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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 March 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 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
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<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 ___
Description of Shares Outstanding
Registrant Common Stock at April 30, 1998
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 meet 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.
2
<PAGE>
Table of Contents
PAGE
PART I
Selected Definitions 4
Item 1. Financial Statements 10
Mobile Energy Services Company, L.L.C.
Management's Opinion as to Fair Statement of Results 10
Condensed Statements of Income 11
Condensed Statements of Cash Flows 12
Condensed Balance Sheets 13
Mobile Energy Services Holdings, Inc.
Management's Opinion as to Fair Statement of Results 14
Condensed Consolidated Statements of Income 15
Condensed Consolidated Statements of Cash Flows 16
Condensed Consolidated Balance Sheets 17
Notes to the Condensed Financial Statements 18
Item 2. Combined Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
PART II
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
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 Kimberly-Clark Tissue and located on the property
leased by Kimberly-Clark Tissue to Mobile Energy.
"Alabama Power" means Alabama Power Company.
"Alabama PSC" means the Alabama Public Service Commission.
"Cluster Rule" means a regulation adopted by the Environmental
Protection Agency ("EPA") in 1997 that includes (1) certain effluent limitation
guidelines and standards for the control of waste water pollutants and (2)
national emission standards for hazardous air pollutants emitted from mills that
chemically pulp wood fiber using kraft, sulfite, soda, or semi-chemical methods.
"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 hazardous air pollutant
emission standards for combustion sources.
"Common Services Agreement" means the Common Services
Agreement dated December 12, 1994 among Mobile Energy, Kimberly-Clark Tissue,
the Paper Mill Owner, the Tissue Mill Owner and the Pulp Mill Owner, including
any amendments thereto.
"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.
"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.
"FERC" means the Federal Energy Regulatory Commission.
"Financing Documents" means all agreements, documents and
instruments evidencing and/or securing the senior indebtedness of Mobile Energy.
4
<PAGE>
"First Mortgage Bonds" means $255,210,000 original principal
amount of 8.665% First Mortgage Bonds due 2017 issued by Mobile Energy and
unconditionally guaranteed by Holdings.
"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.
"Kimberly-Clark Tissue" means Kimberly-Clark Tissue Company,
the owner of the Tissue Mill and the Pulp Mill.
"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,
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 amended and restated
Master Operating Agreement (including any amendments thereto or restatements
thereof) dated as of July 13, 1995 among Mobile Energy, Kimberly-Clark Tissue,
the Tissue Mill Owner, the Pulp Mill Owner, and the Paper Mill Owner.
"Mill" means either of the Pulp Mill, the Paper Mill or the
Tissue Mill.
"Mill Closure" means a Mill Owner makes a public announcement
that it will close its Mill for a period of at least one year or that it will
reduce production of pulp, tissue or paper (as applicable) at its Mill
(permanently or for a period of at least two years) to less than 10% of such
Mill's 1994 production levels, or there occurs a two-year period during which
production at such Mill is less than 10% of 1994 production levels (for any
reason other than a force majeure event).
5
<PAGE>
"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.
"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 original principal amount of
Industrial Development Revenue Bonds 1994 Series A due December 1, 2014 issued
by the IDB and Scott.
"Operations 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 Warren Alabama 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.
6
<PAGE>
"Process Water Plant" means the plant owned by the Pulp Mill
Owner which supplies water to the Energy Complex and the Mills.
"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.
"Processing Services" means Power Processing Services, Steam
Processing Services and Liquor Processing Services.
"Pulp Mill Owner" means Kimberly-Clark Tissue 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.
"Scott" means Scott Paper Company.
"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 Resources, Inc.
(formerly known as Southern Energy, Inc. and Southern Electric International,
Inc.)
"Step-In Rights" means Mill Owner Step-In Rights or Mobile
Energy Step-In Rights, as the context may require.
"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.
7
<PAGE>
"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 Kimberly-Clark Tissue acting in its
capacity as the owner of the Tissue Mill.
"Warren Alabama" means S.D. Warren Alabama L.L.C., the owner
of the Paper Mill.
"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.
8
<PAGE>
Cautionary Statement Regarding Forward-Looking Information
In addition to historical information, this Quarterly Report on Form 10-Q
includes forward-looking statements. The registrants caution that there are
various important factors that could cause actual results to differ materially
from those indicated in the forward-looking statements; accordingly, there can
be no assurance that any such indicated results will be realized. Factors which
could cause the actual results in future periods to differ materially include
but are not limited to those discussed or identified from time to time in Mobile
Energy's or Holdings' filings with the SEC. Specifically, these factors include,
but are not limited to, the following: the impact of the Cluster Rules and the
Combustion Rules on the Mills and the Energy Complex; the ability of each Mill
Owner to reduce its production at its Mill and to terminate its Energy Services
Agreement upon the closure of its Mill, which could reduce materially the Demand
Charges and Processing Charges received by Mobile Energy; the effect of the
closure of the Pulp Mill and the termination of the Pulp Mill ESA; the cyclical
market fluctuations in the pulp, tissue and paper industry; the inability of
Mobile Energy to change its Demand Charges or Processing Charges to the Mill
Owners to reflect increased capital expenditures or operating expenses except
under certain limited circumstances; the ability of the Mill Owners to sell and
transfer their respective Mills which could result in the reduction of the
credit quality or industry expertise of the Mill Owner; and changes in or the
application of environmental and other laws and regulations to which Mobile
Energy and Holdings are subject.
9
<PAGE>
Item 1. FINANCIAL STATEMENTS
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 included only
normal recurring adjustments) necessary to present fairly the results for the
periods ended March 31, 1997 and 1998. The presentation of the financial
statements does not reflect any adjustments related to the events discussed in
footnote (B) to the financial statements. As discussed in footnote (B),
management is in the process of assessing the impact of such events and
determining what, if any, result they will have on the financial statements.
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. These condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto included in Mobile Energy's Report on Form 10-K for the year ended
December 31, 1997.
10
<PAGE>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three For the Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
OPERATING REVENUES:
Demand charges $13,929 $14,086
Processing charges 6,690 7,690
Compressed air 240 180
Ash hauling 157 287
--------- --------
Total operating revenues 21,016 22,243
--------- --------
OPERATING EXPENSES:
Operations and maintenance 6,737 6,792
Fuel 1,795 2,923
Depreciation and amortization 3,254 3,241
--------- --------
Total operating expenses 11,786 12,956
--------- --------
OPERATING INCOME 9,230 9,287
INTEREST EXPENSE (7,259) (7,413)
OTHER INCOME 127 132
--------- --------
NET INCOME $2,098 $2,006
========= ========
The accompanying notes as they relate to Mobile Energy are an integral part of
these condensed statements.
11
<PAGE>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 1998 Ended March 31, 1997
-------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,098 $ 2,006
------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,621 3,598
Change in operating assets and liabilities:
Accounts receivable 1,289 (296)
Prepaid expenses and other current assets 8,796 7,711
Accounts payable (4,176) (3,949)
Accrued interest and other current liabilities (8,132) (6,696)
------- ---------
Total adjustments 1,398 368
------- ---------
Net cash provided by operating activities 3,496 2,374
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (731) (352)
-------- ---------
Net cash used in investing activities (731) (352)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable, net (5,751) (7,211)
Equity Contributions 0 7,071
Repayment of long-term debt (3,835) (3,515)
Payment of member distributions (12,643) (12,782)
-------- ---------
Net cash used in financing activities (22,229) (16,437)
------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (19,464) (14,414)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 23,131 19,896
------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 3,667 $ 5,482
======= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $13,437 $ 13,959
======= ========
</TABLE>
The accompanying notes as they relate to Mobile Energy are an integral part of
these condensed statements.
12
<PAGE>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
<TABLE>
<CAPTION>
At March 31, 1998 At December 31,
(Unaudited) 1997
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,667 $ 23,131
Restricted deposits 8,737 17,335
Trade accounts receivable 14,221 15,510
Materials and supplies 3,219 3,185
Prepaid expenses and other 751 982
--------- --------
Total current assets 30,595 60,143
--------- --------
PROPERTY, PLANT AND EQUIPMENT 378,368 377,232
Less accumulated depreciation (39,261) (35,091)
Construction work in process 2,407 1,676
--------- --------
Property, plant and equipment, net 341,514 343,817
--------- --------
DEFERRED LOAN COST
Net of accumulated amortization of $1,822 and $1,652 at
March 31, 1998 and December 31, 1997, respectively 13,334 13,504
--------- --------
Total assets $ 385,443 $417,464
========= ========
</TABLE>
LIABILITIES AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
At March 31, 1998 At December 31,
(Unaudited) 1997
CURRENT LIABILITIES
<S> <C> <C>
Trade accounts payable $ 2,078 $ 1,898
Account payable - associated company 824 5,180
Distribution payable 0 12,642
Note payable 10,405 16,156
Current portion - long-term debt 8,100 7,885
Accrued interest 6,685 13,503
Other 1,946 3,210
-------- --------
Total current liabilities 30,038 60,474
-------- --------
LONG-TERM DEBT 286,286 289,969
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY 69,119 67,021
-------- --------
Total liabilities and members' equity $385,443 $417,464
======== ========
</TABLE>
The accompanying notes as they relate to Mobile Energy are an integral part of
these condensed statements.
13
<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 included only normal recurring
adjustments) necessary to present fairly the results for the periods ended March
31, 1997 and 1998. The presentation of the financial statements does not reflect
any adjustments related to the events discussed in footnote (B) to the financial
statements. As discussed in footnote (B), management is in the process of
assessing the impact of such events and determining what, if any, result they
will have on the financial statements. 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. These condensed consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in
Holdings Report on Form 10-K for the year ended December 31, 1997.
14
<PAGE>
MOBILE ENERGY SERVICES HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 1998 Ended March 31, 1997
-------------------- --------------------
OPERATING REVENUES:
<S> <C> <C>
Demand charges $13,929 $14,086
Processing charges 6,690 7,690
Compressed air 240 180
Ash hauling 157 287
------- -------
Total operating revenues 21,016 22,243
------- -------
OPERATING EXPENSES:
Operations and maintenance 6,737 6,792
Fuel 1,795 2,923
Depreciation and amortization 3,254 3,241
------- -------
Total operating expenses 11,786 12,956
------- -------
OPERATING INCOME 9,230 9,287
INTEREST EXPENSE (7,259) (7,413)
OTHER INCOME 148 116
MINORITY INTEREST (20) (20)
------- -------
INCOME BEFORE TAXES 2,099 1,970
PROVISION FOR INCOME TAXES 795 754
------- -------
NET INCOME $ 1,304 $ 1,216
======= =======
</TABLE>
The accompanying notes as they relate to Holdings are an integral part of these
condensed statements.
15
<PAGE>
MOBILE ENERGY SERVICES HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 1998 Ended March 31, 1997
--------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,304 $ 1,216
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,621 3,598
Increase in deferred income taxes 3,048 3,451
Changes in operating assets and liabilities:
Accounts receivable 1,289 (296)
Prepaid expenses and other current assets 6,709 4,278
Accounts payable 145 (366)
Accrued interest and other current liabilities (8,281) (5,737)
------- -------
Total adjustments 6,531 4,928
------- -------
Net cash provided by operating activities 7,835 6,144
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (731) (352)
-------- -------
Net cash used in investing activities (731) (352)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable (5,751) (7,211)
Repayment of long-term debt (3,835) (3,515)
Payment of dividends & return of capital (22,518) (16,012)
------- -------
Net cash used in financing activities (32,104) (26,738)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (25,000) (20,946)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 28,780 26,679
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,780 $ 5,733
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $13,437 $13,959
======= =======
</TABLE>
The accompanying notes as they relate to Holdings are an integral part of these
condensed statements.
16
<PAGE>
MOBILE ENERGY SERVICES HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
<TABLE>
<CAPTION>
At March 31, 1998 At December 31,
(Unaudited) 1997
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,780 $ 28,780
Restricted deposits 8,737 17,335
Trade accounts receivable 14,221 15,510
Materials and supplies 3,219 3,185
Prepaid expenses and other 3,338 1,483
---------- --------
Total current assets 33,295 66,293
---------- --------
PROPERTY, PLANT AND EQUIPMENT 378,368 377,232
Less accumulated depreciation (39,261) (35,091)
Construction work in process 2,407 1,676
---------- --------
Property, plant and equipment, net 341,514 343,817
---------- --------
DEFERRED LOAN COST
Net of accumulated amortization of $1,822 and $1,652 at
March 31, 1998 and December 31, 1997, respectively 13,334 13,504
---------- --------
Total assets $388,143 $423,614
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
At March 31, 1998 At December 31,
(Unaudited) 1997
CURRENT LIABILITIES
<S> <C> <C>
Trade accounts payable $ 2,078 $ 1,898
Account payable - associated company 1,324 1,360
Dividends payable 0 22,518
Note payable 10,405 16,156
Current portion - long-term debt 8,100 7,885
Income Taxes Payable 0 166
Accrued interest 6,685 13,498
Other 1,946 3,218
---------- --------
Total current liabilities 30,538 66,699
---------- --------
DEFERRED INCOME TAXES 54,436 51,388
---------- --------
LONG-TERM DEBT 286,286 289,969
---------- --------
MINORITY INTEREST 690 670
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $1 par value; 1,000 shares
authorized and outstanding 1 1
Paid-in capital 14,887 14,120
Retained earnings (deficit) 1,305 767
---------- --------
Total stockholder's equity 16,193 14,888
---------- --------
Total liabilities and stockholder's equity $ 388,143 $423,614
========== ========
</TABLE>
The accompanying notes as they relate to Holdings are an integral part of these
condensed statements.
17
<PAGE>
30
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
18
<PAGE>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
MOBILE ENERGY SERVICES HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS:
(A) Mobile Energy is contractually obligated under three energy service
agreements (the "Agreements") to provide Power Processing Services and Steam
Processing Services to 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") 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. Mobile Energy received notice on May 5, 1998 from the
Pulp Mill Owner of its intention to close the Pulp Mill, for which Mobile Energy
provides electricity, steam and liquor processing services pursuant to a Pulp
Mill Energy Services Agreement between Mobile Energy and the Pulp Mill Owner
(the "Pulp Mill ESA"). (See footnote (B) Subsequent Events).
Mobile Energy is subject to dynamic federal, state and local environmental
laws and regulations. For example, the Environmental Protection Agency ("EPA")
has adopted (1) certain effluent limitation guidelines and standards for the
control of waste water pollutants and (2) a national emission standard for
hazardous air pollutants from mills that chemically pulp wood fiber using kraft,
sulfite, soda, or semi-chemical methods (the "Cluster Rule"). The Cluster Rule
(which principally applies to the Mills) will require significant modifications
to the Mills. The EPA has also proposed regulations applicable to combustion
sources at pulp and paper facilities. These regulations, collectively referred
to as the "Combustion Rule," will likely consist of effluent guidelines and
hazardous air pollutant emission standards.
Accordingly, the Cluster Rule could have a materially adverse impact on the
economic status of the Mills and the amount of processing services they require,
and the Combustion Rule could have a materially adverse impact on Mobile Energy
directly, by requiring Mobile Energy to modify its equipment or operations in
order to comply with the Combustion Rule's provisions. Under the Master
Operating Agreement, Mobile Energy generally is permitted to charge the Mills
the reasonable cost of capital expenditures and Operations and Maintenance Costs
incurred by Mobile Energy as a result of the Cluster Rule or the Combustion
Rule. Nevertheless, there can be no assurance that a Mill Owner would not
abandon its Mill rather than incur the costs imposed by the Cluster Rule (or any
other environmental or non-environmental law or regulation) or would have the
ability to comply with its obligations under the Master Operating Agreement
associated with the Combustion Rule. (See footnote (B) Subsequent Events).
Either such result could have a materially adverse impact on Mobile Energy's
financial condition and results of operations.
Because the final Cluster Rule and proposed Combustion Rule have only
recently been published, Mobile Energy is unable to reasonably estimate the
potential costs, if any, that may result from compliance with these additional
programs.
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In connection with the acquisition of the Energy Complex, Mobile Energy
entered into non-cancelable land leases (the "Leases") with Kimberly-Clark
Tissue. Rent expense under the Leases approximates $1 per year from 1995 through
2019. Also contained in the Leases is a right to purchase the land from
Kimberly-Clark Tissue at the end of the lease term for $10. However, retention
of the property is not under the control of Mobile Energy due to Kimberly-Clark
Tissue's superseding option to repurchase the Energy Complex from Mobile Energy
at the end of the lease term at fair market value. Accordingly, Mobile Energy's
repurchase option is not reasonably assured and therefore is not considered a
bargain purchase option under SFAS No. 13, "Accounting for Leases."
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
On January 1, 1998, Mobile Energy adopted this standard which requires the
display of comprehensive income and its components in the financial statements.
In Mobile Energy's case, comprehensive income was not materially different than
net income.
(B) Subsequent Events
Mobile Energy received notice on May 5, 1998 from the Pulp Mill Owner of
its intention to close the Pulp Mill, for which Mobile Energy provides Power
Processing Services, Steam Processing Services and Liquor Processing Services
pursuant to a Pulp Mill Energy Services Agreement between Mobile Energy and the
Pulp Mill Owner (the "Pulp Mill ESA"). In connection with such mill closure, the
Pulp Mill Owner also notified Mobile Energy on May 5, 1998 of its intention to
terminate the Pulp Mill ESA and certain of its obligations under the Master
Operating Agreement effective September 1, 1999. Based on such termination date,
the Master Operating Agreement and the Pulp Mill ESA provide that payments of
Demand Charges by the Pulp Mill Owner pursuant to the Pulp Mill ESA will
continue until March 1, 2000. Mobile Energy currently provides energy and steam
to its customers under three energy services agreements, including the Pulp Mill
ESA, an energy service agreement with Kimberly-Clark Tissue acting in its
capacity as the owner of the Tissue Mill and an energy service agreement with
Warren Alabama as owner of the Paper Mill. The Pulp Mill ESA provided
approximately 50% of Mobile Energy's operating revenues for the quarter ended
March 31, 1998 and approximately 50% of Mobile Energy's operating revenues for
the year ended December 31, 1997. Mobile Energy is evaluating the announced
closure of the Pulp Mill and the termination of the Pulp Mill ESA to determine
its options and the potential impact on its business. In the event that a
sufficient alternative revenue source is not obtained, the reduction in the
Demand Charges and Processing Charges received by Mobile Energy due to the
termination of the Pulp Mill ESA will have a material adverse effect on Mobile
Energy's revenues, and thereafter Mobile Energy will not have sufficient cash
flows to pay principal and interest on its senior debt, including its $238
million principal amount of outstanding First Mortgage Bonds and its obligations
under certain leases which fund payments under the $85 million principal amount
of outstanding Tax-Exempt Bonds. Termination of the Pulp Mill ESA will also
constitute an event of default under the Indenture and the Tax-Exempt Indenture
unless, within 180 days after such termination, the Pulp Mill ESA is reinstated
on identical terms pursuant to the provisions of the Master Operating Agreement
or Mobile Energy has entered into an alternative agreement which satisfies the
requirements of the Indenture and the Tax Exempt Indenture as to the nature of
the alternative agreement and the projected debt service coverage ratios. There
can be no assurance that any alternative that may be available to Mobile Energy
will permit it to pay debt service on its senior debt, including the First
Mortgage Bonds and its obligations under certain leases which fund payments
under the Tax Exempt Bonds.
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Item 2. COMBINED 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 (this process, the "Liquor
Processing Services"), a necessary component of the pulp making process. 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.
Announced Closure of the Pulp Mill
Mobile Energy received notice on May 5, 1998 from the Pulp Mill Owner of
its intention to close the Pulp Mill, for which Mobile Energy provides Power
Processing Services, Steam Processing Services and Liquor Processing Services
pursuant to a Pulp Mill Energy Services Agreement between Mobile Energy and the
Pulp Mill Owner (the "Pulp Mill ESA"). In connection with such mill closure, the
Pulp Mill Owner also notified Mobile Energy on May 5, 1998 of its intention to
terminate the Pulp Mill ESA and certain of its obligations under the Master
Operating Agreement effective September 1, 1999. Based on such termination date,
the Master Operating Agreement and the Pulp Mill ESA provide that payments of
Demand Charges by the Pulp Mill Owner pursuant to the Pulp Mill ESA will
continue until March 1, 2000. Mobile Energy currently provides energy and steam
to its customers under three energy services agreements, including the Pulp Mill
ESA, an energy service agreement with Kimberly-Clark Tissue acting in its
capacity as the owner of the Tissue Mill and
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<PAGE>
an energy service agreement with Warren Alabama as owner of the Paper Mill. The
Pulp Mill ESA provided approximately 50% of Mobile Energy's operating revenues
for the quarter ended March 31, 1998 and approximately 50% of Mobile Energy's
operating revenues for the year ended December 31, 1997. Mobile Energy is
evaluating the announced closure of the Pulp Mill and the termination of the
Pulp Mill ESA to determine its options and the potential impact on its business.
In the event that a sufficient alternative revenue source is not obtained, the
reduction in the Demand Charges and Processing Charges received by Mobile Energy
due to the termination of the Pulp Mill ESA will have a material adverse effect
on Mobile Energy's revenues, and thereafter Mobile Energy will not have
sufficient cash flows to pay principal and interest on its senior debt,
including its $238 million principal amount of outstanding First Mortgage Bonds
and its obligations under certain leases which fund payments under the $85
million principal amount of outstanding Tax-Exempt Bonds. Termination of the
Pulp Mill ESA will also constitute an event of default under the Indenture and
the Tax-Exempt Indenture unless, within 180 days after such termination, the
Pulp Mill ESA is reinstated on identical terms pursuant to the provisions of the
Master Operating Agreement or Mobile Energy has entered into an alternative
agreement which satisfies the requirements of the Indenture and the Tax Exempt
Indenture as to the nature of the alternative agreement and the projected debt
service coverage ratios. There can be no assurance that any alternative that may
be available to Mobile Energy will permit it to pay debt service on its senior
debt, including the First Mortgage Bonds and its obligations under certain
leases which fund payments under the Tax Exempt Bonds.
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.
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.
Revenues
Operating revenues for the first quarter of 1998 decreased $1.2 million, or
5.5%, compared to the first quarter 1997. The decrease is primarily due to
decreased gas prices which impact the prices charged to the Mill Owners. Demand
Charges and Processing Charges for the first quarter of 1998 and the first
quarter of 1997, in thousands of dollars and expressed as a percent of total
revenues, were as follows:
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<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
March 31, 1998 March 31, 1997
----------------------- ------------------
Dollars Percent Dollars Percent
------- ------- ------- -------
($ in thousands)
Demand Charges:
<S> <C> <C> <C> <C>
Pulp Mill $8,807 41.9% $8,958 40.3%
Tissue Mill 2,542 12.1% 2,533 11.4%
Paper Mill 2,580 12.3% 2,595 11.7%
----- ----- ----- -----
13,929 66.3% 14,086 63.3%
Processing Charges:
Pulp Mill 1,804 8.6% 1,869 8.4%
Tissue Mill 2,371 11.3% 2,870 12.9%
Paper Mill 2,515 12.0% 2,951 13.3%
---- ----- ----- -----
6,690 31.9% 7,690 34.6%
Compressed Air 240 1.1% 180 0.8%
Ash Hauling 157 0.7% 287 1.3%
Total operating revenues $21,016 100.0% $22,243 100.0%
-====== ====== ======= ======
</TABLE>
The Mills' Peak Usage of Processing Services during the first quarter of
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
March 31, 1998 March 31, 1997
--------------------------- -------------------
Peak Contractual Peak Contractual
Mill Processing Services Usage Demand Usage Demand
Pulp Liquor Conversion
<S> <C> <C> <C> <C>
MMLBs/week 44.9 44.5 44.0 42.7
Steam
MMBTUs/hr 688.0 500.0 627.0 500.0
Electricity
MW/hr 30.0 29.5 29.6 32.0
Tissue Steam
MMBTUs/hr 262.3 280.0 313.0 280.0
Electricity
MW/hr 38.6 37.8 37.6 39.5
Paper Steam
MMBTUs/hr 473.2 420.0 484.0 420.0
Electricity
MW/hr 21.8 21.4 22.2 22.5
</TABLE>
Expenses
Total operating expenses decreased $1.2 million, or 9.0%, from $13.0
million to $11.8 million in the three month period ending March 31, 1998
compared to the same period for 1997. This decrease is primarily due to fuel
expenses. The Operations and Maintenance Costs decreased from $6.8 million to
$6.7 million, a 1.5% decrease from the first quarter of 1997. Fuel expenses
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decreased $1.1 million, or 38.6%, from the first quarter 1998 compared to the
first quarter 1997. Fuel costs decreased from 1998 to 1997 as a result of
decreased gas prices.
Interest expense decreased $0.1 million, or 2.1%, from the first quarter
1998 compared to the same period for 1997. The decrease reflects the repayment
of short term notes payable with Banque Paribas in January of 1998.
Net Income
Mobile Energy's net income for the first quarter of 1998 was $2.1 million,
representing an increase of $0.1 million, or 4.6%, compared to the first quarter
of 1997. Similarly, Holding's net income for the first quarter of 1998 increased
7.3%, or $0.1 million, compared to the first quarter of 1997. Income taxes were
provided for based on a combined 38.25% state and federal rate applied to pretax
income of $2.1 million for the first quarter of 1998 and $2.0 million for the
first quarter of 1997. The Energy Complex is designed to operate efficiently in
conjunction with the Mills. There can be no assurance that the closure of the
Pulp Mill and termination of the Pulp Mill ESA will not cause an increase in
Mobile Energy's cost structure that will have a material adverse effect on
Mobile Energy's results of operations. See " - Announced Closure of the Pulp
Mill" and "Item 5 Other Information - Significant Event - Pulp Mill Closure and
Termination of the Pulp Mill ESA."
Liquidity and Capital Resources
As of March 31, 1998, Holdings had $3.8 million in cash and cash
equivalents and total debt of $304.8 million. This level of liquidity (as
applied to Mobile Energy) will be affected by Mobile Energy's operating
performance, capital expenditures and dividend policies. On May 5, 1998, Mobile
Energy received notice of the closure of the Pulp Mill and termination of the
Pulp Mill ESA effective September 1, 1999. Based on such termination date, the
Master Operating Agreement and the Pulp Mill ESA provide that payments of Demand
Charges by the Pulp Mill Owner pursuant to the Pulp Mill ESA will continue until
March 1, 2000. Because the Pulp Mill ESA provides substantial revenues and cash
flows to Mobile Energy, unless an alternative source of revenues or cash flows
is obtained, closure of the Pulp Mill and termination of the Pulp Mill ESA will
have a material adverse effect on the liquidity of Holdings and Mobile Energy.
See " - Announced Closure of the Pulp Mill" and "Item 5 Other Information -
Significant Event - Pulp Mill Closure and Termination of the Pulp Mill ESA."
Mobile Energy's working capital needs generally relate to Operations 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.
Operations and Maintenance Costs are budgeted at $27.9 million for 1998 .
During the three month period ending March 31, 1998, actual Operations and
Maintenance Costs aggregated $6.7 million compared to $6.8 million for the three
months ended March 31, 1997.
Mobile Energy's projected accrued obligations for required payments of
principal and interest on long-term debt for calendar year 1998 are $34.5
million. Payments of principal and interest on long-term debt for the three
month period ending March 31, 1998 aggregated $17.3 million and were $17.3
million for the same period in 1997.
Mobile Energy's principal sources of working capital are cash flow from
operations, borrowings under a revolving credit facility providing for working
capital loans to Mobile Energy (which is limited to $15.0 million), balances in
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<PAGE>
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 $8.5 million under such a revolving credit facility maintained by Southern
with Banque Paribas. As of March 31, 1998, $7.0 million of this amount had been
repaid by Southern.
Mobile Energy has established 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, of 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 monies 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 which are 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 currently consists 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 cash flow. On May 5, 1998, Mobile Energy received notice of the closure
of the Pulp Mill and termination of the Pulp Mill ESA effective September 1,
1999. Based on such termination date, the Master Operating Agreement and the
Pulp Mill ESA provide that payments of Demand Charges by the Pulp Mill Owner
pursuant to the Pulp Mill ESA will continue until March 1, 2000. In the event
that a sufficient alternative revenue source is not obtained, closure of the
Pulp Mill and termination of the Pulp Mill ESA will have a material adverse
effect on Mobile Energy's revenues, and Mobile Energy will not have sufficient
cash flows to pay principal and interest on its senior debt, including its $238
million principal amount of outstanding First Mortgage Bonds and its obligations
under certain leases which fund payments under the $85 million principal amount
of outstanding Tax Exempt Bonds. See " - Announced Closure of the Pulp Mill" and
"Item 5 - Other Information - Significant Event - Pulp Mill Closure and
Termination of the Pulp Mill ESA."
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.
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 ended March 31, 1998, 66.3% of Mobile Energy's total operating
revenues were attributable to Demand Charges with almost all of the remainder
attributable to Processing Charges.
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<PAGE>
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.
Mobile Energy believes that its current cash flow from operations, together
with its other available sources of liquidity, will be adequate to fund working
capital and other cash requirements for the period that the Mills, including the
Pulp Mill, continue to pay Demand Charges; however, there can be no assurance
that any alternatives that may be available to Mobile Energy upon termination of
the Pulp Mill ESA will provide sufficient cash flows to Mobile Energy to permit
it to pay debt service on its senior debt, including the First Mortgage Bonds
and its obligations under certain leases that fund the Tax Exempt Bonds, after
payments of Demand Charges under the Pulp Mill ESA cease. See "- Announced
Closure of the Pulp Mill" and "Item 5 Other Information - Significant Event
- -Pulp Mill Closure and Termination of the Pulp Mill ESA".
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.
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<PAGE>
PART II OTHER INFORMATION
Item 5. OTHER INFORMATION
Significant Event - Pulp Mill Closure and Termination of the Pulp Mill ESA
On May 5, 1998, Kimberly-Clark Tissue, in its capacity as Pulp Mill Owner,
announced that it intends to close the Pulp Mill on September 1, 1999.
Kimberly-Clark Tissue also announced that it intends to sell its southeast
timberland operations (the "Southeast Timberland"), which controls over 500,000
acres of woodlands in Alabama and Mississippi. Kimberly-Clark stated that it
will continue to operate the Tissue Mill and that it planned to invest
approximately $100 million at the Mobile facility over the next several years to
install systems that process recycled fiber and that allow the use of baled
pulp. The Pulp Mill Owner also notified Mobile Energy on May 5, 1998 that it
intends to terminate the Pulp Mill ESA and certain provisions of the Master
Operating Agreement on September 1, 1999 (such written notice referred to herein
as the "Pulp Mill Termination Notice").
Under the Energy Services Agreements, each Mill Owner has the right to
terminate its Energy Services Agreement if the Mill Owner makes a public
announcement that it will close its Mill for a period of at least one year or
that it will reduce production of pulp, tissue or paper (as applicable) at its
Mill to certain levels. Termination may occur as soon as six months after
delivery of such notice. If a Mill Owner terminates its Energy Services
Agreement due to the closure of its Mill, the Mill Owner is required by the
Master Operating Agreement to pay Demand Charges for a period equal to the
greater of (a) six months from the date of termination or (b) the remainder of
the then current demand period. The current demand period expires in December of
1999. Based on a termination of the Pulp Mill ESA effective September 1, 1999,
the Master Operating Agreement and the Pulp Mill ESA provide that payment of
Demand Charges pursuant to the Pulp Mill ESA will continue until March 1, 2000.
No assurance can be given that the Pulp Mill Owner or another Mill Owner will
not provide notice of closure of a Mill that will cause Demand Charges to be
reduced prior to March 1, 2000.
Mobile Energy is dependent upon the Pulp Mill for the Energy Complex's
supply of weak black liquor and relies upon the Pulp Mill to provide almost all
of the Energy Complex's supply of solid waste fuel (consisting of biomass and
sludge).
Pursuant to the Pulp Mill ESA, the Pulp Mill Owner is obligated to deliver
to Mobile Energy the minimum quantity of solid waste that is required to be used
by the Number 7 Power Boiler in order for it to qualify as a "solid waste
disposal facility" as that term is defined under the Internal Revenue Code and
the regulations promulgated thereunder (such quantity, as further defined in the
Project Agreements, the "Required Solid Waste Amount"). Mobile Energy's failure
to continue to receive the Required Solid Waste Amount following the termination
of the Pulp Mill ESA will entitle Mobile Energy to decrease the output of the
Number 7 Power Boiler (to a level consistent with the solid waste disposal
requirements to maintain the tax-exempt status of the Tax-Exempt Bonds) and the
amount of Processing Services delivered to the Mill Owners (without incurring
any reduction in the Demand Charges payable to Mobile Energy during the then
current demand period as a result).
Pursuant to the Pulp Mill ESA, the Pulp Mill Owner also is obligated to
deliver to the Energy Complex all weak black liquor that the Pulp Mill Owner
requires to have processed and that the Energy Complex is capable of processing.
Mobile Energy's failure to continue to receive weak black liquor from the Pulp
Mill Owner following termination of the Pulp Mill ESA in amounts sufficient to
operate the recovery boilers in accordance with specified prudent operating
standards does entitle Mobile Energy, subject to the satisfaction of certain
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<PAGE>
conditions with respect to the use of alternative fuels, to reduce the output of
the recovery boilers and the amount of Processing Services delivered to the Mill
Owners (again, without incurring any reduction in the Demand Charges payable to
Mobile Energy during the then current demand period as a result).
A failure by Mobile Energy to obtain solid waste or weak black liquor from
the Pulp Mill Owner following termination of the Pulp Mill ESA could decrease
operating cash flow to Mobile Energy to the extent that (i) Processing Charges
decline due to diminished Energy Complex output and (ii) operations and
maintenance costs fail to decline correspondingly. In addition, such a reduction
could lead to a downward adjustment of Demand Charges in subsequent demand
periods. Also, because the Energy Complex has no reliable long-term source of
supply of weak black liquor other than the Pulp Mill, and because the Pulp Mill
has the most readily available supply of biomass for the Energy Complex, the
closure of the Pulp Mill could deprive the Energy Complex of two significant
fuels, and could thereby impede, physically and economically, the Energy
Complex's ability to provide electricity and steam services to the Tissue Mill,
the Paper Mill or third parties.
The Master Operating Agreement provides that the terminating Mill Owner
give reasonable assistance to Mobile Energy in Mobile Energy's endeavors to
create new business opportunities for the Energy Complex; however, the
terminating Mill Owner has no liability or other monetary obligation to Mobile
Energy if such business opportunities are not available or are not created.
Kimberly-Clark Tissue has acknowledged this obligation to provide reasonable
assistance in the Pulp Mill Termination Notice.
The Master Operating Agreement grants the Mill Owners certain rights to
claim or reserve the Demand of a closing Mill following a Mill Closure. If a
Mill Owner has an immediate need for Energy Complex capacity that has been
allocated to a closed Mill, such Mill Owner might, subject to the restrictions
set forth in the Master Operating Agreement, "claim" the Demand of the closed
Mill, thereby increasing the "claiming" Mill's allocation of immediately
available Energy Complex capacity. "Claiming" Demand should have a limited
effect on Mobile Energy's revenues, because it entails the shifting of Demand
from one Mill to another without any reduction in aggregate Demand. If, by
contrast, a Mill Owner anticipates a future need for additional Energy Complex
capacity, but has no immediate need for such additional capacity, such Mill
Owner might, subject to the restrictions set forth in the Master Operating
Agreement, "reserve" the Demand of the closed Mill for future use. "Reserving"
Demand could have a material adverse effect on Mobile Energy's revenues, because
it requires Mobile Energy to reserve capacity for future use by a Mill without
concurrently increasing that Mill's Demand Charges. The reserving Mill Owner is
only required to pay Mobile Energy for its costs of "mothballing" equipment as a
result of the Demand reservation.
While Demand is reserved by a Mill Owner, Mobile Energy may use or sell the
Processing Services associated with the reserved Demand to another Mill Owner or
a third party only on an as-available, fully interruptible basis. Thus, the
reservation of Demand prevents Mobile Energy from entering into long-term energy
service contracts with third parties with respect to the Demand that has been
reserved, even though the reserving Mill Owner is not paying Demand Charges to
Mobile Energy with respect to such reserved Demand. The reservation by one or
more of the Mill Owners of part or all of the Pulp Mill's Demands for Processing
Services following the termination of the Pulp Mill ESA could, therefore, have a
material adverse effect on Mobile Energy's ability to obtain alternative sources
of revenues.
In addition, the Master Operating Agreement provides that if the Pulp
Mill's Demands for Processing Services are not claimed or reserved by a Mill
Owner following the closure of the Pulp Mill, the Demands of the closed Pulp
Mill are deemed to be relinquished, and may be sold by Mobile Energy to third
parties; however, it cannot now be determined that alternative customers will be
willing or able to enter into long or short term energy service contracts with
28
<PAGE>
Mobile Energy following termination of the Pulp Mill ESA due to closure of the
Pulp Mill. The Energy Complex was designed to provide processing services to the
Mills and benefits from certain efficiencies derived from its relationship with
the Mills, including proximity and ready availability of certain fuel products.
Other customers requiring power, steam and/or liquor processing may not be
readily available following the termination of the Pulp Mill ESA.
In general, sales to customers other than the Mills may require Mobile
Energy to significantly modify (1) the charges currently received by Mobile
Energy or (2) the assets comprising the Energy Complex in order to effectuate
such sales or to obtain additional regulatory approvals that could be required
in order to enable Mobile Energy to provide the appropriate services. For
example, Mobile Energy does not have the necessary regulatory approvals to sell
electricity to Alabama Power or to any other person that intends to resell the
electricity to third parties nor does it own or have contractual rights to use
transmission facilities necessary to provide electricity to parties other than
the Mills. To make wholesale electricity sales (to Alabama Power for instance),
Mobile Energy would have to obtain approval of the terms of such sales from
FERC. In addition, providing power or steam processing services to end-users
other than the Mill Owners could subject Mobile Energy to regulation by, and
could require approval of, the Alabama PSC. Any modifications to the Energy
Complex or its regulatory structure could increase Mobile Energy's projected
capital and operating expenses. Furthermore, no assurance can be given that any
regulatory approvals that may be required for Mobile Energy to sell or transmit
to other customers would be granted.
Failure of Mobile Energy to find a suitable long-term customer to replace
the Pulp Mill after termination of the Pulp Mill ESA or to develop other
strategies to replace the loss of revenues and cash flow from the Pulp Mill ESA
will have a material adverse effect on Mobile Energy's financial condition and
results of operations, and Mobile Energy will not have sufficient cash flows to
pay principal and interest on its senior debt, including its First Mortgage
Bonds and its obligations under certain leases which fund payments under the Tax
Exempt Bonds. See "Item 2. Combined Management's Discussion and Analysis of
Financial Condition and Results of Operations - Announced Closure of Pulp Mill."
The preceding summaries of contract terms and the description of certain
effects of the termination of the Pulp Mill ESA are in summary form and are
qualified in their entirety by reference to the descriptions of such contracts
and such effects contained in the Annual Report on Form 10-K for the year ended
December 31, 1997, and to the full text of the actual agreements, which have
previously been filed as exhibits to the Registration Statement on Form S-1
dated August 15, 1995, commission file number 33-92776.
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 first quarter of 1998.
29
<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 Thomas G. Boren
President and Chief Executive Officer
(Principal Executive Officer)
By Raymond D. Hill
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 1998
- -------------------------------------------------------------------------------
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. Marce Fuller
President and Chief Executive Officer
(Principal Executive Officer)
By James A. Ward
Vice President and Controller
(Principal Financial Officer)
Date: May 15, 1998
30
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<TABLE> <S> <C>
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<LEGEND>
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<CIK> 0000945979
<NAME> MOBILE ENERGY SERVICES HOLDINGS, INC
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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