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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 September 30, 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 ___
<TABLE>
<CAPTION>
<S> <C> <C>
Description of Shares Outstanding
Registrant Common Stock at October 31, 1998
Mobile Energy Services Company, L.L.C. Not Applicable 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.
2
</TABLE>
<PAGE>
Table of Contents
PAGE
PART I
Selected Definitions 4
Cautionary Statement Regarding Forward-Looking Information 9
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. and Subsidiary
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 6. Exhibits and Reports on Form 8-K 28
Signatures 29
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
5
<PAGE>
(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).
"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
6
<PAGE>
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.
"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 Mobil
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 Rule
and the Combustion Rule 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 announced closure of the Pulp Mill and 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 September 30, 1997 and September 30, 1998. The presentation of the
financial statements does not reflect any adjustments related to the events
discussed in footnotes (A) and (B) to the financial statements. As discussed in
footnotes (A) and (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. 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 Report on Form 10-K
for the year ended December 31, 1997.
10
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
<S> <C> <C>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING REVENUES:
Demand charges $14,474 $14,167 $42,937 $42,649
Processing charges 6,110 6,321 18,848 20,081
Compressed air 180 180 600 540
Ash hauling 164 183 481 610
------- ------- ------- -------
Total operating revenues 20,928 20,851 62,866 63,880
------- ------- ------- -------
OPERATING EXPENSES:
Operations and maintenance 5,637 6,135 18,697 19,329
Redevelopment Costs 912 0 1,069 0
Fuel 1,626 1,594 5,072 6,130
Depreciation and amortization 3,284 3,248 9,795 9,760
------- ------- ------- -------
Total operating expenses 11,459 10,977 34,633 35,219
------- ------- ------- -------
OPERATING INCOME 9,469 9,874 28,233 28,661
INTEREST EXPENSE (7,066) (7,231) (21,482) (22,005)
OTHER INCOME 192 164 553 484
------- ------- ------- -------
NET INCOME $2,595 $2,807 $7,304 $7,140
======= ======= ======= =======
The accompanying notes as they relate to Mobile Energy are an integral part of these condensed financial statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
<S> <C> <C>
For the Nine Months For the Nine Months
Ended September 30, 1998 Ended September 30, 1997
------------------------ ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,304 $ 7,140
----------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,877 10,814
Change in operating assets and liabilities:
Accounts receivable 1,229 546
Prepaid expenses and other current assets 9,223 8,198
Accounts payable (5,259) 342
Accrued interest and other current liabilities (8,624) (7,206)
---------- ---------
Total adjustments 7,446 12,694
---------- ---------
Net cash provided by operating activities 14,750 19,834
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (1,933) (936)
---------- ---------
Net cash used in investing activities (1,933) (936)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable, net (9,259) (20,962)
Equity contributions 0 7,071
Repayment of long-term debt (7,885) (7,350)
Payment of member distributions (12,642) (12,782)
---------- ---------
Net cash used in financing activities (29,786) (34,023)
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (16,969) (15,125)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 23,131 19,896
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,162 $ 4,771
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $ 26,708 $ 27,358
========== =========
The accompanying notes as they relate to Mobile Energy are an integral part of these condensed financial statements.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
<S> <C> <C>
At September 30, 1998 At December 31,
(Unaudited) 1997
--------------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 6,162 $ 23,131
Restricted deposits 8,645 17,335
Trade accounts receivable 14,281 15,510
Materials and supplies 3,398 3,185
Prepaid expenses and other 236 982
--------- ---------
Total current assets 32,722 60,143
--------- ---------
PROPERTY, PLANT AND EQUIPMENT 378,775 377,232
Less accumulated depreciation (44,018) (35,091)
Construction work in process 1,710 1,676
---------- ---------
Property, plant and equipment, net 336,467 343,817
---------- ---------
DEFERRED LOAN COST
Net of accumulated amortization of $2,164 and $1,652 at
September 30, 1998 and December 31, 1997, respectively 12,992 13,504
---------- ---------
Total assets $382,181 $417,464
========== =========
LIABILITIES AND MEMBERS' EQUITY
At September 30, 1998 At December 31,
(Unaudited) 1997
--------------------- --------------
CURRENT LIABILITIES
Trade accounts payable $ 1,357 $ 1,898
Accounts payable - associated company 463 5,180
Distribution payable 0 12,642
Note payable 6,897 16,156
Current portion - long-term debt 8,340 7,885
Accrued interest 6,561 13,503
Other 1,526 3,210
---------- ---------
Total current liabilities 25,144 60,474
---------- ---------
LONG-TERM DEBT 282,712 289,969
COMMITMENTS AND CONTINGENCIES
(NOTES A and B)
MEMBERS' EQUITY 74,325 67,021
---------- ---------
Total liabilities and members' equity $382,181 $417,464
========== =========
The accompanying notes as they relate to Mobile Energy are an integral part of these condensed financial statements.
</TABLE>
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
September 30, 1997 and September 30, 1998. The presentation of the financial
statements does not reflect any adjustments related to the events discussed in
footnotes (A) and (B) to the financial statements. As discussed in footnotes (A)
and (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. It is suggested that these condensed
consolidated financial statements 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>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES HOLDINGS, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
<S> <C> <C>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING REVENUES:
Demand charges $14,474 $14,167 $42,937 $42,649
Processing charges 6,110 6,321 18,848 20,081
Compressed air 180 180 600 540
Ash hauling 164 183 481 610
------- ------- ------- -------
Total operating revenues 20,928 20,851 62,866 63,880
------- ------- ------- -------
OPERATING EXPENSES:
Operations and maintenance 5,637 6,135 18,697 19,329
Redevelopment Costs 912 0 1,069 0
Fuel 1,626 1,594 5,072 6,130
Depreciation and amortization 3,284 3,248 9,795 9,760
------- ------- ------- -------
Total operating expenses 11,459 10,977 34,633 35,219
------- ------- ------- -------
OPERATING INCOME 9,469 9,874 28,233 28,661
INTEREST EXPENSE (7,066) (7,231) (21,482) (22,005)
OTHER INCOME 230 220 634 560
MINORITY INTEREST (26) (28) (73) (71)
------- ------- ------- -------
INCOME BEFORE TAXES 2,607 2,835 7,312 7,145
PROVISION FOR INCOME TAXES 997 1,084 2,797 2,733
------- ------- ------- -------
NET INCOME $ 1,610 $ 1,751 $ 4,515 $ 4,412
======= ======= ======= =======
The accompanying notes as they relate to Holdings are an integral part of these condensed consolidated financial statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES HOLDINGS, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
<S> <C> <C>
For the Nine Months For the Nine Months
Ended September 30, 1998 Ended September 30, 1997
------------------------ ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,515 $ 4,412
---------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,877 10,814
Increase in deferred income taxes 6,431 7,516
Changes in operating assets and liabilities:
Accounts receivable 1,216 545
Prepaid expenses and other current assets 9,094 8,742
Accounts payable (938) 319
Accrued interest and other current liabilities (9,596) (5,355)
---------- ---------
Total adjustments 17,084 22,581
---------- ---------
Net cash provided by operating activities 21,599 26,993
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (1,933) (936)
----------- ---------
Net cash used in investing activities (1,933) (936)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable, net (9,259) (21,681)
Repayment of long-term debt (7,885) (7,350)
Payment of dividends & return of capital (22,518) (16,012)
---------- ----------
Net cash used in financing activities (39,662) (45,043)
----------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (19,996) (18,986)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 28,780 26,679
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,784 $7,693
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $ 26,708 $ 27,358
========== ==========
Cash received during period for:
Cash received from income tax refunds $ 2,464 $ 6,934
========== ==========
The accompanying notes as they relate to Holdings are an integral part of these condensed consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
MOBILE ENERGY SERVICES HOLDINGS, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Thousands of Dollars)
<S> <C> <C>
ASSETS
At September 30, 1998 At December 31,
(Unaudited) 1997
--------------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 8,784 $ 28,780
Restricted deposits 8,645 17,335
Trade accounts receivable 14,294 15,510
Materials and supplies 3,398 3,185
Prepaid expenses and other 866 1,483
-------- --------
Total current assets 35,987 66,293
-------- --------
PROPERTY, PLANT AND EQUIPMENT 378,775 377,232
Less accumulated depreciation (44,018) (35,091)
Construction work in process 1,710 1,676
-------- --------
Property, plant and equipment, net 336,467 343,817
-------- --------
DEFERRED LOAN COST
Net of accumulated amortization of $2,164 and $1,652 at
September 30, 1998 and December 31, 1997, respectively 12,992 13,504
-------- --------
Total assets $385,446 $423,614
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
At September 30, 1998 At December 31,
(Unaudited) 1997
----------- ---------------
CURRENT LIABILITIES
Trade accounts payable $ 1,357 $ 1,898
Accounts payable - associated company 963 1,360
Dividends payable 0 22,518
Note payable 6,897 16,156
Current portion - long-term debt 8,340 7,885
Income taxes payable 0 166
Accrued interest 6,561 13,498
Other 651 3,218
-------- --------
Total current liabilities 24,769 66,699
-------- --------
DEFERRED INCOME TAXES 57,819 51,388
-------- --------
LONG-TERM DEBT 282,712 289,969
-------- --------
MINORITY INTEREST 743 670
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES A and B)
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 4,515 767
-------- --------
Total stockholder's equity 19,403 14,888
-------- --------
Total liabilities and stockholder's equity $385,446 $423,614
======== ========
The accompanying notes as they relate to Holdings are an integral part of these condensed consolidated financial statements.
</TABLE>
17
<PAGE>
Mobile Energy Services Company, L.L.C.
Mobile Energy Services Holdings, Inc. and Subsidiary
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
MOBILE ENERGY SERVICES COMPANY, L.L.C.
MOBILE ENERGY SERVICES HOLDINGS, INC. and SUBSIDIARY
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
Registrant Applicable Notes
MOBILE ENERGY A, B, C
HOLDINGS A, B, C
18
<PAGE>
MOBILE ENERGY SERVICES COMPANY, L.L.C.
MOBILE ENERGY SERVICES HOLDINGS, INC. and SUBSIDIARY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) Combustion Rule and Cluster Rule
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 indicated it expects to propose 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) Announced Closure of the
Pulp Mill). Either such result could have a materially adverse impact on Mobile
Energy's financial condition and results of operations. Because of the
uncertainty that exists as a result of the events discussed in footnote (B),
Mobile Energy is unable to reasonably estimate the potential costs, if any, that
may result from compliance with these additional programs.
(B) Announced Closure of the Pulp Mill
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 which commenced on 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"). In connection with such mill closure, the Pulp Mill
19
<PAGE>
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 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 three months ended September 30, 1998 and
approximately 50% of Mobile Energy's operating revenues for the nine months
ended September 30, 1998. Additionally, approximately 85% of the fuel
requirements of the Energy Complex are satisfied with by-products generated by
the operations of the Pulp Mill or provided by the Pulp Mill.
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, as of September 30, 1998, its $234 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.
(C) Other Accounting Matters
Certain prior period amounts have been reclassified to conform with current
period presentation.
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.
20
<PAGE>
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
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 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
21
<PAGE>
Energy's operating revenues for the three months ended September 30, 1998 and
approximately 50% of Mobile Energy's operating revenues for the nine months
ended September 30, 1998. Additionally, approximately 85% of the fuel
requirements of the Energy Complex are satisfied with by-products generated by
the operations of the Pulp Mill or provided by the Pulp Mill.
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, as of September 30, 1998, its $234 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 third quarter of 1998 increased $0.1 million, or
0.4%, compared to the third quarter 1997. For year to date 1998 versus year to
date 1997, operating revenues decreased $1.0 million, or 1.6%, primarily due to
decreased gas prices in the first quarter which impacted the prices charged to
the Mill Owners. Demand Charges and Processing Charges for the third quarters of
1998 and 1997, in thousands of dollars and expressed as a percent of total
revenues, were as follows:
22
<PAGE>
Quarter Ended
-----------------------------------------
September 30, 1998 September 30, 1997
Dollars Percent Dollars Percent
------- ------- ------- -------
(in thousands)
Demand Charges:
Pulp Mill $9,307 44.5% $9,011 43.2%
Tissue Mill 2,560 12.2% 2,554 12.2%
Paper Mill 2,607 12.5% 2,602 12.5%
------ ----- ------ ----
14,474 69.2% 14,167 67.9%
Processing Charges:
Pulp Mill 1,111 5.3% 1,294 6.2%
Tissue Mill 2,482 11.9% 2,483 11.9%
Paper Mill 2,517 12.0% 2,544 12.2%
----- ----- ----- ----
6,110 29.2% 6,321 30.3%
Compressed Air 180 0.9% 180 0.9%
Ash Hauling 164 0.7% 183 0.9%
--- ---- --- ---
Total operating revenues $20,928 100.0% $20,851 100.0%
======= ===== ======= =====
The Mills' peak usage of Processing Services for the year to date through
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
YTD 9-30-98 YTD 9-30-97
----------------------- -----------------------
Peak Contractual Peak Contractual
Mill Processing Services Usage Demand Usage Demand
--- ------------------- ----- ---------- ----- -----------
Pulp Liquor Conversion
MMLBs/week 46.0 44.5 46.5 44.5
Steam
MMBTUs/hr 688.0 500.0 627.0 500.0
Electricity
MW/hr 30.0 29.5 29.8 32.0
Tissue Steam
MMBTUs/hr 262.3 280.0 313.0 280.0
Electricity
MW/hr 40.8 37.8 39.2 39.5
Paper Steam
MMBTUs/hr 473.2 420.0 484.0 420.0
Electricity
MW/hr 23.4 21.4 22.3 22.5
</TABLE>
23
<PAGE>
Expenses
Total operating expenses increased $0.5 million, or 4.4%, from $11.0
million to $11.5 million for the three month period ended September 30, 1998
compared to the same period for 1997. Total operating expenses decreased $0.6
million, or 1.7%, from $35.2 million to $34.6 million for the nine month period
ended September 30, 1998 compared to the prior year period. This decrease is
primarily due to decreased gas prices in the first quarter. The Operations and
Maintenance Costs increased from $6.1 million in the third quarter of 1997, to
$6.5 million in the third quarter of 1998, a 6.7% increase. This increase is the
result of additional expenses due to the announced Pulp Mill closure. For the
nine month period ended September 30, 1998, Operations and Maintenance Costs
increased 2.3% from the prior year period. Fuel expenses increased $0.03
million, or 2.0%, for the three month period ended September 30, 1998 compared
to the same period in 1997. Fuel expense decreased $1.0 million, or 17.3%, from
$6.1 million to $5.1 million, for the nine month period ended September 30, 1998
compared to the same period in 1997. This decrease is attributable to a
reduction in the volume of gas for the first six months of 1998, the lower
prices for gas for the first three months of 1998, and the lower prices for coal
for the past three months of 1998 versus 1997.
Interest expense decreased $.2 million, or 2.3%, in the third quarter 1998
compared to the same period for 1997. Interest expense decreased $.5 million to
$21.5 million for the nine months ended September 30, 1998 from $22.0 million
for the prior year period. The decrease reflects a lower average outstanding
balance on the short-term notes payable to Banque Paribas for the nine months
ended September 30, 1998 than the prior year period.
Net Income
Mobile Energy's net income for the third quarter of 1998 was $2.6 million,
representing a decrease of $0.2 million, or 7.6%, compared to the third quarter
of 1997, which was mainly due to increased Operations and Maintenance Costs. For
the nine month period ended September 30, 1998, Mobile Energy's net income was
$7.3 million, representing an increase of $0.2 million, or 2.3%, from the same
period in 1997. Similarly, Holding's net income for the third quarter of 1998,
decreased $0.1 million, or 8.1%, compared to the third quarter of 1997.
Holding's net income for the nine month period ended September 30, 1998 was $4.5
million representing a $0.1 million, or 2.3%, increase from the same period in
1997. Income taxes were provided based on a combined 38.25% state and federal
rate applied to pretax income of $2.6 million for the third quarter of 1998,
$2.8 million for the third quarter of 1997, $7.3 million for the nine month
period ended September 30, 1998, and $7.1 million for the nine month period
ended September 30, 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."
Liquidity and Capital Resources
As of September 30, 1998, Holdings had $8.8 million in cash and cash
equivalents and total debt of $297.9 million. This level of liquidity (as
applied to Mobile Energy) will be affected by Mobile Energy's operating
performance, capital expenditures and dividend policies. 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
24
<PAGE>
Master Operating Agreement and the Pulp Mill ESA provide that 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."
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.
During the nine month period ended September 30, 1998, actual Operations
and Maintenance Costs aggregated $19.8 million compared to $19.3 million for the
nine months ended September 30, 1997.
Mobile Energy's projected accrued obligations for required payments of
principal and interest on long-term debt for calendar year 1998 were $34.5
million. Payments of principal and interest on long-term debt for the nine month
periods ended September 30 were $34.6 million, and $34.7 million for 1998 and
1997, respectively.
Mobile Energy's principal sources of working capital are cash flow from
operations, borrowings under a revolving credit facility providing working
capital loans to Mobile Energy (which is limited to $15.0 million), 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 $8.5 million under such a revolving credit facility maintained by Southern
with Banque Paribas. As of September 30, 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 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
25
<PAGE>
principal and interest on its senior debt, including, as of September 30, 1998,
its $234 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."
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 three months ended September 30, 1998, 69.2% 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 positive operating cash flow. 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 positive
operating cash flow.
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."
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
26
<PAGE>
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.
27
<PAGE>
PART II
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 third quarter of 1998.
28
<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.
/s/ Thomas G. Boren
By Thomas G. Boren
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Raymond D. Hill
By Raymond D. Hill
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 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.
/s/ S. Marce Fuller
By S. Marce Fuller
President and Chief Executive Officer
(Principal Executive Officer)
/s/ James A. Ward
By James A. Ward
Vice President and Controller
(Principal Financial Officer)
Date: November 12, 1998
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for September 30, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000948362
<NAME> MOBILE ENERGY SERVICES CO LLC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 336,467
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 32,722
<TOTAL-DEFERRED-CHARGES> 12,992
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 382,181
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 74,325
<TOTAL-COMMON-STOCKHOLDERS-EQ> 74,325
0
0
<LONG-TERM-DEBT-NET> 291,052
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> (8,340)
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 16,804
<TOT-CAPITALIZATION-AND-LIAB> 382,181
<GROSS-OPERATING-REVENUE> 20,928
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 11,459
<TOTAL-OPERATING-EXPENSES> 11,459
<OPERATING-INCOME-LOSS> 9,469
<OTHER-INCOME-NET> 192
<INCOME-BEFORE-INTEREST-EXPEN> 9,661
<TOTAL-INTEREST-EXPENSE> 7,006
<NET-INCOME> 2,595
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,595
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 14,750
<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, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000945979
<NAME> MOBILE ENERGY SERVICES HOLDINGS, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 336,467
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 35,987
<TOTAL-DEFERRED-CHARGES> 12,992
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 385,446
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 14,887
<RETAINED-EARNINGS> 4,515
<TOTAL-COMMON-STOCKHOLDERS-EQ> 19,403
0
0
<LONG-TERM-DEBT-NET> 291,052
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> (8,340)
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 74,991
<TOT-CAPITALIZATION-AND-LIAB> 385,446
<GROSS-OPERATING-REVENUE> 20,928
<INCOME-TAX-EXPENSE> 997
<OTHER-OPERATING-EXPENSES> 11,485
<TOTAL-OPERATING-EXPENSES> 12,482
<OPERATING-INCOME-LOSS> 8,446
<OTHER-INCOME-NET> 230
<INCOME-BEFORE-INTEREST-EXPEN> 8,676
<TOTAL-INTEREST-EXPENSE> 7,066
<NET-INCOME> 1,610
0
<EARNINGS-AVAILABLE-FOR-COMM> 1,610
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 21,599
<EPS-PRIMARY> 1,610
<EPS-DILUTED> 1,610
</TABLE>
