===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1996
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
33-92776 Mobile Energy Services Company, L.L.C. 63-1148953
(An Alabama Limited Liability Company)
900 Ashwood Parkway, Suite 300
Atlanta, Georgia 30338
(770) 379-7781
33-92776 Mobile Energy Services Holdings, Inc. 58-2133689
(An Alabama Corporation)
900 Ashwood Parkway, Suite 450
Atlanta, Georgia 30338
(770) 379-7730
===============================================================================
<PAGE>
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months(or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No ___
<TABLE>
<CAPTION>
<S> <C> <C>
Description of Shares Outstanding
Registrant Common Stock at October 31, 1996
Mobile Energy Services Company, L.L.C. Not Applicable
Mobile Energy Services Holdings, Inc. Par Value $1 Per Share 1,000
Each of the registrants meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is
therefore filing this form with reduced disclosure as permitted by such General Instruction H.
</TABLE>
2
<PAGE>
Table of Contents
PAGE
PART I
Selected Definitions 4
Item 1. Financial Statements 11
Mobile Energy Services Company, L.L.C.
Management's Opinion as to Fair Statement of Results 11
Statements of Income 12
Statements of Cash Flows 13
Balance Sheets 14
Mobile Energy Services Holdings, Inc.
Management's Opinion as to Fair Statement of Results 15
Consolidated Statements of Income 16
Consolidated Statements of Cash Flows 17
Consolidated Balance Sheets 18
Notes to the Condensed Financial Statements 19
Item 2. Combined Management's Discussion and Analysis of Results of
Operations and Financial Condition 21
PART II
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
3
<PAGE>
SELECTED DEFINITIONS
When used in this report, the following terms will have the meanings
indicated.
"Air Compressors" means the air compressors and related facilities that
service the compressed air needs of the Mills and the Energy Complex that are
owned by Scott/Kimberly-Clark and located on the property leased by
Scott/Kimberly-Clark to Mobile Energy.
"Ash Agreement" means the Boiler Ash Disposal Agreement between the
Pulp Mill Owner and Mobile Energy dated December 12, 1994, including any
amendments thereto.
"Bankruptcy Code" means the Federal Bankruptcy Code of 1978, as amended.
"Bankruptcy Event" means, with respect to any Person, (i) such
Person's general inability, or its admission of its inability, to pay its debts
as such debts become due, (ii) the application by such Person for or its consent
to the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property,
(iii) the commencement by such Person of a voluntary case under the Bankruptcy
Code, (iv) the making by such Person of a general assignment for the benefit of
its creditors, (v) the filing of a petition by such Person seeking to take
advantage as a debtor of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement, winding-up or
readjustment of debts, (vi) the failure by such Person to controvert in a timely
and appropriate manner, or its acquiescence in writing to, any petition filed
against it in an involuntary case under the Bankruptcy Code, (vii) the taking of
any corporate or other action by such Person for the purpose of effecting any of
the foregoing, (viii) the commencement of a proceeding or case, without the
application or consent of such Person, in any court seeking (A) such Person's
reorganization, liquidation, dissolution, arrangement or winding-up, or the
composition or readjustment of its debts, (B) the appointment of a trustee,
receiver, custodian, liquidator, examiner or the like of such Person or all or
any substantial part of its property or (C) similar relief in respect of such
Person under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect for a period of 60 or more days, or (ix) an order for relief against such
Person shall be entered in an involuntary case under the Bankruptcy Code.
"Cluster Rule" means a regulation initially proposed by the EPA in
December 1993 and subsequently revised by the EPA in 1996 that includes
(1) certain effluent limitation guidelines and standards for the control of
waste water pollutants from pulp and paper industry facilities and (2) a
national emission standard for hazardous air pollutants emitted from mills that
chemically pulp wood fiber using kraft, sulfite, soda, or semi-chemical methods.
4
<PAGE>
"Combustion Rule" means the regulation that the EPA has indicated it
expects to propose applicable to the pulp and paper industry facilities,
consisting of effluent guidelines and emission standards for combustion sources.
"Common Services Agreement" means the Common Services Agreement dated
December 12, 1994 among Mobile Energy, Scott/Kimberly-Clark, the Paper Mill
Owner, the Tissue Mill Owner and the Pulp Mill Owner, including any
amendments thereto.
"Confidentiality Agreement" means the Confidentiality Agreement dated
December 12, 1994 among Southern Energy, Mobile Energy, Scott/Kimberly-Clark,
and S.D. Warren.
"Contractual Demand" means with respect to a particular Processing
Service and a particular Mill, the Demand level for such Processing Service
used to determine the Demand Charges for such Processing Service for
such Mill under the Energy Services Agreements and the Master Operating
Agreement.
"Demand" means with respect to a particular Processing Service, and a
particular Mill, the quantity of the Energy Complex's capacity to provide such
Processing Service that Mobile Energy is obligated to dedicate to such Mill
pursuant to the Energy Services Agreements and the Master Operating
Agreement.
"Demand Charges" means the fixed capacity charges each Mill Owner is
obligated to pay, based upon formulas set forth in the Master Operating
Agreement, to Mobile Energy based upon the level of such Mill Owner's Demand for
each Processing Service.
"Direct Lease" means the Lease Agreement between Scott/Kimberly-Clark
and Mobile Energy dated December 12, 1994, including any amendments thereto.
"EPA" means the Environmental Protection Agency.
"Easement Deeds" means bilateral easement deeds entered into by Mobile
Energy, Scott/Kimberly-Clark and S.D. Warren.
"Energy Services Agreements" means the three separate Energy Services
Agreements dated December 12, 1994, including any amendments thereto, between
Mobile Energy and each of (1) the Tissue Mill Owner, (2) the Pulp Mill Owner,
and (3) the Paper Mill Owner.
"Environmental Bonds" means the four series of 30-year bonds issued by
the IDB between 1973 and 1980 having an aggregate principal amount of
$24,000,000 to finance the purchase of certain pollution control equipment at
the Energy Complex and the Mills.
"FASB" means the Financial Accounting Standards Board.
5
<PAGE>
"Financing Documents" means all agreements, documents and
instruments evidencing and/or securing the senior indebtedness of Mobile Energy.
"First Mortgage Bonds" means $255,210,000 principal amount of 8.665%
First Mortgage Bonds due 2017 issued by Mobile Energy and unconditionally
guaranteed by Holdings.
"Governmental Authority" means any federal, state, county, municipal,
foreign, international, regional or other governmental authority, agency,
department, board, body, instrumentality, commission, arbiter or court.
"Holdings" means Mobile Energy Services Holdings, Inc.
"IDB" means Industrial Development Board of the City of Mobile, Alabama.
"Indenture" means the Trust Indenture dated as of August 1, 1995 among
Mobile Energy, Holdings, and First Union National Bank of Georgia, as trustee.
"Intercreditor Agreement" means the Intercreditor and Collateral Agency
Agreement dated as of August 1, 1995 among Bankers Trust (Delaware) as the
collateral agent, Mobile Energy, Holdings, First Union National Bank of Georgia
as trustee under the Indenture, First Union National Bank of Georgia as trustee
under the Tax-Exempt Indenture, the IDB, and Banque Paribas as the Working
Capital Facility Provider.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
"Maintenance Expenditures" means all costs and expenses of operating
and maintaining the Energy Complex and, when Mobile Energy is exercising the
Mobile Energy Step-In Rights, the Pulp Mill Step-In Equipment, other than (i)
fuel costs and expenses, (ii) labor and employee expenses, including fringe
benefits and labor relations expense, (iii) payments for insurance premiums and
like insurance-related expenses, (iv) costs and expenses of consumable items
such as process or cleaning chemicals and lubricants, (v) equipment rental,
small tools and vehicle maintenance expenses, (vi) costs and expenses associated
with legal, accounting and other office and administrative functions, (vii)
permitting fees, (viii) costs and expenses of safety supplies, office supplies
and other office expenses, (ix) property taxes and payments made in lieu of
taxes, (x) computer maintenance expenses, (xi) any amounts payable for services
rendered under the Common Services Agreement, (xii) ash disposal costs, (xiii)
certain liquidated damages payable to the Mill Owners under the Master Operating
Agreement, (xiv) amounts payable to the Mill Owners for reimbursement of costs
incurred in connection with the exercise of Mill Owner Step-In Rights, (xv) any
amounts required to be rebated to the United States government pursuant to
Section 148 of the Internal Revenue Code in connection with any of the
Tax-Exempt Indenture Securities and (xvi) payments to the IDB,
6
<PAGE>
including payments required to be made by Mobile Energy with respect to the 1994
Bonds, in each case to the extent the foregoing costs or expenses are not
customarily treated as capital expenditures.
"Master Operating Agreement" means the Master Operating Agreement
(including any amendments thereto or restatements thereof) dated as of
December 12, 1994 among Mobile Energy, Scott/Kimberly-Clark, the Tissue Mill
Owner, the Pulp Mill Owner, and the Paper Mill Owner.
"Mill Environmental Indemnity Agreements" means three separate
environmental indemnity agreements dated December 12, 1994, including any
amendments thereto, between Mobile Energy and each of (1) the Pulp Mill Owner,
(2) the Paper Mill Owner, and (3) the Tissue Mill Owner.
"Mill Owner Maintenance Reserve Account Agreement" means the Mill Owner
Maintenance Reserve Account Agreement dated as of August 1, 1995 among Mobile
Energy, Southern, the Pulp Mill Owner, the Paper Mill Owner, and the Tissue
Mill Owner.
"Mill Owners" means the Paper Mill Owner, the Pulp Mill Owner, and the
Tissue Mill Owner.
"Mill Owner Step-In Rights" means the rights granted to the Mill Owners
by the Master Operating Agreement to assume operational responsibility for the
Energy Complex under certain circumstances where Mobile Energy fails to meet the
needs of the Mills for Processing Services and that failure is not excused under
the Master Operating Agreement.
"Mixed-Use Bonds" means a total of $172,000,000 in aggregate
principal amount of taxable Industrial Development Revenues Bonds due December
1,2019 issued by the IDB in December 1984 to finance the acquisition of certain
facilities at the Energy Complex and at the Pulp Mill.
"Mobile Energy" means Mobile Energy Services Company, L.L.C.
"Mobile Energy Step-In Rights" means the right granted to Mobile Energy
under the Master Operating Agreement to assume operational responsibility for
the Pulp Mill Step-In Equipment if the Pulp Mill Owner fails to perform its
obligations under the Water Agreement (and if certain other conditions are
satisfied).
"1994 Bonds" means $117,000,000 principal amount of Industrial
Development Revenue Bonds 1994 Series A due December 1, 2014 issued by the IDB
and Scott.
"O&M Agreement" means the Facility Operations and Maintenance
Agreement dated December 12, 1994 between Mobile Energy and Southern Energy.
7
<PAGE>
"Operation and Maintenance Costs" means all costs and expenses of
operating and maintaining the Energy Complex and, when Mobile Energy is
exercising the Mobile Energy Step-In Rights, the Pulp Mill Step-In Equipment,
including and together with, without limitation, Maintenance Expenditures and
any costs and expenses specified in clauses (i) through (xvi) of the definition
of Maintenance Expenditures (other than rent payments under the lease agreement
between the IDB and Mobile Energy that secures the Tax-Exempt Bonds and payments
of principal, premium and interest on the 1994 Bonds).
"Paper Mill Owner" means S.D. Warren acting in its capacity as the owner
of the Paper Mill.
"Peak Usage" (I) with respect to Liquor Processing Services, means
the amount of Liquor Processing Services utilized by the Pulp Mill (measured in
millions of pounds of virgin dry black liquor solids sent to the precipitation
mix tanks) during the one (1) week interval of time in which the Liquor
Processing Services consumed by the Pulp Mill were at the highest levels;
(ii) with respect to Power Processing Services, means with regard to a
particular Mill, the average of the amount of Power Processing Services utilized
by that Mill (measured in kilowatts) during the five (5) fifteen (15) minute
intervals of time (which intervals do not overlap) in which the Power Processing
Services utilized by that Mill were at the highest levels; and (iii) with
respect to Steam Processing Services, means with regard to a particular Mill,
the average of the amount of Steam Processing Services utilized by that Mill
(measured in millions of BTUs per hour) during the five (5) one (1) hour
intervals of time (which intervals do not overlap) in which the Steam Processing
Services utilized by that Mill were at the highest levels.
"Person" means any individual, sole proprietorship, corporation,
partnership, limited liability company, joint venture, trust, unincorporated
association, Governmental Authority or other entity.
"Processing Charges" means the usage charges that the Mill Owners are
required to pay to Mobile Energy under the Energy Services Agreements based
upon formulas set forth in the Master Operating Agreement and which vary from
month to month in accordance with the amount of Processing Services required by,
and provided to, such Mill Owner and Mobile Energy's efficiency with respect to
fuel usage.
"Process Model" means the computer model currently being developed by
Mobile Energy and the Mill Owners in accordance with certain principles set
forth in the Master Operating Agreement that will be used to calculate the fuel
cost component of the Processing Charges.
"Process Water Plant" means the plant owned by the Pulp Mill Owner
which supplies water to the Energy Complex and the Mills.
"Processing Services" means Power Processing Services, Steam Processing
Services and Liquor Processing Services.
8
<PAGE>
"Project Agreements" means the Energy Services Agreements, the
Master Operating Agreement, the Direct Lease, the Supplementary Lease, the O&M
Agreement, the Confidentiality Agreement, the Common Services Agreement, the
Water Agreement, the Ash Agreement, the Pulp Supply Agreement, the
Scott/Kimberly-Clark Environmental Indemnity Agreement, the Mill Environmental
Indemnity Agreements, the Transition Agreement and the Easement Deeds.
"Pulp Mill Owner" means Scott/Kimberly-Clark acting in its capacity as
the owner of the Pulp Mill.
"Pulp Mill Step-In Equipment" means the Process Water Plant, the Waste
Water Treatment Plant, the Air Compressors (if any of the Mill Owners are
operating the Air Compressors) and the Pulp Mill's truck scales.
"Pulp Supply Agreement" means the agreement under which the Pulp Mill
Owner entered into a long-term agreement for the Pulp Mill to supply the Paper
Mill with its pulp requirements (subject to minimum and maximum
amounts).
"Scott" means Scott Paper Company.
"Scott/Kimberly Clark" means Scott, the wholly owned subsidiary of
Kimberly-Clark, Inc.
"Scott/Kimberly-Clark Environmental Indemnity Agreement" means
the Environmental Indemnity Agreement between Mobile Energy and
Scott/Kimberly-Clark dated December 12, 1994, including any amendments thereto.
"S.D. Warren" means S.D. Warren Company.
"SEC" means the Securities and Exchange Commission.
"Shared Services" means Steam Processing Services, Power
Processing Services, process water, and compressed air.
"Services" means any one or more (as the context may require)
of Liquor Processing Services and the Shared Services.
"Southern" means The Southern Company.
"Southern Energy" means Southern Energy, Inc. formerly Southern Electric
International, Inc.
9
<PAGE>
"Step-In Rights" means Mill Owner Step-In Rights or Mobile Energy
Step-In Rights, as the context may require.
"Supplementary Lease" means the Supplementary Lease Agreement
between Mobile Energy and Scott/Kimberly-Clark dated December 12, 1994,
including any amendments thereto.
"Tax-Exempt Bonds" means $85,000,000 principal amount of 6.95%
Solid Waste Revenue Refunding Bonds (Mobile Energy Services Company, L.L.C.
Project) Series 1995 due 2020 issued by the IDB.
"Tax-Exempt Indenture" means the Amended and Restated Trust Indenture
dated as of August 1, 1995 between the IDB and First Union National Bank of
Georgia, as trustee, under which the Tax-Exempt Bonds were issued in
August 1995.
"Tax-Exempt Indenture Securities" means the Tax-Exempt Bonds and any
additional senior indebtedness issued pursuant to the Tax-Exempt Indenture.
"Tissue Mill Owner" means Scott/Kimberly-Clark acting in its capacity
as the owner of the Tissue Mill.
"Transition Agreement" means the Transition Agreement dated
December 12, 1994 between Mobile Energy and Scott/Kimberly-Clark, including any
amendments thereto.
"Waste Water Treatment Plant" means the treatment plant owned by the
Pulp Mill Owner and used to treat waste water from the Energy Complex and
the Mills.
"Water Agreement" means the Water Procurement and Effluent Services
Agreement dated December 12, 1994 among Mobile Energy, the Pulp Mill Owner, the
Tissue Mill Owner, and the Paper Mill Owner, including any amendments thereto.
10
<PAGE>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
MANAGEMENT'S OPINION AS TO FAIR STATEMENT OF RESULTS
The condensed financial statements of Mobile Energy included herein have
been prepared by Mobile Energy without audit, pursuant to the rules and
regulations of the SEC. In the opinion of Mobile Energy's management, the
information furnished herein reflects all adjustments (which, except for the
termination of interest rate hedging agreements as described in Note (A) to the
Condensed Financial Statements herein, included only normal recurring
adjustments) necessary to present fairly the results for the periods ended
September 30, 1996 and 1995. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the SEC, although Mobile Energy believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes thereto included in Mobile Energy's
Annual Report on Form 10-K for the year ended December 31, 1995.
11
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
OPERATING REVENUES:
Demand charges $14,350 $14,678 $43,276 $43,658
Processing sales 6,068 5,520 18,809 17,757
Other 200 125 643 347
------- ------- -------- -------
Total operating revenues 20,618 20,323 62,728 61,762
OPERATING EXPENSES:
Operations and maintenance 6,490 6,974 18,642 19,024
Fuel 1,351 1,137 5,260 4,645
Depreciation and amortization 3,135 2,923 9,340 8,558
------- ------- -------- -------
Total operating expenses 10,976 11,034 33,242 32,227
OPERATING INCOME 9,642 9,289 29,486 29,535
INTEREST EXPENSE (7,497) (5,487) (22,622) (11,036)
OTHER INCOME 132 546 601 589
------- ------- -------- -------
NET INCOME $ 2,277 $ 4,348 $ 7,465 $19,088
======= ======= ======== =======
The accompanying notes as they relate to Mobile Energy are an integral part of these condensed statements.
</TABLE>
12
<PAGE>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine Months
Ended September 30,
--------------------------------
1996 1995
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,465 $ 19,088
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,340 8,558
Change in operating assets and liabilities:
Accounts receivable 33 (9,168)
Materials and supplies (42) 0
Prepaid expenses and other current assets 1,367 1,403
Accounts payable (1,014) (8,675)
Accrued interest and other current liabilities (3,510) 2,375
-------- --------
Total adjustments 6,174 (5,507)
-------- --------
Net cash provided by operating activities 13,639 13,581
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (5,516) (680)
Construction work in process (3,481) (4,065)
-------- --------
Net cash used in investing activities (8,997) (4,745)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan Costs 20 0
Issuance of notes payable (1,612) (190,000)
Equity Contributions 0 3,057
Payments on long-term debt (4,880) 211,408
Payment of member distributions (23,004) (13,825)
-------- --------
Net cash used in financing activities (29,476) 10,640
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (24,834) 19,476
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 40,990 1,173
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,156 $ 20,649
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $ 24,585 $ 6,805
======== =========
The accompanying notes as they relate to Mobile Energy are an integral part of these condensed statements.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
<S> <C> <C>
At September 30, 1996 At December 31,
(Unaudited) 1995
--------------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 7,469 $ 40,990
Restricted deposits 8,687 0
Trade accounts receivable 13,765 13,798
Materials and supplies 2,560 2,518
Prepaid expenses and other 265 1,632
-------- --------
Total current assets 32,746 58,938
-------- --------
PROPERTY, PLANT AND EQUIPMENT 366,592 361,076
Less accumulated depreciation (20,541) (11,795)
Construction work in process 11,291 7,810
-------- --------
Property, plant and equipment, net 357,342 357,091
-------- --------
DEFERRED LOAN COST
Net of accumulated amortization of $797 and $285 at
September 30, 1996 and December 31, 1995 respectively 14,359 14,862
-------- --------
Total assets $404,447 $430,891
======== ========
LIABILITIES AND MEMBERS' EQUITY
At September 30, 1996 At December 31,
(Unaudited) 1995
--------------------- --------------
CURRENT LIABILITIES
Trade accounts payable $ 1,133 $ 783
Account payable - associated company 4,621 5,985
Dividends payable 0 23,004
Note payable 12,463 14,075
Current portion - long-term debt 7,350 5,895
Accrued interest 6,878 9,889
Other 1,533 2,022
-------- --------
Total current liabilities 33,978 61,653
-------- --------
LONG-TERM DEBT 296,131 302,466
COMMITMENTS AND CONTINGENCIES (Note B)
MEMBERS' EQUITY 74,338 66,772
-------- --------
Total liabilities and members' equity $404,447 $430,891
======== ========
The accompanying notes as they relate to Mobile Energy are an integral part of these condensed statements.
</TABLE>
14
<PAGE>
MOBILE ENERGY SERVICES HOLDINGS, INC. AND SUBSIDIARY
MANAGEMENT'S OPINION AS TO FAIR STATEMENT OF RESULTS
The condensed consolidated financial statements of Holdings included herein
have been prepared by Holdings without audit, pursuant to the rules and
regulations of the SEC. In the opinion of Holdings' management, the information
furnished herein reflects all adjustments (which, except for the termination of
interest rate hedging agreements as described in Note (A) to the Condensed
Consolidated Financial Statements herein, included only normal recurring
adjustments) necessary to present fairly the results for the periods ended
September 30, 1996 and 1995. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the SEC, although Holdings believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in
Holdings' Annual Report on Form 10-K for the year ended December 31, 1995.
15
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
OPERATING REVENUES:
Demand charges $14,350 $14,678 $43,276 $43,658
Processing sales 6,068 5,520 18,809 17,757
Other 200 125 643 347
------- ------- ------- -------
Total operating revenues 20,618 20,323 62,728 61,762
OPERATING EXPENSES:
Operations and maintenance 6,390 6,974 18,542 19,024
Fuel 1,351 1,137 5,260 4,645
Depreciation and amortization 3,135 2,923 9,340 8,558
------- ------- ------- -------
Total operating expenses 10,876 11,034 33,142 32,227
OPERATING INCOME 9,742 9,289 29,586 29,535
INTEREST EXPENSE (7,497) (5,487) (22,622) (11,036)
OTHER INCOME 195 546 681 589
MINORITY INTEREST (23) (26) (75) (117)
------- ------- ------- -------
INCOME BEFORE TAXES 2,417 4,322 7,570 18,971
PROVISION FOR INCOME TAXES 886 1,663 2,857 7,301
------- ------- ------- -------
NET INCOME $ 1,531 $ 2,659 $ 4,713 $11,670
======= ======= ======= =======
The accompanying notes as they relate to Holdings are an integral part of these condensed statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
<S> <C> <C>
For the Nine Months
Ended September, 30,
-----------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,713 $ 11,670
-------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,340 8,558
Change in operating assets and liabilities:
Accounts receivable 33 (9,168)
Materials and supplies (42) 0
Prepaid expenses and other current assets 1,368 0
Accounts payable (4,740) (8,654)
Accrued interest and other current liabilities (1,328) 3,326
-------- ----------
Total adjustments 4,631 (5,938)
-------- ----------
Net cash provided by operating activities 9,344 5,732
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (5,516) (680)
Construction work in process (3,481) (4,065)
-------- ---------
Net cash used in investing activities (8,997) (4,745)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan Costs 0 0
Increase in deferred income taxes 7,814 15,985
Issuance of notes payable (1,612) (190,000)
Payments on long-term debt (4,880) 211,408
Payment of dividends (23,004) (14,694)
-------- ---------
Net cash used in financing activities (21,682) 22,699
-------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (21,335) 23,686
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 41,118 1,173
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,783 $ 24,859
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $ 24,585 $ 6,805
======== =========
Cash received during the period for:
Cash received for Income Tax $ 7,144 $ 7,268
======== =========
The accompanying notes as they relate to Holdings are an integral part of these condensed statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in Thousands of Dollars)
<S> <C> <C>
ASSETS
At September 30, 1996 At December 31,
(Unaudited) 1995
--------------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 11,096 $ 41,118
Restricted deposits 8,687 0
Trade accounts receivable 13,765 13,798
Materials and supplies 2,560 2,518
Prepaid expenses and other 265 1,633
-------- ---------
Total current assets 36,373 59,067
-------- ---------
PROPERTY, PLANT AND EQUIPMENT 366,592 361,076
Less accumulated depreciation (20,541) (11,795)
Construction work in process 11,291 7,810
-------- --------
Property, plant and equipment, net 357,342 357,091
-------- --------
DEFERRED LOAN COST
Net of accumulated amortization of $797 and $285 at
September 30, 1996 and December 31, 1995 respectively 14,359 14,862
-------- --------
Total assets $408,074 $431,020
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
At September 30, 1996 At December 31,
(Unaudited) 1995
---------------------- ----------------
CURRENT LIABILITIES
Trade accounts payable $ 1,133 $ 783
Account payable - associated company 917 6,007
Dividends payable 0 23,004
Note payable 12,463 14,075
Current portion - long-term debt 7,350 5,895
Current income tax payable 5,523 3,335
Accrued interest 6,878 9,889
Other 1,549 2,038
-------- --------
Total current liabilities 35,813 65,026
-------- --------
DEFERRED INCOME TAX 29,908 22,094
-------- --------
LONG-TERM DEBT 296,131 302,466
-------- --------
MINORITY INTEREST 743 668
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $1 par value; 1,000 shares
authorized and outstanding 1 1
Paid-in capital 41,367 41,367
Retained earnings (deficit) 4,111 (602)
-------- --------
Total stockholder's equity 45,479 40,766
-------- --------
Total liabilities and stockholder's equity $408,074 $431,020
======== ========
The accompanying notes as they relate to Holdings are an integral part of these condensed statements.
</TABLE>
18
<PAGE>
Mobile Energy Services Company, L.L.C.
Mobile Energy Services Holdings, Inc.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
MOBILE ENERGY SERVICES COMPANY L.L.C.
MOBILE ENERGY SERVICES HOLDINGS, INC.
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
Registrant Applicable Notes
MOBILE ENERGY A, B
HOLDINGS A, B
19
<PAGE>
MOBILE ENERGY SERVICES COMPANY L.L.C.
MOBILE ENERGY SERVICES HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS:
(A) On December 19, 1994, Mobile Energy entered into two swaps with a bank. The
purpose of the swaps was to reduce the potential impact of interest rate
fluctuations between December 19, 1994 and the date the rates on the Tax Exempt
Bonds and the First Mortgage Bonds were fixed. On August 24, 1995, Mobile Energy
paid approximately $32.3 million from the proceeds of its First Mortgage Bond
offering to terminate the swaps. This payment is deferred and amortized to
interest expense over the period of the related debt.
(B) Mobile Energy is contractually obligated under the Energy Service Agreements
to provide Power Processing Services and Steam Processing Services to the Mills
and Liquor Processing Services to the Pulp Mill for a period of 25 years
beginning December 16, 1994. Under the terms of the Agreements, the Mill Owners
are obligated to pay monthly fixed Demand Charges for dedicated capacity of the
Energy Complex and also variable charges for actual amounts purchased.
In connection with the Acquisition (as hereinafter defined), Mobile
Energy entered into two noncancelable land leases (the "Leases") with Scott.
Rent expense under each of the Leases approximates $1 per year from 1995 through
2019. Also contained in each of the Leases is an option to purchase the land
from Scott/Kimberly-Clark at the end of the lease term for $10. However,
retention of the property is not under the control of Mobile Energy due to
Scott/Kimberly-Clark's superseding option to repurchase the Energy Complex from
Mobile Energy at the end of the lease term at fair market value within certain
preset bounds. Accordingly, Mobile Energy's repurchase option is not reasonably
assured and therefore is not considered a bargain purchase option under FASB No.
13, "Accounting for Leases."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Background
Mobile Energy and Holdings were formed to acquire, own and manage the energy and
black liquor recovery complex (the "Energy Complex") located at an integrated
pulp, paper and tissue manufacturing facility in Mobile, Alabama (the "Mobile
Facility"). Holdings acquired the Energy Complex (the "Acquisition") and
commenced operations on December 16, 1994 (the "Acquisition Closing Date").
Holdings transferred all its interests in the Energy Complex to Mobile Energy on
July 14, 1995. Mobile Energy's sole business consists exclusively of the
ownership and management of the Energy Complex. Holdings, which owns 99% of the
equity interests in Mobile Energy, does not conduct any independent operations.
Southern Energy owns the remaining equity interest in Mobile Energy.
The Mobile Facility is a physically integrated complex that produces tissue
and paper products from timber that is processed into bleached and unbleached
pulp. The Mobile Facility is comprised of the Energy Complex, a tissue mill (the
"Tissue Mill"), a pulp mill (the "Pulp Mill"), and a paper mill (the "Paper
Mill," and together with the Tissue Mill and the Pulp Mill, the "Mills"). The
Pulp, Paper and Tissue Mills currently obtain all of their aggregate steam
processing needs and 98 percent of their aggregate power processing needs from
the Energy Complex. In addition, the Energy Complex processes weak black liquor
delivered by the Pulp Mill Owner into green liquor, a necessary component of the
pulp making process (this process, the "Liquor Processing Services"). The
conversion of weak black liquor into green liquor involves a combustion process
which provides heat that is further used to generate steam (the "Steam
Processing Services") and electricity (the "Power Processing Services"). Mobile
Energy's revenues are comprised almost entirely of Demand Charges and Processing
Charges for services provided to the Mills.
Demand Charges represent compensation to Mobile Energy for dedicating a
portion of the Energy Complex's capacity to the Mills. Demand Charges are
designed generally to cover, among other things, costs that are in the nature of
fixed costs, including debt service. Processing Charges are paid by each Mill
Owner to Mobile Energy based on formulary usage charges which vary from month to
month, based on the amount of Processing Services required by, and provided to,
each Mill Owner, and on Mobile Energy's efficiency with respect to fuel usage.
Processing Charges are designed generally to cover the balance of Mobile
Energy's costs that are not projected to be covered by Demand Charges, including
fuel expenses.
Results of Operations
Because the Energy Complex was not operated as an independent business prior to
its acquisition by Holdings, Holdings did not purchase a business from Scott
but, rather, purchased assets. Since the Acquisition, Holdings and subsequently
Mobile Energy have operated such assets as an independent business. The business
with respect to the Energy Complex commenced on December 16, 1994 when Holdings
began operations. As a consequence of the relatively short time period Holdings
and Mobile Energy have operated the Energy Complex, discussion and analysis of
their results of operations is necessarily limited in scope, and may not be
indicative of their future results of operations and financial condition. Thus,
the financial information contained herein is not necessarily representative of
the future results of operations and financial condition of Mobile Energy or
Holdings.
21
<PAGE>
The relationship between Holdings and Mobile Energy is a parent-subsidiary
relationship. Holdings' material assets are comprised solely of its ownership
interest in Mobile Energy and its rights in respect of a tax sharing agreement
(the "Southern Master Tax Sharing Agreement"), which apportions consolidated
income tax among Southern and its corporate subsidiaries, including Holdings.
Accordingly, the consolidated financial statements of Holdings reflect the
assets, liabilities, and operating results of Mobile Energy. Furthermore,
although Mobile Energy did not exist prior to July 13, 1995, the following
discussion of its results of operations assumes that, for purposes of
presentation, Mobile Energy was in existence and operating the Energy Complex as
of the beginning of calendar year 1995.
Revenues
Operating revenues for the quarter and nine month period ended September 30,
1996 increased $.3 million, or 1.5%, and $1.0 million, or 1.6%, respectively,
compared to the same periods in 1995. The increases for both periods are
primarily due to increased processing sales and, to a lesser extent, increases
in compressed air sales. The level of Processing Charges for both periods
reflects utilization of the Energy Complex near capacity levels. Demand Charges
and Processing Charges for the quarter and nine month period ended September 30,
1996 and 1995, in thousands of dollars and expressed as a percent of total
revenues, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Ended Year to Date
------------------------------------------ -----------------------------------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands) (Dollars in thousands)
Demand Charges:
Pulp Mill $9,223 44.7% $9,595 47.2% $27,942 44.5% $28,531 46.2%
Tissue Mill 2,533 12.3% 2,509 12.4% 7,573 12.1% 7,478 12.1%
Paper Mill 2,594 12.6% 2,574 12.7% 7,761 12.4% 7,649 12.4%
------ ---- ------ ---- ------- ---- ------- ----
14,350 69.6% 14,678 72.3% 43,276 69.0% 43,658 70.7%
Processing Charges: (1)
Pulp Mill 1,117 5.4% 877 4.3% 3,913 6.2% 3,326 5.4%
Tissue Mill 2,479 12.0% 2,339 11.5% 7,461 11.9% 7,206 11.6%
Paper Mill 2,472 12.0% 2,304 11.3% 7,435 11.9% 7,225 11.7%
------ ---- ------ ---- ------- ---- ------- ----
6,068 29.4% 5,520 27.1% 18,809 30.0% 17,757 28.7%
Other revenues (2) 200 1.0% 125 0.6% 643 1.0% 347 0.6%
------- ----- ------- ----- -------- ----- -------- ------
Total revenues $20,618 100.0% $20,323 100.0% $62,728 100.0% $61,762 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
(1) Includes Processing Charges plus ash hauling revenue.
(2) Consists only of compressed air sales.
The Mills' Peak Usages of Processing Services during 1995 and the nine
month periods ended September 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1995 YTD 9-30-96 YTD 9-30-95
--------------------- -------------------- ----------------------
Peak Contractual Peak Contractual Peak Contractual
Mill Processing Services Usage Demand Usage Demand Usage Demand
---- ------------------- ----- ------ ----- ------ ----- ------
Pulp Liquor Conversion
MMLBs/week 38.9 42.7 44.6 42.7 42.2 42.7
Steam
MMBTUs/hr 602.2 500.0 486.0 500.0 602.2 500.0
Electricity Not
MW/hr 31.2 32.0 30.0 32.0 Available 32.0
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1995 YTD 9-30-96 YTD 9-30-95
--------------------- -------------------- ----------------------
Peak Contractual Peak Contractual Peak Contractual
Mill Processing Services Usage Demand Usage Demand Usage Demand
---- ------------------- ----- ------ ----- ------ ----- ------
Tissue Steam
MMBTUs/hr 239.3 280.0 222.0 280.0 233.3 280.0
Electricity
MW/hr 39.5 39.5 38.9 39.5 39.5 39.5
Paper Steam
MMBTUs/hr 506.2 420.0 395.0 420.0 506.2 420.0
Electricity
MW/hr 22.6 22.5 22.3 22.5 22.6 22.5
</TABLE>
Prior to the installation of certain electrical meters, which was completed
in February 1996, Mobile Energy could not precisely determine the peak usage of
each Mill for Power Processing Services.
Expenses
Total operations and maintenance expense decreased $.5 million, or 6.9%, for the
quarter ended September 30, 1996, compared to the same period in 1995. Year to
date operations and maintenance expense for 1996 decreased $.4 million, or 2.0%,
compared to 1995. The third quarter and year to date decrease in operations and
maintenance expense in 1996 results from the occurrence in 1995 of a scheduled
maintenance outage of the entire Mobile Complex, including the Pulp Mill, the
Paper Mill and the Tissue Mill in 1995. There is not another outage of this type
scheduled until the spring of 1998. Fuel expense compared to the prior year
increased $.2 million, or 18.8%, for the third quarter and increased $.6
million, or 13.2%, for the nine month period ended September 30, 1996. The $.6
million increase in fuel expense resulted from scheduled maintenance outages in
March 1996 and September 1996, during which Mobile Energy used a standby
gas-fired boiler in lieu of its primary coal-fired boiler, which was idle during
the outage. Depreciation and amortization expense increased $.2 million and $.8
million for the quarter and nine months ended September 30, 1996, respectively,
compared to the same periods in 1995 primarily due to capital additions made in
1995 and 1996.
Interest expense increased $2.0 million, or 36.6%, and $11.6 million, or
105%, in the quarter and nine month periods ended September 30, 1996 compared to
the same periods in 1995. Both increases reflect the issuance of $255.2 million
First Mortgage Bonds in August 1995 bearing a coupon interest rate of 8.665% and
the amortization of swap breakage costs relative to interest rate hedging
agreements entered into in connection with the Acquisition.
Mobile Energy's net income for the third quarter of 1996 was $2.3 million,
representing a decrease of $2.1 million, or 47.6%, compared to the third quarter
of 1995. Similarly, net income for the nine month period ended September 30,
1996 was $7.5 million, representing a decrease of $11.6 million, or 60.9%,
compared to the same period in 1995. Both decreases were largely due to the
increases in interest expense explained previously. Holdings' net income for the
third quarter and first nine months of 1996 compared to the same periods in 1995
decreased 42.4% and 59.6% , respectively, and reflected comparable decreases in
minority interest and income taxes. Income taxes were provided for based on a
combined 38.25% state and federal rate applied to pre-tax income.
23
<PAGE>
Liquidity and Capital Resources
As of September 30, 1996, Holdings had $19.8 million in cash and cash
equivalents and total debt of $315.9 million. This level of liquidity (as
applied to Mobile Energy) will be affected by Mobile Energy's operating
performance, capital expenditures and dividend policies.
Mobile Energy's working capital needs generally relate to Operation and
Maintenance Costs and debt service. In accordance with the Intercreditor
Agreement, Mobile Energy will reserve funds for certain operation and
maintenance activities in a separate account (the " Maintenance Reserve
Account") before such operation and maintenance activities are performed for
Mobile Energy.
Operation and Maintenance Costs are budgeted at $28.2 million and $29.6
million for 1996 and 1997, respectively. During the nine month period ending
September 30, 1996, actual Operation and Maintenance Costs aggregated $18.5
million compared to a budget of $18.7 million. As of September 30, 1996 Mobile
Energy also had spent approximately $20.4 million on the construction and
installation of certain facilities and equipment and to purchase inventory, of
which approximately $8.5 million was expended during the nine months of 1996.
In 1995, Mobile Energy spent approximately $32.3 million to pay certain
termination costs related to interest rate hedging agreements to which Mobile
Energy was a party that were entered into in connection with the Acquisition.
The interest rate hedging agreements were not entered into in respect of
existing indebtedness of Holdings or of Mobile Energy. Rather, the interest rate
hedging agreements were entered into in anticipation of the issuance of the
First Mortgage Bonds and Tax-Exempt Bonds issued in August 1995 in order to
enable Holdings, following the Acquisition, to structure its financing around a
targeted aggregate annual debt service (including principal and interest), while
resulting in approximately the same amount of aggregate net proceeds available
to Mobile Energy (inclusive of amounts payable to Mobile Energy, and net of
amounts payable by Mobile Energy, in connection with the termination of such
interest rate hedging agreements). In "terminating" the interest rate hedging
agreements, Mobile Energy assigned its rights and obligations under the
agreements to a bank on a non-recourse basis.
The interest rate hedging agreements served to reduce the potential impact
of interest rate fluctuations between the date of the Acquisition and the date
on which the interest rates on the First Mortgage Bonds and the Tax-Exempt Bonds
were fixed (the "Pricing Date"), because both the settlement amount required to
terminate Mobile Energy's rights and obligations under the interest rate hedging
agreements and Mobile Energy's debt service obligations with respect to the
First Mortgage Bonds and the Tax-Exempt Bonds were determined simultaneously
upon the pricing of such financings, and reflected interest rates then in effect
in the applicable markets. Because market interest rates decreased between the
Acquisition Closing Date and the Pricing Date (causing the interest rate hedging
agreements to be "out of the money"), Mobile Energy paid the assignee of the
agreements a settlement amount. However, as Mobile Energy's interest expense
component of debt service was reduced by the decline in interest rates, thereby
offsetting the higher principal component of debt service that was incurred as a
result of additional debt raised to fund the settlement amount, Mobile Energy's
aggregate debt service obligations were maintained at approximately the level
projected at the time of Acquisition.
Mobile Energy has no plans to enter into other agreements to fix or
otherwise manage interest rate risk in the near future. The indebtedness
evidenced by the First Mortgage Bonds and the Tax-Exempt Bonds bears fixed rate
interest, and the indebtedness represented by borrowings under a revolving
credit facility providing for working capital loans to Mobile Energy (the
"Working Capital Facility"), which is limited to $15.0 million, bears interest
24
<PAGE>
at variable rates. Subject to Mobile Energy's right to incur additional
indebtedness, the indebtedness represented by the First Mortgage Bonds, the
Tax-Exempt Bonds and the Working Capital Facility currently is Mobile Energy's
only material long-term indebtedness.
Mobile Energy's projected accrued obligations for required payments of
principal and interest on long-term debt for calendar years 1996 and 1997 are
$34.7 million and $34.7 million, respectively. Payments of principal and
interest on long-term debt for the nine month period ending September 30, 1996
aggregated $29.7 million.
Mobile Energy's principal sources of working capital are cash flow from
operations, borrowings under the Working Capital Facility, balances in the
Maintenance Reserve Account and drawings under a Southern guaranty in respect of
the Maintenance Reserve Account and/or under any revolving credit facility
maintained by Southern to provide liquidity with respect to such Southern
guaranty. Since December 31, 1995, Mobile Energy has drawn an aggregate of $8.7
million under such a revolving credit facility maintained by Southern with
Banque Paribas.
In order to provide for Mobile Energy's working capital needs, in August
1995 Mobile Energy entered into the Working Capital Facility with Banque Paribas
(the "Working Capital Facility Provider") providing working capital loans to
Mobile Energy. The Working Capital Facility provides for a maximum available
amount of $15.0 million and may be drawn on by Mobile Energy from time to time.
Borrowings under the Working Capital Facility generally will be used by Mobile
Energy to pay for Operation and Maintenance Costs incurred by Mobile Energy.
Each working capital loan is due and payable no later than 90 days from the date
such working capital loan was advanced to Mobile Energy, and no more than $5.0
million (to be adjusted in proportion to any adjustments to the maximum
available amount under the Working Capital Facility) of working capital loans
may be scheduled to mature during any calendar month. Mobile Energy is required
to repay each working capital loan on its due date and may, upon notice to the
Working Capital Facility Provider, repay or prepay any working capital loan on
any business day without premium or penalty, other than certain funding breakage
costs in respect of working capital loans bearing interest at the LIBOR Rate (as
defined in the Working Capital Facility). Mobile Energy is permitted to
re-borrow all amounts repaid or prepaid. Mobile Energy is required to repay all
working capital loans such that no amounts are outstanding under the Working
Capital Facility one time each year for a period of five consecutive days. In
order to meet this request, the working capital facility was paid down on
September 16, 1996 and no amount was outstanding under the Working Capital
Facility until September 30, 1996. Mobile Energy obtained $3.7 million from
Holdings in the form of an intercompany loan, which was used to pay the Working
Capital Facility down. The loan, which is subordinate to Mobile Energy's other
Long Term debt, has an indefinite repayment term. Subject to earlier termination
under certain circumstances and subject to extension thereof by the Working
Capital Facility Provider, the Working Capital Facility will expire on December
31, 2001.
Amounts payable under the Working Capital Facility are secured ratably with
all other senior indebtedness of Mobile Energy (subject to the priority of the
lien of the Working Capital Facility Provider on receivables and fuel
inventory). The Working Capital Facility Provider is entitled to the repayment
of principal, interest, fees and other amounts scheduled to be due under the
Working Capital Facility prior to the payment of operation and maintenance costs
(other than certain operation and maintenance costs payable to the Mill Owners
in connection with the exercise of certain remedies the Mill Owners have under
the Project Agreements) and (together with, upon the occurrence and continuation
of certain Bankruptcy Events in respect of Mobile Energy or Holdings, all
amounts due upon the acceleration thereof) prior to any amounts payable in
respect of other senior indebtedness, including the First Mortgage Bonds and any
amounts payable under the lease entered into in connection with the Tax-Exempt
25
<PAGE>
Bonds. Upon the distribution of certain moneys or proceeds of pledged collateral
following certain events of default or Bankruptcy Events, the Working Capital
Facility Provider is entitled to payment in full in priority to all other
holders of senior indebtedness out of (i) Mobile Energy's receivables and (ii)
the proceeds of the sale of the Energy Complex's fuel inventory.
Upon its establishment in August 1995 at the time of the issuance of the
First Mortgage Bonds and the Tax-Exempt Bonds, the Maintenance Reserve Account
was credited in an amount equal to $11.0 million. In lieu of funding the
Maintenance Reserve Account with cash at that time, Mobile Energy provided
instead a guaranty from Southern in an amount equal to $11.0 million. Moneys in
the Maintenance Reserve Account are applied to the payment of Maintenance
Expenditures.
The Intercreditor Agreement requires Mobile Energy to periodically make
deposits into the Maintenance Reserve Account sufficient to cover projected
future Maintenance Expenditures, any shortfalls in the amounts of prior deposits
required to be made into the account by Mobile Energy, and any withdrawals in
excess of the projected Maintenance Expenditures. Mobile Energy may also make
additional, discretionary deposits into the Maintenance Reserve Account. In lieu
of funding the Maintenance Reserve Account with cash, or in replacement of
moneys required to be on deposit therein, Mobile Energy may from time to time
deliver "Reserve Account Security," which is either, or any combination of, (i)
a guaranty from Southern provided Southern satisfies certain credit standards
set out in the Intercreditor Agreement, or (ii) one or more letters of credit
issued by a commercial bank or banks whose long-term unsecured debt is rated at
least "A" by Standard & Poors' Ratings Group, "A" by Fitch Investors Service,
L.P. and "A2" by Moody's Investors Service, Inc.
Mobile Energy has established a separate account (the "Mill Owner
Maintenance Reserve Account") pursuant to the Master Operating Agreement and the
Mill Owner Maintenance Reserve Account Agreement for the benefit of Mobile
Energy and, while the Mill Owners are exercising the Mill Owner Step-In Rights,
the Mill Owners. The Mill Owner Maintenance Reserve Account is currently funded
in an amount equal to $2.0 million. In lieu of funding the Mill Owner
Maintenance Reserve Account with cash, Mobile Energy provided capital infusion
arrangements executed by Southern in favor of Mobile Energy and the Mill Owners
in an amount equal to $2.0 million in the aggregate. The Mill Owner Maintenance
Reserve Account and moneys on deposit therein, or otherwise credited thereto, do
not secure Mobile Energy's senior indebtedness. Nevertheless, given that the
Master Operating Agreement and the Mill Owner Maintenance Reserve Account
Agreement permit funds on deposit in the Mill Owner Maintenance Reserve Account
to be used, under certain limited circumstances, for, among other things,
operations and maintenance expenses, amounts on deposit therein, or otherwise
credited thereto, will be credited against Mobile Energy's funding obligation in
respect of the Maintenance Reserve Account.
Cash flow from operations is expected to consist almost exclusively of
payments of Demand Charges and Processing Charges by the Mill Owners for
Processing Services. Accordingly, the loss of revenues from any one Mill,
whether due to a mill closure or otherwise, could have a material adverse impact
on Mobile Energy's financial condition.
The Energy Services Agreements and the Master Operating Agreement require
the Mill Owners to pay Demand Charges and Processing Charges. The Demand Charges
were designed generally to cover, among other things, Mobile Energy's projected
costs that are in the nature of fixed costs (including the payment of debt
service), assuming that certain operating performance standards are satisfied.
The Processing Charges were designed generally to cover the balance of Mobile
Energy's costs that are not projected to be covered by Demand Charges, including
variable costs such as fuel related expenses.
26
<PAGE>
Under the Energy Services Agreements, the Demand Charges in effect at any
given time are due and payable on a monthly basis regardless of whether a Mill
Owner actually utilizes any or all of the Processing Services corresponding to
its dedicated Demand and are subject to automatic reduction due to a shortfall
in the provision of Processing Services by Mobile Energy that is not excused by
the Master Operating Agreement. The Processing Charges vary from month to month
in accordance with the amount of Processing Services required by, and provided
to, the Mill Owners and Mobile Energy's efficiency with regard to fuel usage.
For the quarter and nine month period ended September 30, 1996, 69.6% and 69.0%,
respectively, of Mobile Energy's total operating revenues were attributable to
Demand Charges with almost all of the remainder attributable to Processing
Charges.
The Demand Charges and the Processing Charges, collectively, were designed
so as to result in Mobile Energy having net income. There can be no assurance,
however, that (i) the assumptions with respect to operating performance
standards that underlay the design of the Demand Charges and the Processing
Charges will at all times be satisfied, (ii) the Demand Charges will at all
times cover Mobile Energy's costs that are in the nature of fixed costs,
including debt service payments, (iii) the Processing Charges will at all times
cover the costs that are not covered by Demand Charges, including variable costs
such as fuel related expenses, or (iv) the payment of Demand Charges and
Processing Charges will at all times result in Mobile Energy having net income.
Payments of Demand Charges and Processing Charges by the Mill Owners under
the Energy Services Agreements are expected to provide virtually all of Mobile
Energy's operating revenues and are therefore the primary source of funds for
the payment of debt service. There are no significant alternative sources of
funds available to Mobile Energy to make such debt service payments (other than
a debt service reserve account established for the benefit of the holders of the
First Mortgage Bonds (the "Debt Service Reserve Account"), a debt service
reserve account established for the benefit of the holders of the Tax-Exempt
Bonds (the "Tax-Exempt Debt Service Reserve Account") and, under certain
circumstances, certain other accounts). The Debt Service Reserve Account is
funded in an amount equal to $21,936,000 (the "Debt Service Reserve Account
Required Balance"). Mobile Energy may, in whole or in part, replace moneys on
deposit in, or fund amounts required to be deposited in, the Debt Service
Reserve Account with Reserve Account Security. Currently Mobile Energy has
funded the Debt Service Reserve Account with Reserve Account Security (in the
form of a guaranty from Southern) in an amount equal to the Debt Service Reserve
Account Required Balance. Currently, the Tax-Exempt Debt Service Reserve Account
is funded with Reserve Account Security (in the form of a letter of credit) in
an amount equal to $5,908,000.
If Demand Charges and Processing Charges were at any time to be
insufficient to cover Mobile Energy's fixed costs (including payment of debt
service) Mobile Energy could be unable to make its required debt service
payments (particularly if funds then available in the Debt Service Reserve
Account, the Tax-Exempt Debt Service Reserve Account or the other accounts were
also insufficient to cover such payments) or could be unable to pay its other
fixed costs.
The implementation of the Process Model will modify the manner in which the
Processing Charges currently are calculated. Once the Process Model is
implemented, Mobile Energy will be permitted to charge the Mill Owners, as a
component of the Processing Charges, for only those quantities of coal as are
calculated by the Process Model to be efficient quantities and only those
quantities of gas as are determined by the Process Model to be in accordance
with a specified protocol for boiler dispatch incorporated in the Process Model.
If the Energy Complex uses more coal or gas than the quantities calculated or
determined by the Process Model (because, for example, Mobile Energy has been
inefficient in its use of gas, coal, black liquor, biomass, or sludge or has
inappropriately dispatched its equipment), the costs attributable to the excess
quantities of coal or gas will not be permitted to be included in the Processing
27
<PAGE>
Charges and, as a result, will be borne by Mobile Energy. By contrast, if the
Energy Complex uses less coal or gas than the quantities calculated or
determined by the Process Model, Mobile Energy will be permitted to include in
the Processing Charges the costs associated with the Process Model quantities of
coal and gas, notwithstanding that such calculated or determined quantities may
exceed the actual quantities used by the Energy Complex. Thus, Mobile Energy
will be rewarded for operating the Energy Complex more efficiently than the
standards set forth in the Process Model and will bear the risk of operating the
Energy Complex less efficiently than those standards. Mobile Energy believes
that it generally will be able to operate the Energy Complex as efficiently as
the standards set forth in the Process Model. Accordingly, Mobile Energy
believes that the implementation of the Process Model alone will not cause its
future results of operations to differ materially from its historical results of
operations. Nevertheless, there can be no assurance that the Energy Complex will
use fuel in accordance with the standards set forth in the Process Model, that
Mobile Energy will operate the Energy Complex as or more efficiently than the
standards set forth in the Process Model or that the Process Model will perform
in accordance with its design or the principles set forth in the Master
Operating Agreement.
Mobile Energy believes that its cash flow from operations, together with
its other available sources of liquidity will be adequate to make all required
payments of principal of and interest on its debt, to permit anticipated capital
expenditures and to fund working capital and other cash requirements for the
foreseeable future.
Environmental Matters
Mobile Energy is subject to comprehensive and dynamic federal, state and local
environmental laws and regulations, including those governing air emissions,
waste water discharges and hazardous and non-hazardous waste disposal. Mobile
Energy recognizes that both it and the Mills may incur capital and operating
costs in the future to comply with currently existing laws and regulations, new
regulatory requirements and possible new statutory requirements.
One proposed regulatory requirement is the Cluster Rule, which has been
proposed, but has not yet been promulgated, by the EPA. The EPA proposed a
revised version of the water effluent guidelines and emissions standards
contained in the Cluster Rule in 1996. The Cluster Rule has not been finalized.
Mobile Energy has not determined the potential impact of the revised proposed
guidelines and standards on the Mills. None of the Mills are contractually
obligated to Mobile Energy to comply with the Cluster Rule or any other
environmental regulation. Thus, the Mills could choose to close entirely rather
than incur the costs imposed by the Cluster Rule. As such, the failure by the
Mills to spend the moneys necessary to comply with the Cluster Rule could,
indirectly, have a material adverse impact on Mobile Energy's results of
operations, to the extent that it were to reduce the amount of Processing
Services the Mills purchase from the Energy Complex.
Another such regulation is the Combustion Rule, which has not yet been
officially proposed but which the EPA has indicated may be proposed in late
1996. If promulgated in some form, the Combustion Rule (which would principally
apply to the Energy Complex) could require significant capital expenditures by
Mobile Energy and equipment and operational modifications to the Energy Complex.
Because the Combustion Rule has not yet been proposed, Mobile Energy cannot
estimate the expense required to comply with such a rule. Under the Master
Operating Agreement, Mobile Energy generally is permitted to charge the Mills
the reasonable cost of capital expenditures or operation and maintenance
expenses incurred by Mobile Energy as a result of the Combustion Rule or the
Cluster Rule. Nevertheless, there can be no assurance that the Mill Owners will
comply with their obligations under the Master Operating Agreement with respect
to the Combustion Rule or the Cluster Rule. As such, the promulgation of the
Cluster Rule or the Combustion Rule, together with the failure by the Mill
28
<PAGE>
Owners to comply with such obligations under the Master Operating Agreement,
could have a material adverse effect on the financial condition of Mobile
Energy.
As regulatory agencies have not yet promulgated final standards for some
existing programs, and as some proposed requirements (such as the Cluster Rule)
and suggested requirements (such as the Combustion Rule) have not yet been
enacted or adopted, Mobile Energy cannot at this time reasonably estimate its
costs of compliance with these additional programs and requirements (some of
which will not take effect for several years or may not be promulgated at all)
or the timing of any such costs. Nevertheless, assuming that the current
environmental regime (exclusive of any proposed or suggested statutes, rules or
regulations) remains in effect, Mobile Energy is not aware of any environmental
conditions at the Energy Complex that would reasonably be expected to have a
material adverse effect on the financial condition of Mobile Energy.
Finally, in the event that the Jackson Lott Road landfill or any other
landfill at which Mobile Energy's boiler ash is disposed requires remediation in
the future, Mobile Energy may be required to participate. At present, Mobile
Energy cannot estimate the amount by which its costs would increase as a result
thereof. However, a requirement to participate in landfill remediation could
have a material adverse impact on Mobile Energy.
Funding of the Maintenance Reserve Account
The Intercreditor Agreement requires Mobile Energy to make certain deposits into
the Maintenance Reserve Account, and permits Mobile Energy to make additional,
discretionary deposits into the Maintenance Reserve Account. The amount of such
required and discretionary deposits in any given fiscal year may be greater than
the maintenance expenses actually incurred by Mobile Energy in such fiscal year.
For purposes of calculating debt service coverage ratios under Mobile Energy's
Financing Documents, deposits into the Maintenance Reserve Account and the Mill
Owner Maintenance Reserve Account are deemed to be operating expenses in the
fiscal year such deposits are made, rather than in the fiscal year funds are
withdrawn from the Maintenance Reserve Account or the Mill Owner Maintenance
Reserve Account to pay maintenance expenses. The effect of deeming such deposits
to be operating expenses in the fiscal year the deposits are made (together with
the funding provisions set forth in the Intercreditor Agreement that may cause
or permit such deposits to be higher than actual maintenance expenses in any
given fiscal year) is to levelize debt service coverage ratios over the term of
the First Mortgage Bonds and the Tax-Exempt Bonds.
Tax Matters
Mobile Energy is required to comply with the provisions of federal, state and
local tax laws. Future legislative, judicial or administrative changes to or
interpretations of existing tax laws may occur that could result in Mobile
Energy becoming subject to certain taxes to which it is not currently subject.
Such changes could have a material adverse effect on the financial condition of
Mobile Energy.
Under Alabama law, property owned by the IDB and used by a private user
pursuant to a lease or other agreement entered into prior to May 1992 (or
entitled to be used by a private user at some future time pursuant to an
inducement entered into or adopted prior to May 1992) is not subject to ad
valorem taxes. The Energy Complex equipment refinanced with the Tax-Exempt
Bonds, the 1994 Bonds, the Mixed-Use Bonds and the Environmental Bonds is all
owned by the IDB and was constructed and leased to a private user prior to May
1992 or, in the case of the equipment financed with the 1994 Bonds, pursuant to
an inducement agreement entered into prior to May 1992. Accordingly, Mobile
Energy has taken the position that such equipment is not subject to ad valorem
taxes (and that no such taxes have ever been paid with respect to such
29
<PAGE>
equipment). In addition, Mobile Energy has received no notice or other
determination from the Alabama Department of Revenue or the County of Mobile
finding that such equipment actually is (or will be) subject to ad valorem
taxes. There can be no assurance, however, that Mobile Energy will at all times
be considered to be in compliance with all applicable tax statutes and
regulations or if such equipment were subject to ad valorem taxes, that any
action required to bring Mobile Energy into compliance with applicable tax
statutes and regulations would not materially adversely affect Mobile Energy's
financial condition.
30
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to General Instruction J.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedules
(a) Mobile Energy
(b) Holdings
(b) Reports on Form 8-K.
Neither registrant filed a Form 8-K during the nine month
period ended September 30, 1996.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MOBILE ENERGY SERVICES COMPANY L.L.C.
By /s/ Thomas G. Boren
Thomas G. Boren
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Raymond D. Hill
Raymond D. Hill
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 1996
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MOBILE ENERGY SERVICES HOLDINGS, INC.
By /s/ Thomas G. Boren
Thomas G. Boren
President and Chief Executive Officer
By /s/ Raymond D. Hill
Raymond D. Hill
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 1996
<TABLE> <S> <C>
<ARTICLE>UT
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for September 30, 1996, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK>0000948362
<NAME> MOBILE ENERGY SERVICES CO LLC
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 357,342
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 32,746
<TOTAL-DEFERRED-CHARGES> 14,359
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 404,447
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 74,338
<TOTAL-COMMON-STOCKHOLDERS-EQ> 74,338
0
0
<LONG-TERM-DEBT-NET> 303,481
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> (7,350)
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 26,628
<TOT-CAPITALIZATION-AND-LIAB> 404,447
<GROSS-OPERATING-REVENUE> 62,728
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 33,242
<TOTAL-OPERATING-EXPENSES> 33,242
<OPERATING-INCOME-LOSS> 29,486
<OTHER-INCOME-NET> 601
<INCOME-BEFORE-INTEREST-EXPEN> 30,087
<TOTAL-INTEREST-EXPENSE> 22,622
<NET-INCOME> 7,465
0
<EARNINGS-AVAILABLE-FOR-COMM> 7,465
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 13,639
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE>UT
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for September 30, 1996, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK>0000945979
<NAME> MOBILE ENERGY SERVICES HOLDINGS, INC.
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 357,342
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 36,373
<TOTAL-DEFERRED-CHARGES> 14,359
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 408,074
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 41,367
<RETAINED-EARNINGS> 4,111
<TOTAL-COMMON-STOCKHOLDERS-EQ> 45,479
0
0
<LONG-TERM-DEBT-NET> 303,481
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> (7,350)
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 59,114
<TOT-CAPITALIZATION-AND-LIAB> 408,074
<GROSS-OPERATING-REVENUE> 62,728
<INCOME-TAX-EXPENSE> 2,857
<OTHER-OPERATING-EXPENSES> 33,217
<TOTAL-OPERATING-EXPENSES> 36,074
<OPERATING-INCOME-LOSS> 26,654
<OTHER-INCOME-NET> 681
<INCOME-BEFORE-INTEREST-EXPEN> 27,335
<TOTAL-INTEREST-EXPENSE> 22,622
<NET-INCOME> 4,713
0
<EARNINGS-AVAILABLE-FOR-COMM> 4,713
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 9,344
<EPS-PRIMARY> 4,713
<EPS-DILUTED> 4,713
</TABLE>
