIT V
DISCLOSURES
Section 5.8 LIABILITIES
None
LITIGATION
None
Section 5.10 COMPLIANCE
Section 5.12 ENVIRONMENTAL MATTERS
None
Section 5.17 REFUNDS
None
Section 5.19 CASUALTIES
None
Section 5.21 SUBSIDIARIES
Magnolia Pipeline Corporation
H&W Pipeline Corporation
Magnolia Resources, Inc.
Magnolia Gathering, Inc.
Midcoast Holdings No. One, Inc.
Midcoast Gas Pipeline, Inc.,
a Texas corporation
Midcoast Gas Pipeline, Inc.,
a Delaware corporation
Midcoast Marketing, Inc. (inactive)
Nugget Drilling Corporation (inactive)
Tennessee River Intrastate Gas Company, Inc.
Mid Louisiana Gas Company
Creole Gas Pipeline Corporation
Mid Louisiana Gas Transmission Company
Midcoast Interstate Transmission, Inc.
Midcoast Gas Services, Inc.
Midcoast Energy Marketing, Inc.
SeaCrest Company, L.L.C.
DPI/Midcoast, Inc.
Midcoast Canada Capital, Inc.
Midcoast Canada Operating Corporation
MIDCOAST ENERGY RESOURCES, INC AND SUBSIDIARIES
EXHIBIT 21.1: SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Year of State of
Name Incorporation Incorporation Ownership
- - --------------------------------------------- -------------- ------------- ---------
<S> <C> <C>
Mid Louisiana Gas Company 1953 Delaware 100%
Creole Gas Pipeline Corporation 1962 Louisiana 100%
Midcoast Interstate Transmission, Inc. 1966 Alabama 100%
H&W Pipeline Corporation* 1976 Alabama 100%
Nugget Drilling Corporation* 1982 Minnesota 100%
Tennessee River Intrastate Gas Company, Inc. 1986 Alabama 100%
Mid Louisiana Gas Transmission 1987 Delaware 100%
Magnolia Pipeline Corporation 1989 Alabama 100%
Midcoast Marketing, Inc. 1991 Texas 100%
Midcoast Holdings No. One, Inc. 1993 Delaware 100%
Magnolia Resources, Inc. 1996 Mississippi 100%
Magnolia Gathering, Inc. 1996 Alabama 100%
Arcadia/Midcoast Pipeline of New York L.L.C.* 1996 New York 50%
Midcoast Gas Pipeline, Inc. 1997 Texas 100%
Pan Grande Pipeline, L.L.C. 1996 Texas 70%
Starr County Gathering System - A Joint Venture N/A N/A 60%
Texana Gas Pipeline - A Joint Venture N/A N/A 50%
Midcoast Energy Marketing, Inc. 1998 Delaware 100%
Midcoast Gas Services, Inc. 1998 Delaware 100%
Midcoast Del Bajio S. de R.L. de C.V. 1998 Mexico 50%
Midcoast Canada Capital, Inc. 1999 Canada 100%
Midcoast Canada Operating Corporation 1999 Canada 100%
DPI/Midcoast, Inc. 1999 Mississippi 100%
</TABLE>
* Presently Inactive
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report on the financial statements of Midcoast Energy Resources, Inc. as of
December 31, 1998 and for the three-year period then ended, dated March 18,
1999, included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-3 (File No. 333-70371).
HEIN + ASSOCIATES LLP
Houston, Texas
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 200,299
<SECURITIES> 0
<RECEIVABLES> 33,111,991
<ALLOWANCES> 92,000
<INVENTORY> 1,362,652
<CURRENT-ASSETS> 34,582,942
<PP&E> 160,555,874
<DEPRECIATION> 6,308,337
<TOTAL-ASSETS> 191,342,692
<CURRENT-LIABILITIES> 33,593,309
<BONDS> 0
71,496
0
<COMMON> 0
<OTHER-SE> 66,212,513
<TOTAL-LIABILITY-AND-EQUITY> 191,342,692
<SALES> 234,068,630
<TOTAL-REVENUES> 234,068,630
<CGS> 211,036,003
<TOTAL-COSTS> 220,515,818
<OTHER-EXPENSES> (115,538)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,246,591
<INCOME-PRETAX> 10,421,758
<INCOME-TAX> 1,308,752
<INCOME-CONTINUING> 9,113,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,113,018
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.25
</TABLE>
