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                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549



                                    Form 10-K


                (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1997
                                       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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Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:  None.


       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 ___

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )

       Each of the registrants meets the conditions set forth in General
Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with
reduced disclosure as permitted by such General Instruction I.

       A description of the registrants' common stock follows:
<TABLE>
<CAPTION>


<S>                                        <C>                           <C>
                                            Description of              Shares Outstanding
Registrant                                  Common Stock                 at February 28, 1998

Mobile Energy Services Company, L.L.C.      Not applicable               Not applicable
Mobile Energy Services Holdings, Inc.       Par Value $1 Per Share               1,000
</TABLE>


<PAGE>


 <TABLE>
<CAPTION>


<S>                                                                                                                      <C>
                                                   Table of Contents

               PART I                                                                                                    PAGE

Item 1         Business-...............................................................................................    I-1
                  General..............................................................................................    I-1
                  Power, Steam and Liquor Processing Sales.............................................................    I-2
                  Operations...........................................................................................    I-8
                  Sources and Availability of Raw Materials............................................................    I-9
                  Permitting and Regulatory Matters....................................................................    I-10
                  Environmental Considerations.........................................................................    I-11
                  Outages..............................................................................................    I-13
                  Summary of Principal Project Contracts...............................................................    I-15
Item 2         Properties..............................................................................................    I-56
Item 3         Legal Proceedings.......................................................................................    I-62
Item 4         Submission of Matters to a Vote of Security Holders.....................................................    I-62

               PART II

Item 5         Market for Registrants' Common Equity and Related Stockholder Matters...................................    II-1
Item 6         Selected Financial Data.................................................................................    II-1
Item 7         Management's Discussion and Analysis of Financial Condition and Results of Operations...................    II-1
                  Background...........................................................................................    II-1
                  Results of Operations................................................................................    II-1
                  Revenues.............................................................................................    II-2
                  Expenses.............................................................................................    II-2
                  Liquidity and Capital Resources......................................................................    II-3
                  Environmental Matters................................................................................    II-6
                  Funding of the Maintenance Reserve Account...........................................................    II-7
                  Tax Matters..........................................................................................    II-7
                  New Accounting Standards.............................................................................    II-8
                  Year 2000 issue......................................................................................... II-8
Item 7A        Quantitative and Qualitative Disclosures about Market Risk...............................................   II-9
Item 8         Financial Statements and Supplementary Data.............................................................    II-10
Item 9         Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure..................................................................    II-30

               PART III

Item 10        Directors and Executive Officers of the Registrants.....................................................  III-1
Item 11        Executive Compensation..................................................................................  III-1
Item 12        Security Ownership of Certain Beneficial Owners and Management..........................................  III-1
Item 13        Certain Relationships and Related Transactions..........................................................  III-1

               PART IV

Item 14           Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                        IV-1

</TABLE>

                                       i

<PAGE>



                              SELECTED DEFINITIONS


              When used in this report, the following terms will have the
meanings indicated.

                  "Abandonment" means (i) the announcement by Mobile Energy of
its decision to suspend for more than thirty (30) days or abandon the operation
of the Energy Complex or (ii) the suspension for more than thirty (30) days (as
extended during the continuance of a Force Majeure Event), abandonment or
indefinite deferral of the operation of the Energy Complex.

                  "Actual Energy Complex Capacity" means the Actual Liquor
Processing Capacity, the Actual Steam Processing Capacity and the Actual Power
Processing Capacity.

                  "Actual Liquor Processing Capacity" means the actual
capability of the Energy Complex to deliver Liquor Processing Services at any
given time.

                  "Actual Power Processing Capacity" means the actual capability
of the Energy Complex to deliver Power Processing Services at any given time.

                  "Actual Steam Processing Capacity" means the actual capability
of the Energy Complex to provide Steam Processing Services at any given time.

                  "ADEM" means the Alabama Department of Environmental
Management.

                  "Adverse Financial Effect" means the extent to which Mobile
Energy is adversely financially affected as the direct result of a Change Event,
measured as any Change in Net Costs, provided that an "Adverse Financial Effect"
shall in no event include or be calculated to include any amount which is
intended to provide Mobile Energy with any specified or benchmark rate of
return, debt coverage ratio or other similar ratio or amount which is based upon
an anticipated or expected economic benefit to be derived from, or the
anticipated or expected financial performance of, the operation of the Energy
Complex.

                  "Affiliate" of a specified Person means any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the specified Person. As used in
this definition, "control", "controlled by" and "under common control with"
shall mean possession, directly or indirectly, or power to direct or cause the
direction of management or policies of such Person (whether through ownership of
securities or other partnership or ownership interests, by contract or
otherwise), provided that in any event, any Person which owns directly,
indirectly or beneficially ten percent (10%) or more of the securities having
voting power for the election of directors or other governing body of a
corporation or ten percent (10%) or more of the partnership interests or other
ownership interests of any other Person will be deemed to control such Person.
Notwithstanding the foregoing, no individual shall be deemed to be an Affiliate
of a Person solely by reason of his or her being a director, committee member,
officer or employee of such Person.

                  "Aggregate Power Processing Demand" means, collectively, the
Pulp Mill Power Processing Demand, the Tissue Mill Power Processing Demand and
the Paper Mill Power Processing Demand.
                                       ii

<PAGE>


                  "Aggregate Power Processing Requirement" means the aggregate
requirement of the Mills for Power Processing Services at any given time.

                  "Aggregate Steam Processing Demand" means, collectively, the
Pulp Mill Steam Processing Demand, the Tissue Mill Steam Processing Demand and
the Paper Mill Steam Processing Demand.

                  "Aggregate Steam Processing Requirement" means the aggregate
requirement of the Mills for Steam Processing Services at any given time.

                  "Alabama Power" means Alabama Power Company.

                  "Alabama PSC" means the Alabama Public Service Commission.

                  "Asset Lease Agreements" means the series of lease or sublease
and assignment agreements by which Scott conveyed to Mobile Energy (as the
assignee of Holdings) those part of the facilities, structures and equipment
comprising the Energy Complex to which title is held by the IDB and which are
leased by the IDB to Kimberly-Clark Tissue or are currently subject to
installment sale agreements between the IDB and Kimberly-Clark Tissue.

                  "Asset Purchase Agreement"  means the Asset Purchase Agreement
dated as of December 12, 1994 between Scott and Mobile Energy (as the assignee
of Holdings).

                  "Back-Up Power" means power purchased by the Mill Owners from
Alabama Power that is treated by Alabama Power as back-up power under the 1986
Alabama Power Contract as such contract was applied and administered by Scott
and Alabama Power prior to the Acquisition Closing Date.

                  "Bankruptcy Code" means the Federal Bankruptcy Code of 1978,
as amended.

                  "Bankruptcy Event" means, with respect to any person, (i) such
Person's general inability, or its admission of its inability, to pay its debts
as such debts become due, (ii) the application by such Person for or its consent
to the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property,
(iii) the commencement by such Person of a voluntary case under the Bankruptcy
Code, (iv) the making by such Person of a general assignment for the benefit of
its creditors, (v) the filing of a petition by such Person seeking to take
advantage as a debtor of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement, winding-up or
readjustment of debts, (vi) the failure by such Person to controvert in a timely
and appropriate manner, or its acquiescence in writing to, any petition filed
against it in an involuntary case under the Bankruptcy Code, (vii) the taking of
any corporate or other action by such Person for the purpose of effecting any of
the foregoing, (viii) the commencement of a proceeding or case, without the
application or consent of such Person, in any court seeking (A) such Person's
reorganization, liquidation, dissolution, arrangement or winding-up, or the
composition or readjustment of its debts, (B) the appointment of a trustee,
receiver, custodian, liquidator, examiner or the like of such Person or all or
any substantial part of its property or (C) similar relief in respect of such


                                      iii

<PAGE>

Person under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect for a period of 60 or more days, or (ix) an order for relief against such
Person shall be entered in an involuntary case under the Bankruptcy Code.

                  "Bond Transfer Instrument" means the agreement of the Scott
Subsidiary selling, assigning and transferring the 1994 Bonds to Mobile Energy.

                  "Change Event" means a Process Model Adjustment Event or a
Financial Adjustment Event, individually or collectively, as the context may
require.

                  "Change in Net Costs" means, as the direct result of a Change
Event, any capital expenditure incurred by Mobile Energy or any change in Mobile
Energy's costs required to operate and maintain the Energy Complex (which shall
be deemed to include any energy taxes payable due to a Financial Adjustment
Event pursuant to clause (A) of the definition thereof), net of any offsetting
financial benefit that will be recovered by Mobile Energy through (i) an
automatic adjustment (including any change through indices or escalators)
applicable to the Process Model, Processing Charges, Demand Charges or any other
charges payable by the Mill Owners under their respective Energy Services
Agreements, the Master Operating Agreement or any other Project Agreement, (ii)
reduced operating costs or other monetary benefit derived by Mobile Energy in
connection with such Change Event or (iii) insurance proceeds received in
connection with such Change Event.

                  "Clean Air Act" means the Clean Air Act Amendments of 1990.

                  "Collateral Agent" means the collateral agent for the Senior
Secured Parties under the Intercreditor Agreement, which is Bankers Trust
(Delaware).
                  "Confidentiality Agreement" means the Confidentiality
Agreement dated December 12, 1994 among Southern Energy, Mobile Energy,
Kimberly-Clark Tissue, and S.D. Warren.

                  "Consent to Assignment" means any one or more (as the context
may require) of the consents to assignment executed by certain of the parties to
certain of the Project Contracts in connection with the collateral assignment of
Mobile Energy's rights under those contracts to the Collateral Agent.

                  "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 Agreement and the Master Operating
Agreement.

                  "Conversion Demand" means 42.7 million pounds of virgin dry
black liquor solids per week, as such amount may be revised from time to time
pursuant to the Master Operating Agreement.

                  "Conversion Demand Charge" means the Demand Charges for Liquor
Processing Services for a given period of time.



                                       iv
<PAGE>



                  "Current Liquor Processing Nomination" means the maximum
amount of black liquor to be delivered to Mobile Energy pursuant to the Pulp
Mill Energy Services Agreement during any week.

                  "Current Paper Mill Power Processing Nomination" means the
maximum amount of power processing required of Mobile Energy pursuant to the
Paper Mill Energy Services Agreement during any fifteen (15) minute period
during any day, which amount taken together with the Current Pulp Mill Power
Processing Nomination and the Current Tissue Mill Power Processing Nomination
shall not exceed the Aggregate Power Processing Demand, as revised from time to
time pursuant to the Master Operating Agreement.

                  "Current Paper Mill Steam Processing Nomination" means the
maximum amount of steam to be processed by Mobile Energy pursuant to the Paper
Mill Energy Services Agreement during any one (1) hour period during any day,
which amount taken together with the Current Pulp Mill Steam Processing
Nomination and the Current Tissue Mill Steam Processing Nomination shall not
exceed the Aggregate Steam Processing Demand, as such nomination may be revised
from time to time pursuant to the Master Operating Agreement.

                  "Current Power Processing Nomination" means, collectively, the
Current Pulp Mill Power Processing Nomination, the Current Tissue Mill Power
Processing Nomination, and the Current Paper Mill Power Processing Nomination.

                  "Current Pulp Mill Power Processing Nomination" means the
maximum amount of power processing required of Mobile Energy pursuant to the
Pulp Mill Energy Services Agreement during any fifteen (15) minute period during
any day, which amount taken together with the Current Paper Mill Power
Processing Nomination and the Current Tissue Mill Power Processing Nomination
shall not exceed the Aggregate Power Processing Demand, as revised from time to
time pursuant to the Master Operating Agreement.

                  "Current Pulp Mill Steam Processing Nomination" means the
maximum amount of steam to be processed by Mobile Energy pursuant to the Pulp
Mill Energy Services Agreement during any one (1) hour period during any day,
which amount taken together with the Current Paper Mill Steam Processing
Nomination and the Current Tissue Mill Steam Processing Nomination shall not
exceed the Aggregate Steam Processing Demand, as such nomination may be revised
from time to time pursuant to the Master Operating Agreement.

                  "Current Steam Processing Nomination" means, collectively, the
Current Pulp Mill Steam Processing Nomination, the Current Tissue Mill Steam
Processing Nomination and the Current Paper Mill Steam Processing Nomination.

                  "Current Tissue Mill Power Processing Nomination" means the
maximum amount of power processing required of Mobile Energy pursuant to the
Tissue Mill Energy Services Agreement during any fifteen (15) minute period
during any day, which amount taken together with the Current Paper Mill Power
Processing Nomination and the Current Pulp Mill Power Processing Nomination
shall not exceed the Aggregate Power Processing Demand, as such nomination may
be revised from time to time pursuant to the Master Operating Agreement.
                                       v

<PAGE>


                  "Current Tissue Mill Steam Processing Nomination" means the
maximum amount of steam to be processed by Mobile Energy pursuant to the Tissue
Mill Energy Services Agreement during any one (1) hour period during any day,
which amount taken together with the Current Pulp Mill Steam Processing
Nomination and the Current Paper Mill Steam Processing Nomination shall not
exceed the Aggregate Steam Processing Demand, as such nomination may be revised
from time to time pursuant to the Master Operating Agreement.

                  "Environmental Guaranty" means a guaranty provided by Southern
of certain of Mobile Energy's obligations under the Mill Environmental Indemnity
Agreements.

                  "EPA" means the Environmental Protection Agency.

                  "FASB" means the Financial Accounting Standards Board.

                  "FERC" means the Federal Energy Regulatory Commission.

                  "Financing Documents" means all agreements, documents and
instruments evidencing and/or securing the Financing Liabilities.

                  "Financing Liabilities" means all indebtedness, liabilities
and obligations of Mobile Energy or Holdings (including, but not limited to,
principal, interest, fees, reimbursement obligations, penalties, indemnities and
legal expenses, whether due to acceleration or otherwise) to the Senior Secured
Parties (of whatsoever nature and howsoever evidenced) under or pursuant to the
Indenture, the First Mortgage Bonds and all other Indenture Securities, the IDB
Lease Agreement, the Tax-Exempt Indenture, the Working Capital Facility and any
evidence of indebtedness thereunder entered into, the Security Documents and the
Tax-Exempt Security Documents, to the extent arising on or prior to the maturity
of the Senior Securities, in each case, direct or indirect, primary or
secondary, fixed or contingent, now or hereafter arising out of or relating to
any such agreement.

                  "First Mortgage Bonds" means $255,210,000 principal amount of
8.665% First Mortgage Bonds due 2017 issued by Mobile Energy and
unconditionally guaranteed by  Holdings.

                  "Governmental Approvals" means those authorizations, consents,
approvals, waivers, exemptions, variances, registrations, certifications,
permissions, permits, and licenses with any Governmental Authority required for
the ownership and operation of the Energy Complex and the performance of a
person's obligations under the Project Documents.

                  "Governmental Authority" means any federal, state, county,
municipal, foreign, international, regional or other governmental or regulatory
authority, agency, department, board, body, instrumentality, commission, arbiter
or court.
                                       vi

<PAGE>

                  "Governmental Rule" means any law, rule, regulation,
ordinance, order, code, permit, interpretation, judgment, decree, directive,
guideline, policy or similar decision of any governmental authority having the
effect and force of law.

                  "Holdings" means Mobile Energy Services Holdings, Inc.

                  "Indenture" means the Trust Indenture dated as of August 1,
1995 among Mobile Energy, Holdings, and First Union National Bank of Georgia, as
trustee.

                  "Indenture Securities" means the First Mortgage Bonds and any
additional Senior Debt issued by Mobile Energy pursuant to the Indenture in the
future.

                  "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.

                  "Liquidated Damages" means Liquor Processing Liquidated
Damages, Steam Processing Liquidated Damages or Power Processing Liquidated
Damages, individually or collectively, as the context may require.

                  "Long Term Maintenance Power" means power purchased by the
Mill Owners from Alabama Power that is treated by Alabama Power as long term
maintenance power under the 1983 Alabama Power Contract as such contract was
applied and administered by Scott and Alabama Power prior to the Acquisition
Closing Date.

                  "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) 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,

                                      vii


<PAGE>

(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.

                  "Maintenance  Power" means Long Term  Maintenance  Power and
Short Term Maintenance Power, collectively.

                  "Mill Material Adverse Effect" means, with respect to any Mill
Owner, a material adverse effect on (i) the operation, maintenance or use of
such Mill Owner's Mill or such Mill Owner's portion of the Real Property, (ii)
the use by such Mill Owner or its representatives of any easement granted to
such Mill Owner by Mobile Energy pursuant to the Easement Deeds or (iii) the
ability of Mobile Energy or its Affiliates to observe and perform their
respective obligations under any of the Operative Documents.

                  "Mill Owner Consents to Assignment" means the Consents to
Assignment executed by the Mill Owners with respect to the principal Project
Contracts.

                  "Minimum Demand" means the Minimum Conversion Demand, the
Minimum Power Processing Demand and the Minimum Steam Processing Demand,
individually or collectively, as the context may require.

                  "Minimum Economic Demand" refers to the definitions of
"Minimum Economic Conversion Demand," "Minimum Economic Power Processing
Demand" and "Minimum Economic Steam Processing Demand."

                  "Minimum Economic Conversion Demand" means seventy-seven
percent (77%) of the Maximum Liquor Processing Capacity in effect at the
Acquisition Closing Date.

                  "Minimum Economic Power Processing Demand" means
seventy-seven percent (77%) of the Maximum Power Processing Capacity in effect
at the Acquisition Closing Date.

                  "Minimum Economic Steam Processing Demand" means
seventy-seven percent (77%) of the Maximum Steam Processing Capacity in effect
at the Acquisition Closing Date.

                  "Mobile Energy" means Mobile Energy Services Company, L.L.C.

                  "Mobile Energy Material Adverse Effect" means a material
adverse effect on (i) the facilities, structure and equipment comprising the
Energy Complex; (ii) the operation, maintenance or use of the Energy Complex or
the Leased Premises; (iii) the use by Mobile Energy or its representatives of
any easement granted for the benefit of Lots 7 and 9 pursuant to the Easement
Deeds; or (iv) the ability of Kimberly-Clark Tissue or any Mill Owner to observe
and perform its obligations under any of the Operative Documents.



                                      viii
<PAGE>


                  "1986 Alabama Power Contract" means the Contract for Electric
Power dated as of April 14, 1986 between Kimberly-Clark Tissue and Alabama
Power.

                  "1983 Alabama Power Contract" means the Agreement dated as of
July 20, 1983 between Kimberly-Clark Tissue and Alabama Power.

                  "Nondisturbance Agreement" means the Estoppel and
Nondisturbance Agreement dated as of December 12, 1994 between the Scott
Subsidiary and Mobile Energy.

                  "NPDES" means the National Pollutant Discharge Elimination
System.

                  "Operation and Maintenance Costs" means all costs and expenses
of operating and maintaining the Energy Complex and, when Mobile Energy is
exercising the Mobile Energy's 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 IDB Lease
Agreement and payments of principal, premium and interest on the 1994 Bonds).

                  "Operative Documents" means each of the Project Agreements,
the Asset Purchase Agreement and the bill of sale and assignment and assumption
agreement relating thereto, the Asset Lease Agreements, the Bond Transfer
Instrument, the Employee Transition Agreement and the guaranty of Southern of
Mobile Energy's obligations under the Lease Assignment and Assumption Agreement.

                  "Outage" means a Scheduled Outage, a Major Maintenance Outage
or an Unscheduled Outage, as the context may require.

                  "Paper Mill Energy Services Agreement" means the Paper Mill
Energy Services Agreement dated as of December 12, 1994 between Warren Alabama,
in its capacity as Paper Mill Owner, and Mobile Energy, as amended.

                  "Paper Mill Power Processing Demand" means 21,400 kilowatts,
as such amount may be adjusted from time to time pursuant to the Master
Operating Agreement.

                  "Paper Mill Steam Processing Demand" means 420 million british
thermal units per hour, as such amount may be adjusted from time to time
pursuant to the Master Operating Agreement.

                  "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


                                       ix
<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.

                  "Permitted Energy Complex Outage" has the meaning given in
the Master Operating Agreement.

                  "Person" means any individual, sole proprietorship,
corporation, partnership, limited liability company, joint venture, trust,
unincorporated association, Governmental Authority or any other entity.

                  "Power Processing Demand" means the Pulp Mill Power Processing
Demand, the Paper Mill Power Processing Demand and the Tissue Mill Power
Processing Demand.

                  "Process Water Plant" means the plant owned by the Pulp Mill
Owner which supplies water to the Energy Complex and the Mills.

                  "Project Agreements" means the Energy Services Agreements, the
Master Operating Agreement, the Direct Lease, the Supplementary Lease, the O&M
Agreement, the Confidentiality Agreement, the Common Services Agreement, the
Water Agreement, the Ash Agreement, the Pulp Supply Agreement, the
Kimberly-Clark Tissue Environmental Indemnity Agreement, the Mill Environmental
Indemnity Agreements, the Transition Agreement and the Easement Deeds, provided,
that each Project Agreement having a stated term (which may include a stated
renewal term) that has expired in full at the end of such stated term (or such
stated renewal term) and each Project Agreement not having a stated term that
has been fully performed in accordance with its terms (including, without
limitation, through the final payment of all amounts due or to become due
thereunder) shall cease to be a Project Agreement for all purposes with respect
to the Energy Services Agreements and the Master Operating Agreement.

                  "Project Contracts" means, collectively, the Energy Services
Agreements, the Master Operating Agreement, the Direct Lease, the Supplementary
Lease, the O&M Agreement, the Common Services Agreement, the Water Agreement,
the Ash Agreement, the Kimberly-Clark Tissue Environmental Indemnity Agreement,
the Mill Environmental Indemnity Agreements, the Transition Agreement, the
Employee Transition Agreement, the SCS Agreement, the Easement Deeds, the Asset
Purchase Agreement, the Coal Supply Agreement dated as of May 1, 1995 between
Mobile Energy and E.J. Hodder & Associates, the Lease Assignment and Assumption
Agreement, the Facilities Lease and Agreement and the related Sublease and
Assignment Agreement, the Installment Sale Agreements and the related Lease and
Assignment Agreements, the Recovery Boiler Lease and Agreement and the related
1994 Bond Agreement, the Nondisturbance Agreement, the Recognition Agreements,
the Mill Owner Maintenance Reserve Account Agreement, the Omnibus Deed, Bill of
Sale, General Assignment and Conveyance Agreement dated July 14, 1995 between
Holdings and Mobile Energy and any other contract entered into by Mobile Energy
or Holdings for the provision of fuel to the Energy Complex (in each case, as
the same may be amended, supplemented, modified, replaced or assigned in
accordance with the Indenture).

                                       x

<PAGE>

                  "Project Documents" means, collectively, the Financing
Documents and the Project Contracts.

                  "PUHCA" means the Public Utility Holding Company Act of 1935,
as amended.

                  "Pulp Mill Energy Services Agreement" means the Pulp Mill
Energy Services Agreement, dated as of December 12, 1994 between Kimberly-Clark
Tissue, in its capacity as Pulp Mill Owner, and Mobile Energy.

                  "Pulp Mill Power Processing Demand" means 29,500 kilowatts, as
such amount may be adjusted from time to time pursuant to the Master Operating
Agreement.

                  "Pulp Mill Steam Processing Demand" means 500 million british
thermal units per hour, as such amount may be adjusted from time to time
pursuant to the Master Operating Agreement.

                  "PURPA" means the Public Utility Regulatory  Policies Act of
1978, as amended.

                  "Qualifying Facility" means a qualifying facility under PURPA.

                  "Recognition Agreements"  means the Mixed-Use Bonds
Recognition Agreement and the Tax-Exempt Bonds Recognition Agreement.

                  "Scheduled Outage" means a scheduled Energy Complex Outage or
a Scheduled Mill Outage, as the context may require.

                  "Scott" means Scott Paper Company.

                  "SCS" means Southern Company Services, Inc.

                  "S.D. Warren " means S.D. Warren Company.

                  "SEC" means the Securities and Exchange Commission.

                  "Security Documents" means, collectively, (i) the Mortgage,
(ii) the Security Agreement, (iii) the Indenture, (iv) the Intercreditor
Agreement, (v) the Tax-Exempt Indenture, (vi) the IDB Lease Agreement, (vii) the
Consents to Assignment and (viii) each Uniform Commercial Code financing
statement in connection with the foregoing.

                  "Senior Debt" means all Senior Securities, together with
additional debt under any Working Capital Facility.

                  "Senior Secured Parties" shall mean collectively the trustee
under the Indenture (on behalf of holders of Indenture Securities), the trustee
under the Tax-Exempt Indenture (on behalf of holders of Tax-Exempt Indenture
Securities) and the Working Capital Facility Provider.

                                       xi

<PAGE>

                  "Senior Securities" shall mean the Indenture Securities and
the Tax-Exempt Indenture Securities collectively.

                  "Services" means any one or more (as the context may require)
of Liquor Processing Services and the Shared Services.

                  "Shared Services" means Steam Processing Services, Power
Processing Services, process water, and compressed air.

                  "Short Term Maintenance Power" means the power purchased by
the Mill Owners from Alabama Power that is treated by Alabama Power as short
term maintenance power under the 1983 Alabama Power Contract as such contract
was applied and administered by Scott and Alabama Power prior to the Acquisition
Closing Date.

                  "Shortfall Hour" means, for a Liquor Processing Shortfall
Event, a Steam Processing Shortfall Event or a Power Processing Shortfall Event,
the duration of such shortfall event rounded up to the next whole hour.

                  "Site" means the Real Property, the Mills, and the Energy
Complex.
                  "Southern" means The Southern Company.

                  "Southern Energy" means Southern Energy Resources, Inc.
(formerly known as Southern Energy, Inc. and Southern Electric International,
Inc.)

                  "Steam Processing Demand" means the Pulp Mill Steam Processing
Demand, the Tissue Mill Steam Processing Demand and the Paper Mill Steam
Processing Demand.

                  "Step-In Rights" means Mill Owner Step-In Rights or Mobile
Energy Step-In Rights, as the context may require.

                  "Supplemental Power" means power purchased by the Mill Owners
from Alabama Power that is treated by Alabama Power as supplemental power under
the 1986 Alabama Power Contract as such contract was applied and administered by
Scott and Alabama Power prior to the Acquisition Closing Date.

                  "Tax-Exempt Bonds" means $85,000,000 principal amount of 6.95%
Solid Waste Revenue Refunding Bonds (Mobile Energy Services Company, L.L.C.
Project) Series 1995 due 2020 issued by the IDB.

                  "Tax-Exempt Indenture Securities" means the Tax-Exempt Bonds
and any additional Senior Debt issued pursuant to the Tax-Exempt Indenture.

                                      xii
<PAGE>


                  "Tax-Exempt Security Documents" means, collectively, (i) the
Mortgage, (ii) the Security Agreement, (iii) the Tax-Exempt Indenture, (iv) the
IDB Lease Agreement, (v) the Intercreditor Agreement, (vi) the Consents to
Assignment and (viii) each Uniform Commercial Code financing statement in
connection with the foregoing.

                  "Tissue Mill Energy Services Agreement" means the Tissue Mill
Energy Services Agreement dated as of December 12, 1994 between
Scott/Kimberly-Scott, in its capacity as Tissue Mill Owner, and Mobile Energy.

                  "Tissue Mill Power Processing Demand" means 37,800 kilowatts,
as such amount may be adjusted from time to time pursuant to the Master
Operating Agreement.

                  "Tissue Mill Steam Processing Demand" means 280 million
british thermal units per hour, as such amount may be adjusted from time to time
pursuant to the Master Operating Agreement.

                  "Unit Trip" means any sudden and immediate removal from
service or sudden and immediate interruption of service not caused by the Mills
of any boiler, turbine-generator or high voltage distribution component such
that (i) in the case of the boiler, either fuel input shuts off, or super heater
steam flows stop, (ii) in the case of the turbine generator, either the
generator circuit breaker opens, or the main steam stop valve closes, or (iii)
in the case of the high voltage distribution system, the 13.8kv power supply to
the Mills is interrupted, provided that prior to the interruption of service of
any boiler, turbine generator or high voltage distribution component, the
applicable unit shall have been in service contributing to the Liquor Processing
Services, Steam Processing Services or Power Processing Services provided to the
Mills for not less than 12 hours.

                  "Uniform Commercial Code" means the Uniform Commercial Code of
the jurisdiction the law of which governs the document in which such term is
used.

                  "Unscheduled Mill Outage" means any Outage with respect to a
Mill which is not a Scheduled Mill Outage, other than any Outages caused by a
Force Majeure Event with respect to such Mill or its respective owner.

                  "Unscheduled Outage" means an Unscheduled Energy Complex
Outage or an Unscheduled Mill Outage, as the context may require.

                  "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.

                                      xiii


<PAGE>


                                     PART I


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

         In addition to historical information, this Annual
 Report on Form 10-K 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 below at Item 1
"Business" and at Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operation" herein, as well as those discussed or
identified from time to time in Mobile Energy's or Holdings' filings with the
SEC, including, but not limited to, the Company's Registration Statement on Form
S-1 (Registration No. 33-92776). 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 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; changes in or the
application of environmental and other laws and regulations to which Mobile
Energy and Holdings are subject; and other factors discussed elsewhere herein.


Item 1.  BUSINESS

General

Holdings was incorporated in the State of Alabama on August 25, 1994 under the
name Mobile Energy Services Company, Inc. Its name was changed to Mobile Energy
Services Holdings, Inc. on May 17, 1995. Mobile Energy was formed as a limited
liability company in the state of Alabama on July 13, 1995. The mailing address
of the principal executive offices of Mobile Energy is 900 Ashwood Parkway,
Suite 300, Atlanta, Georgia 30338-4780, and its phone number is (770)379-7781.
The mailing address of the principal executive offices of Holdings is 900
Ashwood Parkway, Suite 450, Atlanta, Georgia 30338-4780, and its phone number is
(770)379-7730.

     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 to Mobile Energy the Energy Complex, the Project Contracts
and related assets, permits and agreements 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. Both Holdings and Southern Energy are wholly
owned subsidiaries of Southern.

     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 Mill receives wood primarily in long form, both from truck and barge
deliveries. The "longwood" is cut into ten-foot lengths, cleaned, debarked and
chipped. Chips are then fed into digesters along with an appropriate amount of
white liquor (which is produced from green liquor). Steam is then added and the
chips are "cooked" in order to separate wood fiber (pulp) from lignin (the
binding agent in wood). Spent liquor (weak black liquor) and small debris is
then removed from the resultant pulp stock. The pulp is then bleached and fed to
paper machines as needed for the production of paper. The weak black liquor is
delivered to the Energy Complex for processing. The Energy Complex processes
almost 100% of the Pulp Mill's weak black liquor (which contains, among other

                                      I-1


<PAGE>

things, black liquor solids) into "green liquor" (a chemical solution that is
essential to the production of pulp because it is reused in the production of
white liquor by the Pulp Mill) (this processing, the "Liquor Processing
Services").

     Approximately 90% of the fuel requirements of the Energy Complex currently
are satisfied with by-products generated by the operations of the Pulp Mill or
provided by the Pulp Mill. These by-products include weak black liquor, biomass
(waste wood) and sludge, each of which is provided to Mobile Energy by the Pulp
Mill. The Energy Complex processes various fuels and water provided by the
Mills, together with other fuel obtained by Mobile Energy, into steam (the
"Steam Processing Services") and electricity (the "Power Processing Services").
The Mills currently obtain all of their aggregate steam processing needs and 98%
of their aggregate power processing needs from the Energy Complex. The Pulp
Mill, in turn, disposes of substantially all of the by-products of the Energy
Complex's operations, including boiler ash, and provides process water and waste
water treatment services to the Energy Complex and each of the other Mills.

     The Mobile Facility is one of the largest pulp, paper and tissue production
complexes in North America. At the time of the Acquisition, Scott owned the
Tissue and Pulp Mills. Subsequent to Holdings' acquisition of the Energy
Complex, Scott merged with Kimberly-Clark Tissue, a wholly owned subsidiary of
Kimberly-Clark Corporation ("Kimberly-Clark"). This merger was completed in
December 1995; therefore, the Tissue and Pulp Mills are currently owned by
Kimberly-Clark Tissue. The Tissue Mill consists of five paper machines with a
capacity to manufacture approximately 310,000 tons of tissue per year, as well
as finishing operations and distribution operations. The Tissue Mill and the
Paper Mill currently rely on the Pulp Mill for almost all of their supply of
pulp.

     At the time of the Acquisition, the Paper Mill was owned by S.D.
Warren, and Scott owned S.D. Warren.  On December 21, 1994 Scott sold S.D.
Warren to a company indirectly owned by Sappi Limited, DLJ Merchant Banking
Partners L.P. and UBS Capital Corporation.  S.D. Warren's obligations under the
Project Agreements were not affected by this sale.  Mobile Energy has received
notice that S.D. Warren transferred the Paper Mill to S.D.  Warren Alabama
L.L.C. ("Warren Alabama") , a Delaware limited liability company,  which is an
indirect, wholly-owned subsidiary of S.D. Warren created for the purpose of
owning and operating the Paper Mill. The Project Agreements to which S.D.
Warren is a party have also been be assigned by S.D. Warren and assumed by
Warren Alabama.

     Warren Alabama produces uncoated business, commercial offset printing
(including heavyweight board and colored offset products) and coated specialty
and technical papers at the Paper Mill. The Paper Mill produces all of S.D.
Warren's uncoated free sheet paper and certain coated specialty and technical
papers. The Paper Mill consists of three paper machines with a capacity to
manufacture approximately 270,000 tons of paper per year, as well as finishing
operations and distribution operations.

Power, Steam and Liquor Processing Sales

Mobile Energy is a party to various long-term contracts, including (A) Energy
Services Agreements (including any amendments thereto, the "Energy Services
Agreements") with (1) Kimberly-Clark Tissue acting in its capacity as the owner
of the Tissue Mill (Kimberly-Clark Tissue in such capacity, together with
successors and permitted assigns, the "Tissue Mill Owner"), (2) Kimberly-Clark
Tissue acting in its capacity as the owner of the Pulp Mill (Kimberly-Clark
Tissue in such capacity, together with successors and permitted assigns, the
"Pulp Mill Owner"), and (3) Warren Alabama acting in its capacity as the owner
of the Paper Mill ( Warren Alabama in such capacity, together with successors
and permitted assigns, the "Paper Mill Owner," and together with the Tissue Mill
Owner and the Pulp Mill Owner, the "Mill Owners") and (B) a Master Operating
Agreement (including any amendments thereto or restatements thereof, the "Master
Operating Agreement") with Kimberly-Clark Tissue, the Tissue Mill Owner, the
Pulp Mill Owner and the Paper Mill Owner. Pursuant to the Energy Services
Agreements, Mobile Energy subsequently, provides Steam Processing Services and
Power Processing Services to the Mills and Liquor Processing Services to the
Pulp Mill.

     The provision of Power Processing Services, Steam Processing Services and
Liquor Processing Services (collectively, the "Processing Services") by Mobile
Energy under the Energy Services Agreements is governed by the Master Operating
Agreement, which, among other things, coordinates operations at the Mobile
Facility. Subject to certain limited exceptions described herein, the Energy



                                       I-2
<PAGE>

Services Agreements and the Master Operating Agreement provide that Mobile
Energy will be the exclusive supplier of the Mills' requirements for the
Processing Services up to the stipulated capacity (such capacity, as further
defined in the Master Operating Agreement with respect to particular processing
services, the "Maximum Capacity") of the Energy Complex.

     Pursuant to the Energy Services Agreements and the Master Operating
Agreement, Mobile Energy is obligated to dedicate to each Mill an agreed upon
portion of the Energy Complex's capacity to provide Processing Services (the
quantity of such capacity being referred to as a Mill's "Demand" for the
particular Processing Service). Concurrently with the Acquisition, the Mill
Owners selected initial Demand levels under the Energy Services Agreements that,
in the aggregate, equal the current Maximum Capacity of the Energy Complex to
provide such processing services.

     Mobile Energy's revenues are comprised almost entirely of charges for
Processing Services provided to the Mills. To compensate Mobile Energy for
dedicating a portion of the Energy Complex's capacity to a Mill, each Mill Owner
is obligated to pay fixed capacity charges (the "Demand Charges") 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. The aggregate
Demand Charges payable by the Mills 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. There can be no assurance, however, that
such operating performance standards will be satisfied or that the Demand
Charges will at all times cover Mobile Energy's costs that are in the nature of
fixed costs, including the payment of principal of and interest on its
outstanding indebtedness. Under the Energy Services Agreements, Demand Charges
are due and payable on a monthly basis regardless of whether a Mill actually
utilizes any or all of the processing services corresponding to its dedicated
demand. Demand Charges are subject to automatic reduction ("Demand Charge
Reductions") due to a shortfall in the provision of Processing Services by
Mobile Energy that is not excused by the Project Agreements. In addition, such
an unexcused shortfall would require Mobile Energy to pay the Mill Owners
liquidated damages in an amount up to $10,000 per day (subject to escalation
from the Acquisition Closing Date) for each day on which there is such an
unexcused shortfall.

     The Master Operating Agreement provides that (except as described below)
the sum of the three Mills' Demand Levels (and, therefore, the aggregate Demand
Charges payable by the Mills) for any Processing Service (the "Aggregate Demand"
for that Processing Service) is subject to reduction (and upon the satisfaction
of certain conditions) only in December 1999, and on each second anniversary
thereafter (each such date, a "Demand Anniversary Date," and the period from one
Demand Anniversary Date until the next succeeding Demand Anniversary Date, a
"Demand Period"). If, during any Demand Period, a Mill's peak usage of a
particular Processing Service is less than such Mill's then applicable Demand
level for such Processing Service (and, in certain circumstances, is less than a
specific usage level set forth in the Master Operating Agreement), then, on the
Demand Anniversary Date on which such Demand Period concludes, the Mill is
permitted to select a lower Demand level (and, hence, incur a lower Demand
Charge) for the ensuing Demand Period. Pursuant to the Master Operating
Agreement, such lower Demand level cannot be less than such Mill's peak usage
(as determined pursuant to the Master Operating Agreement) of the particular
Processing Service during the just concluded Demand Period.

     Mobile Energy believes that since the Acquisition Closing Date, the Mills
have, from time to time, required and utilized, in the aggregate, Steam
Processing Services and Power Processing Services, and the Pulp Mill has
required and utilized Liquor Processing Services, in amounts such that the
Aggregate Demand levels for Steam Processing Services, Power Processing Services
and Liquor Processing Services will not, pursuant to the terms of the Master
Operating Agreement, be permitted to be decreased at the conclusion of the first
Demand Period in December 1999. Therefore, pursuant to the Master Operating
Agreement, unless there is a Mill Closure (as hereinafter defined) or certain
casualty or force majeure events occur, Mobile Energy believes that the
aggregate Demand Charges payable by the Mill Owners for Steam Processing
Services, Power Processing Services and Liquor Processing Services are not
subject to reduction by the Mill Owners until at least the conclusion of the
second Demand Period in December 2001. However, there can be no assurance that a
Mill Closure, casualty or force majeure event will not occur, or that such
aggregate Demand Charges will remain in effect after December 2001.

                                      I-3

<PAGE>

     Each Mill Owner has the right to terminate its Energy Services Agreement
(i) during the pendency of a Mobile Energy Event of Default (as hereinafter
defined) or (ii) if (a) 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 (permanently or
for a period of at least two years ) to less than 10% of such Mill's 1994
production levels, or (b) 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 (as hereinafter defined)) (clauses (a) and (b) each
constituting a "Mill Closure"). If a Mill Owner terminates its Energy Services
Agreement due to a Mobile Energy Event of Default, such Mill Owner will stop
accruing Demand Charges and Processing Charges (as hereinafter defined) as of
the date of the termination. If a Mill Owner terminates its Energy Services
Agreement due to a Mill Closure, on the other hand, such Mill Owner is required
by the Master Operating Agreement to pay Demand Charges for a period equal to
the greater of (i) one year following the date upon which the Mill Owner gives
notice of termination to Mobile Energy or (ii) until the end of the then current
Demand Period. The first Demand Period ends in December 1999, and each
subsequent Demand Period ends on the second anniversary of the end of the
preceding Demand Period.

     Thus, a Mill Closure or the occurrence of certain casualty or force majeure
events at any time during the terms of the Energy Services Agreements would,
after the satisfaction of certain conditions and the expiration of the various
time periods set forth in the Master Operating Agreement, relieve the affected
Mill Owner from its obligations to pay Demand Charges and, therefore, could have
a materially adverse impact on Mobile Energy. For example, if a Mill Closure
occurs before December 1999, the aggregate Demand Charges payable by the Mill
Owners will be subject to reduction commencing as early as December 1999. In
addition, if certain casualty or force majeure events occur with respect to any
Mill or the Energy Complex before December 1999, the aggregate Demand Charges
payable by the Mill Owners may be subject to reduction prior to such date, in
accordance with the casualty and force majeure provisions of the Master
Operating Agreement and Energy Services Agreements.

     Subject to certain restrictions set forth in the Master Operating
Agreement, the Mill Owners are entitled to reallocate Demand levels and,
correspondingly, Demand Charges, among the various Mills once each year.
However, such reallocations are not permitted to result in a decrease in the
Aggregate Demand levels or the aggregate Demand Charges then in effect.

     As indicated above, concurrently with the acquisition of the Energy Complex
by Holdings, the Mill Owners selected initial Demand levels for each of the
Processing Services, which Demand levels currently remain in effect. The
following table sets forth the approximate percentage of Aggregate Demand by
Mill Owners for each of the Processing Services as of December 31, 1997:

                                  Power      Steam   Liquor
                               Processing ProcessingProcessing
                                Services   Services Services
Pulp Mill Owner...................33%        42%      100%
Tissue Mill Owner.................43%        23%       N/A
Paper Mill Owner..................24%        35%       N/A
                                  ---      -----       ---
                                 100%       100%      100%

The foregoing allocations of Aggregate Demand are subject to reallocation among
the Mill Owners as early as December 1998 and at various times thereafter.

     The Energy Services Agreements also require each Mill Owner to pay usage
charges (the "Processing Charges") based upon formulas set forth in the Master
Operating Agreement 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. 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. There can be no assurance, however, that the Processing
Charges will at all times cover such costs, including variable costs such as
fuel related expenses.

         The Master Operating Agreement provides for Mobile Energy and the Mill
Owners to develop a computer model (the "Process Model") to be used to calculate
the fuel cost component of the Processing Charges in accordance with certain
principles set forth in the Master Operating Agreement. The parties' intent was
that the Process Model would be designed to compute, among other things, the
quantity of coal that the Energy Complex should be using at any time in order to
satisfy certain efficiency and reliability standards, and the amount of gas that
the Energy Complex should be using at any time, in accordance with the specified
protocol for boiler dispatch. The Master Operating Agreement provides that once

                                      I-4
<PAGE>

the Process Model is implemented, Mobile Energy will be permitted to charge the
Mill Owners, as a component of the Processing Charges, for only those quantities
of coal as are calculated by the Process Model to be efficient quantities and
for only those quantities of gas as are determined by the Process Model to be in
accordance with a specified protocol for boiler dispatch. Therefore, under the
Process Model computations, Mobile Energy will be rewarded for operating the
Energy Complex more efficiently than the standards set forth in the Process
Model and will bear the risk of operating the Energy Complex less efficiently
than those standards.

         In 1997, Mobile Energy and the Mill Owners determined to delay the
development of the Process Model indefinitely due to technical constraints. The
Master Operating Agreement provides that until the Process Model is developed
and certain accuracy and reliability tests are completed (the "Interim Period"),
Mobile Energy is permitted to charge the Mills for any and all quantities of
coal used by the Energy Complex to provide Processing Services. In addition,
during the Interim Period, Mobile Energy is, subject to certain conditions
described herein, permitted to charge the Mills for any and all quantities of
gas used by the Energy Complex to provide the Processing Services. Certain other
modifications to the formula used to calculate the Processing Charges also
remain in effect during the Interim Period. Therefore, Mobile Energy is
currently charging the Mills for fuel costs in accordance with the provisions
applicable to the Interim Period.

         There can be no assurance that the Process Model will be developed by
Mobile Energy and the Mill Owners. If the Process Model is developed and
implemented, there can be no assurance that the Energy Complex will use fuel in
accordance with the standards set forth in the Process Model or that Mobile
Energy will operate the Energy Complex more efficiently than the standards set
forth in the Process Model. Moreover, there can be no assurance that the Process
Model will perform in accordance with its design or the principles set forth in
the Master Operating Agreement. If the Process Model is developed and
implemented and fails to calculate accurately the amount of coal and gas the
Energy Complex should be using in accordance with the standards described above,
Mobile Energy's ability to recover its cost for coal and gas could be adversely
effected.

     Pursuant to the Master Operating Agreement, the unit charge payable by the
Mill Owners for coal is contractually fixed and escalated in accordance with an
escalator based upon the market price for coal mined east of the Mississippi
River and sold to specified utilities across the United States. Thus, Mobile
Energy receives the benefit, and bears the burden, of any difference between
Mobile Energy's actual coal costs and the contractual coal charges. The unit
charge payable by the Mill Owners for gas is Mobile Energy's actual "all in" per
unit gas cost.

     For the twelve-month period ended December 31, 1997, sales to the Pulp
Mill, Tissue Mill and Paper Mill (including both Demand Charges and Processing
Charges) were $42.9 million, $20.9 million, and $21.6 million, respectively,
which accounted for 50.2%, 24.5% and 25.3%, respectively, of Mobile Energy's
operating revenues. Payments of Demand Charges and Processing Charges by the
Mill Owners under the Energy Services Agreements are expected to provide
virtually all of Mobile Energy's operating revenues and are therefore the
primary source of funds for the payment of debt service. There are no
significant alternative sources of funds available to Mobile Energy to make debt
service payments (other than certain reserve accounts). Accordingly, a
significant decrease in revenues payable under the Energy Services Agreements
that is not accompanied by a corresponding decrease in operating costs may have
a material adverse impact on Mobile Energy's financial condition. If Demand
Charges and such other charges were at any time to be insufficient to cover
Mobile Energy's fixed costs (including payment of debt service), Mobile Energy
could be unable to pay principal of and interest on its outstanding indebtedness
or could be unable to pay its other fixed costs.

     Subject to certain limited exceptions, the Energy Services Agreements and
the Master Operating Agreement require the Mill Owners to purchase their entire
requirements for Processing Services from Mobile Energy up to the Maximum
Capacity of the Energy Complex, but do not require that the Mill Owners purchase
any minimum level of Processing Services at any time. No assurance can be given
that the Mill Owners will continue to operate the Mills at historical operating
levels for all or any portion of the term of the Energy Services Agreements.
Also, seasonal and cyclical fluctuations in the pulp, tissue and paper industry
will affect the Mills' requirements for Processing Services. The markets for
certain of the Mills' products historically have been highly cyclical,
characterized by periods of supply and demand imbalance. Therefore, revenues
from Processing Charges may fluctuate considerably from month to month.


                                      I-5
<PAGE>

     Subject to the limitations discussed above with respect to adjustments of
Demand Charges, Mobile Energy's revenues from Demand Charges can be affected by
such cyclical fluctuations in the pulp, tissue and paper industry as well.
Revenues from Demand Charges with respect to Steam Processing Services, Power
Processing Services and Liquor Processing Services could substantially decline
in January 2002, and again on each second anniversary thereof (based on Mobile
Energy's belief that such Demand Charges would not be subject to reduction prior
to such time, except if there is a Mill Closure or if certain casualty or force
majeure events occur).

     Sales to each of the three Mills account for substantially all of Mobile
Energy's revenues. Accordingly, the loss of revenues from any one Mill, whether
due to decreased operations, a Mill Closure or otherwise, could have a material
adverse impact on Mobile Energy. Given that sales to the Pulp Mill account for
the greatest percentage of Mobile Energy's operating revenues, and because the
Pulp Mill supplies certain fuels, water and waste water treatment services and
boiler ash disposal services to the Energy Complex, a permanent, substantial
curtailment of production at or a closure of the Pulp Mill could have a far more
detrimental effect on Mobile Energy's revenues than similar occurrences with
respect to the Paper Mill or the Tissue Mill.

     No assurance can be given that the Mill Owners will timely pay amounts due
to Mobile Energy or perform the services required under the Project Agreements
or that, regardless of whether or not the Mill Owners timely make such payments
and perform such services, Mobile Energy's revenues from Processing Charges and
Demand Charges will be sufficient to pay the operating and maintenance expenses
of the Energy Complex and the principal of and interest on Mobile Energy's
indebtedness.

     The markets for certain of the Mills' products are highly cyclical,
characterized by periods of supply and demand imbalance, and have historically
experienced price fluctuations driven by changes in supply, end-user demand and
preferences (including as to use of recycled contents in finished goods) and the
availability and relative price of imported products. Certain sectors of the
paper industry have also been significantly affected by changes in general
economic conditions, levels of consumer confidence and income, the availability
of financing and interest rate levels. Some of the Mill Owners' competitors have
greater financial resources than the Mill Owners, and certain mills operated by
competitors may be lower cost producers than the Mills. Accordingly, there can
be no assurance that a Mill Closure will not occur, that the Mills will be
operated at current levels over the life of the Mobile Facility or that such
levels of operation will generate sufficient revenue to Mobile Energy to enable
it to pay principal of and interest on its outstanding indebtedness.

     After the sale of the Energy Complex by Scott to Holdings, S.D. Warren
transferred some of its grade coated production (in which it is a market leader)
from the Paper Mill to another of its mills which is not serviced by the Energy
Complex. While S.D. Warren indicated that the change in operations was designed,
in part, to convert capacity at the Paper Mill to the production of coated
specialty and technical paper, and while such change in operations increased the
Paper Mill's usage of Steam Processing Services, there can be no assurance that
the altered product mix of the Paper Mill will not have a materially adverse
impact on the Paper Mill's requirement for Processing Services, or that the
Paper Mill will continue to be operated on an economic basis.

     Also, the Mill Owners have broad discretion to merge with or otherwise
combine with other companies and to otherwise transfer their interests in the
Mills, and there can be no assurance that the current Mill Owners will retain
their respective interests in the Mills. The consummation of any merger,
combination or other transfer, including the Scott merger with Kimberly-Clark
Tissue and the transfer of the Paper Mill by S.D. Warren to Warren Alabama,
could result in a change in the mix or level of processing services demanded by
such Mill and/or a decrease in the creditworthiness of the Mill Owner, any of
which could have a material adverse effect on Mobile Energy. For example, Mobile
Energy is informed that Warren Alabama is a sole purpose entity which has no
assets other than the Paper Mill.

     Prior to the announcement in July 1995 of its intent to merge with
Kimberly-Clark, Scott had announced its intention to sell the Pulp Mill as part
of a general corporate initiative to focus on its tissue operations. Payments
from the Pulp Mill Owner accounted for approximately 50.2% of Mobile Energy's
operating revenues in 1997. There can be no assurance that Kimberly-Clark Tissue
will not seek to sell the Pulp Mill or that any successor to Kimberly-Clark
Tissue as the Pulp Mill Owner would be of equivalent credit quality or industry

                                      I-6

<PAGE>

expertise, would require the same level of Processing Services as are currently
or have been historically required by Kimberly-Clark Tissue for its operation of
the Pulp Mill or would continue to provide the services and products currently
provided by Kimberly-Clark Tissue (as the Pulp Mill Owner) pursuant to certain
of the Project Contracts to the other Mills or the Energy Complex.

     The Tissue Mill and the Paper Mill currently rely upon the Pulp Mill for
almost all of their supply of pulp. Because both the Tissue Mill and the Pulp
Mill currently are owned by Kimberly-Clark Tissue, there is no contractual
arrangement between the Tissue Mill and the Pulp Mill for the supply of pulp. By
contrast, in connection with the sale of S.D. Warren in December 1994, Scott
entered into a long-term agreement (the "Pulp Supply Agreement") for the Pulp
Mill to supply the Paper Mill with its pulp requirements (subject to minimum and
maximum amounts) at prices that are generally based upon, though somewhat
discounted from, market prices. There can be no assurance that future owners of
the Pulp Mill and/or the Tissue Mill would enter into similar long-term pulp
supply arrangements or that any such pulp supply arrangements would be
economically beneficial to such parties. There also can be no assurance that
Warren Alabama and Kimberly-Clark Tissue will not modify materially the terms of
the Pulp Supply Agreement.

     Prior to the announcement of its intent to merge with Kimberly-Clark, Scott
had also announced its intention to sell in 1995 its Southeast timberland
operations (the "Southeast Timberland"), which controls over 500,000 acres of
woodlands in Alabama and Mississippi. The Pulp Mill currently relies upon the
Southeast Timberland for the supply of a significant portion of the Pulp Mill's
timber requirements and a significant portion of the biomass that the Pulp Mill
supplies to the Energy Complex. If the Southeast Timberland were to be sold, a
significant source of timber and biomass for the Pulp Mill may no longer be
available to the Pulp Mill on terms as advantageous to the Pulp Mill as at the
present time. Accordingly, the sale of the Southeast Timberland could have a
materially adverse impact on the Pulp Mill's (and therefore the Tissue Mill's
and Paper Mill's) business, in the level of Processing Services demanded by such
Mills and on the supply of biomass to the Energy Complex.

     In connection with its proposed merger with Kimberly-Clark Tissue, Scott
announced that it had suspended its previously stated plans to sell its global
pulp operations (including the Pulp Mill) and its timberlands in the United
States and Canada (including the Southeast Timberland). However, subsequent to
the merger Kimberly-Clark has indicated that the combined entity will endeavor
to eliminate redundant overhead costs, reduce its workforce and sell certain
assets including some manufacturing facilities. Therefore, although any sale of
the Pulp Mill or the Southeast Timberland may be delayed or abandoned as a
result of the merger, there can be no assurances that the Pulp Mill or the
Southeast Timberland (or any other assets (including the Tissue Mill)) would not
eventually be sold by the combined entity.

     The revenues received by Mobile Energy from the sale of Processing Services
to the Mills could also be adversely affected if one or more Mill Owners were to
go into bankruptcy. The Energy Services Agreements, the Master Operating
Agreement and certain of the other Project Contracts to which one or more Mill
Owners are party are "executory contracts" under the Bankruptcy Code because
performance is still due, to some extent, by both Mobile Energy and the Mill
Owners. Therefore, if a voluntary or involuntary petition with respect to a Mill
Owner were filed in a bankruptcy court, the Mill Owner (as debtor) could, with
the approval of the bankruptcy court, assume, assume and assign, or reject its
Energy Services Agreement, the Master Operating Agreement or any other of the
Project Contracts to which it is a party. No assurance can be given that a Mill
Owner in bankruptcy would be willing or able to assume any or all of the Project
Contracts to which it is a party, including its Energy Services Agreement.
Furthermore, no assurance can be given that Mobile Energy would be able to
replace any such Mill Owner with another customer willing to purchase power,
steam or liquor processing services on terms similar to those in an Energy
Services Agreement that is rejected by a Mill Owner in bankruptcy or on other
terms that are beneficial to Mobile Energy.

     If, after the filing of a bankruptcy petition, a Mill Owner in bankruptcy
does not immediately assume or reject the Project Contracts to which it is a
party and Mobile Energy provides Processing Services to such Mill Owner pursuant
to the Project Contracts, Mobile Energy would be compensated for such
post-petition services at a rate equal to the "actual and necessary" value of
the benefit of those services to the bankruptcy estate. In addition, a
bankruptcy court could compel Mobile Energy to continue to provide Processing

                                      I-7
<PAGE>

Services to the Mill Owner in bankruptcy, provided that the Mill Owner pays
Mobile Energy an amount equal to the "actual and necessary" value of the benefit
of the Processing Services to the bankruptcy estate. Furthermore, if Mobile
Energy were deemed to be a "utility" under Section 366 of the Bankruptcy Code,
Mobile Energy could be compelled by the bankruptcy court to provide Processing
Services to the Mill Owner for the remainder of the bankruptcy case even
following the Mill Owner's rejection of its Energy Services Agreement, in return
for payment based on the "actual and necessary" value of the benefit to the Mill
Owner in bankruptcy of such Processing Services. There can be no assurance that
a bankruptcy court would determine that the "actual and necessary" value of the
benefit of the Processing Services to a Mill Owner in bankruptcy (i.e., the
amount payable by the bankrupt Mill Owner) is equal to the sum of the Processing
Charges and Demand Charges otherwise payable under the Project Contracts. If a
bankruptcy court were to determine that the "actual and necessary" value of the
benefit of the Processing Services to the bankrupt Mill Owner is in fact less
than the sum of the Processing Charges and Demand Charges otherwise payable by
such Mill Owner, the financial condition of Mobile Energy could be adversely
affected.

Operations

The Energy Complex is operated by Southern Energy pursuant to an agreement with
Mobile Energy (the "O&M Agreement"). Southern Energy provides operation,
maintenance and administrative services to Mobile Energy and currently employs
all of the personnel who work at the Energy Complex. At December 31, 1997, there
were 29 salaried and 104 union employees working at the Energy Complex. Southern
Energy is compensated by Mobile Energy pursuant to the O&M Agreement on a cost
pass-through basis for the labor and other costs incurred by Southern Energy in
operating and maintaining the Energy Complex.

     Mobile Energy, Kimberly-Clark Tissue and each of the Mill Owners are
parties to a common services agreement (including any amendments thereto, the
"Common Services Agreement") which, among other things, (i) provides for Mobile
Energy and the Mill Owners to share certain facilities owned by Kimberly-Clark
Tissue at the Mobile Facility (such as a cafeteria, an infirmary, a maintenance
training facility and certain roads) and (ii) requires the Tissue Mill Owner to
provide certain services (such as cafeteria services, medical services,
maintenance training services and parking lot maintenance) to Mobile Energy and
each of the other Mill Owners. In addition, each of the Mill Owners has granted
Mobile Energy non-exclusive easements over the portions of the Mobile Facility
owned by such Mill Owner (other than Lots 7 and 9 of the Real Property (as
hereinafter defined), which Mobile Energy leases from Kimberly-Clark Tissue),
and Mobile Energy has granted non-exclusive easements over Lots 7 and 9 to each
of the Mill Owners, in each case, among other things, for access to the common
facilities described above, for access to the portions of the Mobile Facility
owned or leased by the person to whom the easement was granted and for other
purposes required for or incidental to the performance of the grantee's
obligations and the exercise of its rights under the Project Agreements. These
agreements, together with the Master Operating Agreement, which, among other
things, provides for the coordination of operations at the Mobile Facility and
the management of the common services, establish the contractual framework that
enables the Mobile Facility to continue to operate as an integrated
manufacturing complex.

     Mobile Energy, Kimberly-Clark Tissue and the Mill Owners are party to the
Master Operating Agreement which, among other things, provides for a committee
(the "Site Operating Committee") to coordinate and integrate the operations of
the Mills and the Energy Complex. The Site Operating Committee is comprised of
one representative from each of the Mills and the Energy Complex. The Site
Operating Committee meets once a week (or, if necessary, more frequently) to
address scheduled and unscheduled events that affect the Processing Services and
other flows among the Energy Complex and the Mills, the operating systems, the
common facilities and the safety and integrity of the Mobile Facility. The
Master Operating Agreement provides for the members of the Site Operating
Committee to work on a cooperative basis to promote the Operation and
Maintenance of the Energy Complex and each of the Mills in a manner that will
optimize, in accordance with the Project Agreements, the performance of the
Energy Complex and the Mills as an integrated facility. Pursuant to the Master
Operating Agreement, the Site Operating Committee, among other things, (i)
coordinates the delivery of Processing Services and other flows among the Energy
Complex and the Mills pursuant to the Project Agreements, (ii) coordinates
Scheduled Energy Complex Outages (as hereinafter defined), scheduled outages at
the Mills ("Scheduled Mill Outages") and Major Maintenance Outages (as
hereinafter defined), (iii) develops and modifies emergency operating and


                                      I-8

<PAGE>

shutdown procedures, (iv) endeavors to resolve disputes among the parties (in
accordance with the dispute resolution procedures set forth in the Master
Operating Agreement) and (v) supervises and/or directs the performance of the
Essential Common Services (as hereinafter defined) in accordance with the Common
Services Agreement. Except for certain categories of decisions set forth in the
Master Operating Agreement, all resolutions of the Site Operating Committee are
required to be by unanimous decision of all members present in person or by
telephone at a Site Operating Committee meeting. The effective functioning of
the Site Operating Committee is important to the effective operation of the
Mobile Facility and to the rapid resolution of disagreements between Mobile
Energy and the Mill Owners. No assurance can be given that the Site Operating
Committee will effectively coordinate and integrate the operations of the Mills
and the Energy Complex, resolve disagreements between Mobile Energy and the Mill
Owners or otherwise function as designed or that the failure to do so would not
have a materially adverse impact on Mobile Energy.

Sources and Availability of Raw Materials

Approximately 90% of the fuel requirements of the Energy Complex are currently
satisfied with by-products generated by the operations of the Pulp Mill or
provided by the Pulp Mill. These by-products include black liquor, biomass
(waste wood), and sludge, each of which is provided to Mobile Energy by the Pulp
Mill Owner under the Pulp Mill Energy Services Agreement.

     Although a failure by the Pulp Mill Owner to deliver solid waste or weak
black liquor to the Energy Complex by itself should not cause Mobile Energy to
default upon its obligations to the Mill Owners under the Project Agreements,
such failure 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. No assurance can be given that the Pulp Mill will
continue to operate at historical levels (or at all) and continue to provide the
Energy Complex with historical levels of black liquor to process.

     If the Pulp Mill does reduce or suspend its operations, it will have a
reduced (or no) need for any of the Processing Services and, in particular, will
reduce its requirements for (or cease to require) Liquor Processing Services
because it will be producing limited (or no) amounts of weak black liquor. Since
there is no other long-term customer for Liquor Processing Services currently
available to the Energy Complex and, therefore, no alternative source of supply
for weak black liquor, the failure by the Pulp Mill Owner to deliver weak black
liquor for processing could have a materially adverse impact on Mobile Energy's
ability to generate revenues due to a resulting decrease in Demand Charges in
future Demand Periods or to the extent that Processing Charges decline and
operations and maintenance costs fail to decline correspondingly. 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 the
Power Processing Services and Steam Processing Services to the Tissue Mill, the
Paper Mill or third parties.

     The supplemental fuel needs of the Energy Complex are satisfied with coal,
presently procured by Mobile Energy pursuant to a short-term contract which will
expire on March 31, 1998 and which is subject to extension for successive
one-year terms, and natural gas, currently procured by the Tissue Mill Owner
from third parties. Both products are readily available on the open market from
a variety of suppliers. Accordingly, Mobile Energy anticipates no significant
problems in satisfying its future needs for coal and natural gas.

     Pursuant to the Master Operating Agreement, the unit charge payable by the
Mill Owners for coal is contractually fixed and escalated in accordance with an
escalator based upon the market price for coal mined east of the Mississippi
River and sold to specified utilities across the United States. Thus, Mobile
Energy receives the benefit, and bears the burden, of any difference between
Mobile Energy's actual coal costs and the contractual coal charges. There can be
no assurance that Mobile Energy will be able to procure coal at prices equal to
or less than the contractual coal charges.

     Additionally, the Energy Complex and each of the Mills are dependent upon
the Pulp Mill to provide, pursuant to a Water Procurement and Effluent Services
Agreement (including any amendments thereto, the "Water Agreement"), process


                                      I-9

<PAGE>

water and waste water treatment services, and the Energy Complex currently
relies on the Pulp Mill Owner to provide, pursuant to a Boiler Ash Disposal
Agreement (including any amendments thereto, the "Ash Agreement"), ash disposal
services. If Mobile Energy does not receive any such products or services,
Mobile Energy is entitled by the Master Operating Agreement to reduce the amount
of Processing Services provided 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). However, such a reduction could decrease Mobile
Energy's operating cash flow 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. No
assurance can be given that the Pulp Mill Owner can or will perform its
obligations under the Water Agreement, the Ash Agreement or any other Project
Contract.

     If the Pulp Mill Owner fails to perform any of its obligations under the
Water Agreement (and if certain other conditions are satisfied), Mobile Energy
is granted the right under the Master Operating Agreement to assume operational
responsibility for the Pulp Mill's process water plant and waste water treatment
plant (the "Mobile Energy Step-In Rights"). In addition, Mobile Energy has a
license from the Pulp Mill Owner to utilize, at Mobile Energy's expense, certain
Pulp Mill equipment (including the two water plants) if the Pulp Mill Owner
terminates its Energy Services Agreement in connection with a Mill Closure with
respect to the Pulp Mill. However, no assurance can be given that the Mobile
Energy Step-In Rights are legally enforceable, that Mobile Energy would be able
successfully to exercise the Mobile Energy Step-In-Rights or that Mobile
Energy's use of the license would be economically beneficial to Mobile Energy.
Additionally, no assurance can be given that Mobile Energy has or could obtain
the Governmental Approvals necessary to exercise the Mobile Energy
Step-In-Rights.

     Finally, because both the Tissue Mill and the Paper Mill currently rely
upon the Pulp Mill for almost all of their supply of pulp, and for all of their
supply of process water and waste water treatment services, the failure by the
Pulp Mill to provide any of these products or services could have a material
adverse effect on the operation of the Tissue Mill or the Paper Mill, thereby
reducing their requirements for processing services. Therefore, even if Mobile
Energy were able to obtain from other sources any products or services that the
Pulp Mill failed to supply to Mobile Energy, Mobile Energy's revenues could be
materially adversely affected to the extent that a reduction of operations at,
or the closure of, the Pulp Mill adversely affects operations at the other
Mills. Because both the Tissue Mill and the Pulp Mill currently are owned by
Kimberly-Clark Tissue, there is no contractual agreement between the Pulp Mill
and the Tissue Mill for the supply of pulp and no assurance can be given that
future owners of the Pulp Mill and/or the Tissue Mill would enter into pulp
supply agreements. Furthermore, no assurance can be given that the Pulp Mill
will continue to supply pulp, process water or waste water treatment services to
the other Mills, or that any such supply failure would not have a material
adverse effect on the Tissue Mill, the Paper Mill or Mobile Energy.

Permitting and Regulatory Matters

Both Holdings and Mobile Energy are subject to regulation as subsidiary
companies of a registered public utility holding company (Southern) by the SEC
under PUHCA. Under PUHCA, the SEC regulates certain activities undertaken by
Mobile Energy and Holdings, including securities sales, certain asset sales and
acquisitions, and sales, service, and construction contracts with affiliates,
among other matters. Mobile Energy believes that it is not subject to
regulation, including rate regulation, by the FERC because Mobile Energy does
not currently sell electricity at wholesale or transmit electricity in
interstate commerce. In addition, Mobile Energy believes that it is not subject
to regulation, including rate regulation, as a public utility by the Alabama PSC
because it does not offer Power Processing Services or Steam Processing Services
to the public generally. The Alabama PSC has not provided notice to Mobile
Energy of any intent to exercise regulatory authority over Mobile Energy.

     As with any project comparable in size and nature to the Energy Complex,
Mobile Energy is required to comply with the provisions of numerous statutes and
regulations relating to the safety and health of employees and the public during
the operation of the Energy Complex, including: emergency response and
remediation or cleanup in connection with hazardous and toxic materials or other
substances associated with the Energy Complex; limits on noise emissions from
the Energy Complex; safety and health standards; practices and procedures
applicable to the operation of the Energy Complex; environmental protection
requirements (such as standards relating to the discharge of pollutants into the

                                      I-10
<PAGE>

air, water and land); and employment, hiring and anti-discrimination
requirements. Compliance with such requirements may impose significant
additional costs on Mobile Energy. Failure to comply with any such statutes or
regulations could have material adverse effects on Mobile Energy, including
civil or criminal liability, imposition of clean-up liens and fines and
expenditures of funds to bring the Energy Complex into compliance. There can be
no assurance that Mobile Energy will at all times be in compliance with all
applicable statutes and regulations or that the steps to bring Mobile Energy
into compliance would not materially adversely affect Mobile Energy's financial
condition. Additionally, there can be no assurance that the Mills or the Mill
Owners at all times will be in compliance with applicable statutes and
regulations. Due to the integrated nature of the Mills and the Energy Complex,
such failure by the Mills or the Mill Owners to comply with applicable statutes
and regulations could have a material adverse impact on Mobile Energy.

     Mobile Energy also is obligated to comply with the provisions of the
numerous federal, state and local statutory and regulatory regimes specifically
applicable to its operations and to obtain and/or maintain numerous governmental
approvals pursuant to applicable laws. Mobile Energy, Holdings, Southern Energy
and Southern have obtained all material discretionary governmental approvals
required as of the date hereof in order to acquire and operate the Energy
Complex. Although not currently required, additional governmental approvals,
including without limitation, renewals, extensions, transfers, assignments,
reissuances or similar actions regarding governmental approvals, may be required
in the future due to a change in law or a change in Mobile Energy's customers or
for other reasons.

     For example, if Mobile Energy were to sell electricity to a purchaser which
intended to resell the electricity, such as Alabama Power, Mobile Energy would
need the approval of the FERC, and there can be no assurance that Mobile Energy
could obtain such approval on acceptable terms, or at all. In addition, if
Mobile Energy were to sell electricity or steam to more than a limited number of
end users, Mobile Energy (and such sales) could be subject to rate and other
regulation by the Alabama PSC, which could materially adversely affect Mobile
Energy's revenues. No assurance can be given that Mobile Energy will be able to
obtain and/or maintain all required governmental approvals that it does not yet
have or that it may in the future require, or that Mobile Energy will be able to
obtain any necessary modifications to existing governmental approvals.

     Delay in obtaining or failure to obtain and maintain in full force and
effect any such governmental approvals, or amendments thereto, or delay or
failure to satisfy any such conditions or other applicable requirements, could
prevent operation of the Energy Complex, sales to persons other than the Mill
Owners or delivery of fuel or ash disposal, or could result in additional costs
to Mobile Energy. Mobile Energy's business also could be materially adversely
affected as a result of statutory or regulatory changes or judicial or
administrative interpretations of existing laws that impose more comprehensive
or stringent requirements on the Energy Complex, the use or transportation of
fuel or the transportation or disposal of ash. For example, a statutory or
regulatory change, or a new judicial or administrative interpretation of
existing laws, could subject Mobile Energy and its sales of Power Processing
Services and Steam Processing Services to regulation by the Alabama PSC even if
Mobile Energy's business does not change significantly. Any such changes could
substantially increase the cost of Mobile Energy's operations or decrease Mobile
Energy's revenues and have a material adverse effect on the financial condition
of Mobile Energy.

     Under Chapter 14 of Title 37 of the Code of Alabama (the "Alabama
Territorial Law"), which regulates service territories for electric suppliers,
Alabama Power is the primary electric supplier in the City of Mobile. Secondary
electric suppliers are prohibited from extending facilities to serve existing or
new premises within the city limits. The Mobile Facility lies within the city
limits. Mobile Energy believes that its acquisition of the Energy Complex and
provision of electric power to the existing Mobile Facility would not cause it
to be in violation of the Alabama Territorial Law. However, there can be no
assurance that the Alabama PSC would reach the same conclusion if presented with
the issue. If the Alabama Territorial Law were found to prohibit Mobile Energy
from providing Power Processing Services to the Mills, Mobile Energy's revenues
and its ability to pay the principal of and interest on its indebtedness could
be materially adversely affected.

Environmental Considerations

Pursuant to three separate environmental indemnity agreements between each of
the Mill Owners and Mobile Energy (collectively, including any amendments



                                      I-11

<PAGE>

thereto, the "Mill Environmental Indemnity Agreements"), each of the Mill Owners
has agreed to indemnify Mobile Energy and Mobile Energy has agreed to indemnify
each of the Mill Owners, and, in each such case, their respective affiliates,
directors, officers, agents, attorneys and employees from and against various
enumerated environmental-related claims ("Environmental Claims") brought
against, and various enumerated environmental-related expenses ("Environmental
Expenses") imposed upon, such indemnified parties in connection with (1)
breaches by the indemnifying party of any of its representations and warranties,
covenants or other obligations in the applicable Energy Service Agreement or the
Master Operating Agreement, or (2) any environmental-related conditions
("Environmental Conditions") that give rise to, or could give rise to,
Environmental Claims or other liabilities, or any violation of any environmental
law ("Environmental Noncompliance") located at or otherwise relating to the
Mills or the Energy Complex (as applicable) or associated facilities of the
indemnifying party, to the extent arising out of facts or circumstances that
occur or come into existence after December 12, 1994. Also, Kimberly-Clark
Tissue has agreed to indemnify, defend and hold harmless Mobile Energy, its
affiliates, and its and their respective officers, directors, agents, attorneys
and employees (the "Mobile Energy Indemnified Parties"), from and against any
and all Environmental Claims brought against, and any and all Environmental
Expenses imposed upon or incurred by any Mobile Energy Indemnified Party, in
connection with (1) breaches of any Kimberly-Clark Tissue representations and
warranties, or other provisions of the Asset Purchase Agreement, relating to or
otherwise concerning Environmental Conditions or Environmental Noncompliance
with respect to the Mills or Energy Complex, or (2) any (a) Environmental
Conditions that give rise to, or could give rise to, Environmental Claims or
other liabilities or (b) Environmental Noncompliance located at or otherwise
relating to the Mills or Energy Complex, or associated facilities, in each case,
to the extent arising out of any facts or circumstances existing as of or prior
to December 12, 1994. Either (i) Mobile Energy's performance of its obligations
that may in the future arise under the Mill Environmental Indemnity Agreements
or (ii) the failure of Kimberly-Clark Tissue or any Mill Owner to perform its
obligations that may in the future arise under its respective agreement could
have a material adverse effect on Mobile Energy's financial condition.

         Mobile Energy is subject to comprehensive and dynamic federal, state
and local environmental laws and regulations, including those governing air
emissions, waste water discharges and hazardous and non-hazardous waste
disposal. For example, the EPA has issued (1) certain effluent limitation
guidelines and standards for the control of waste water pollutants and (2)
national emission standards 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 would principally apply to the Mills and
could require significant capital expenditures by, and significant modifications
to, the Mills. The Cluster Rule may also require capital expenditures for
additional air emission controls at the Energy Complex. Mobile Energy is in the
process of evaluating the final rule to determine the potential costs and
impacts of the rule on the Energy Complex. The EPA also plans to issue
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.

     None of the Mills is contractually obligated to Mobile Energy to comply
with the Cluster Rule or any other environmental regulation. Thus, the Mills
could choose to close entirely rather than incur the costs imposed by the
Cluster Rule. If a Mill Closure occurs (whether as a result of the costs imposed
on the Mill Owners by the Cluster Rule or otherwise), and the applicable Mill
Owner decides to terminate its Energy Services Agreement, such Mill Owner is
required by the Master Operating Agreement to pay Demand Charges for a period
equal to the greater of (i) one year following the date on which the Mill Owner
gives notice of termination to Mobile Energy or (ii) until the end of the then
current Demand Period. The first Demand Period ends in December 1999 and each
subsequent Demand Period ends on the second anniversary of the end of the
preceding Demand Period. The failure by the Mills to spend the monies necessary
to comply with the Cluster Rule therefore could, indirectly, have a material
adverse impact on Mobile Energy's results of operations, to the extent that it
were to reduce the amount of processing services the Mills purchase from the
Energy Complex and the amount of charges (including Demand Charges) the Mills
pay to Mobile Energy.

         The Combustion Rule, which was proposed in November 1997, could have a
more significant and direct impact on the Energy Complex. Once finalized, the
Combustion Rule's water and air quality regulations for combustion sources at


                                      I-12
<PAGE>

pulp and paper mills could require significant capital expenditures by Mobile
Energy for emission controls and operational modifications to the Energy
Complex. Because the proposed rule has just been released, Mobile Energy is
still in the process of studying the proposal and has not had an opportunity to
fully evaluate the potential impact on the Energy Complex.

     Accordingly, the Cluster Rule could have a material adverse impact on the
economic status of the Mills and the amount of processing services they require,
and the Combustion Rule could have a material 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 Operation and Maintenance
expenses 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. Either such result could have a material
adverse impact on Mobile Energy's financial condition.

     As regulatory agencies have not yet promulgated final standards for some
programs, (such as the Combustion Rule), Mobile Energy cannot at this time
reasonably estimate its costs of compliance with these additional programs and
requirements or the timing of any such costs.

     Pursuant to the Ash Agreement, Kimberly-Clark Tissue has agreed to
transport and dispose of boiler ash that results from operation of the Energy
Complex. Kimberly-Clark Tissue has elected to dispose of some of the boiler ash
at the Lott Road Landfill (as hereinafter defined). The ADEM permit for the
landfill expired on January 3, 1993. ADEM has authorized continued operation of
the landfill under the terms of the expired permit until a final decision has
been made on permit renewal. Permit renewal is under review, the required
information has been submitted, and the landfill can continue to operate until
the review is complete. No assurance can be given that the landfill will obtain
the necessary permits from ADEM to continue operations. Kimberly-Clark Tissue's
obligation to take and dispose of Energy Complex boiler ash, however, is not
dependent upon the continued availability of the Lott Road Landfill.

     Because the landfill is constructed in a sand pit without an engineered
liner, there is a risk that landfill leachate and storm water from the facility
may have percolated to groundwater. According to the landfill's operational
plan, however, most of the materials disposed of in the landfill are inert.
Nevertheless, the disposal of Energy Complex boiler ash in the landfill creates
a risk of participation in future remediation at the landfill, if any such
remediation is ever needed or required.

     At present, Mobile Energy cannot estimate the amount by which its costs
would increase as a result of any of these events.  However, any of these
events could have a material adverse impact on Mobile Energy.

Outages

In each contract year, Mobile Energy is entitled to (i) a specified number of
days of downtime for regularly recurring annual maintenance of each boiler and
turbine ("Scheduled Energy Complex Outages") and (ii) a specified amount of
shortfalls in the provision of Processing Services for unanticipated events that
affect the operation of the Energy Complex equipment ("Unscheduled Energy
Complex Outages") (each number of days and amount of shortfall, an "Outage
Allowance"). In addition, Mobile Energy is entitled to a specified number of
days of downtime for major maintenance activities with respect to each power
boiler and recovery boiler during the term of the Master Operating Agreement
("Major Maintenance Outages") (such number of days also an "Outage Allowance").
Major Maintenance Outages are designed to accommodate life cycle replacement and
refurbishment of equipment, and can generally be anticipated with sufficient
lead time to be added to the Outage Allowance for a particular contract year.
However, Major Maintenance Outages were not allocated to particular contract
years as of the Acquisition Closing Date in order to give Mobile Energy the
flexibility to schedule such outages on an as-needed basis. As such, Major
Maintenance Outages will be scheduled by the Site Operating Committee for
particular contract years over the course of the term of the Master Operating
Agreement. If the outages experienced by the Energy Complex in a contract year
do not exceed the Outage Allowances applicable to that contract year (including
the allowances for Scheduled Energy Complex Outages, Unscheduled Energy Complex

                                      I-13

<PAGE>

Outages and, if scheduled for that contract year, Major Maintenance Outages),
Mobile Energy will not be deemed to be in default under the Energy Services
Agreements or the Master Operating Agreement, will not be liable for Liquidated
Damages (as hereinafter defined), and will not incur Demand Charge Reductions
(as hereinafter defined). By contrast, if the outages experienced by the Energy
Complex for a particular contract year do exceed the Outage Allowances
applicable to that contract year, Mobile Energy could, subject to the applicable
provisions of the Master Operating Agreement and Energy Services Agreements, be
deemed to be in default under such agreements, be liable for Liquidated Damages
and incur Demand Charge Reductions.

    The Outage Allowance to which Mobile Energy is entitled for Liquor
Processing Services can be reduced under certain circumstances as a result of
unscheduled interruptions of electrical power to the Pulp Mill if (i) Mobile
Energy causes an unscheduled interruption of electrical power to the Pulp Mill
that curtails the Pulp Mill from delivering weak black liquor to the Energy
Complex in accordance with the Pulp Mill's current request for Liquor Processing
Services, (ii) Mobile Energy's Outage Allowance for Liquor Processing Services
is greater than zero at the time of the interruption of electrical power, and
(iii) the amount of Liquor Processing Services provided by Mobile Energy in the
week in which the interruption of electrical power occurs does not exceed the
lessor of (A) the average daily amount of Liquor Processing Services provided by
Mobile Energy during the 365 days immediately preceding that week multiplied by
seven, (B) the amount of Liquor Processing Services requested by the Pulp Mill
for that week, and (C) the Pulp Mill Owner's then current Demand for Liquor
Processing Services. The amount of the reduction will be equal to (a) the
average daily amount of Liquor Processing Services provided by Mobile Energy
during the 365 days immediately preceding that week divided by (b) 24 and then
multiplied by (c) the duration of the interruption of electrical power
(expressed in hours and rounded up to the nearest hour); provided that the
Outage Allowance for Liquor Processing Services shall not be reduced below zero.

    The Mill Owners have the right to take an unlimited number of outages for
any duration, provided that the Mill Owners continue to pay Demand Charges and
any other amounts due under the Project Agreements during a Mill outage.

    Each year, the Site Operating Committee is required to prepare a timetable
(the "Yearly Outages Schedule") for Scheduled Outages and, if applicable, Major
Maintenance Outages for the following contract year based upon schedules
proposed by Mobile Energy and each of the Mill Owners. To the maximum extent
practicable, the Site Operating Committee is required to coordinate the timing
of Scheduled Outages among the Energy Complex and the Mills so as to maximize
the availability of Services. At the request of Mobile Energy or any Mill Owner,
the Yearly Outages Schedule may be revised by the Site Operating Committee.

     If Mobile Energy or any Mill Owner anticipates that its facility may
experience an Unscheduled Outage, or (if an outage is unanticipated) following
the occurrence of an Unscheduled Outage, the applicable party is obligated to
notify the other parties of the expected effect that the Unscheduled Outage will
have on its ability to provide Processing Services or Mill Products (as
applicable). In addition, any Mill Owner whose Mill experiences an Unscheduled
Outage is obligated to inform Mobile Energy and the other Mill Owners of the
expected effects that such Unscheduled Outage will have on the affected Mill's
Current Nomination (as hereinafter defined) and short-term future requirements
for any Processing Service, process water or compressed air. If a Mill suffers
an Unscheduled Outage, Mobile Energy may shut down any item of equipment or
machinery at the Energy Complex for maintenance or inspection as long as (i)
Mobile Energy's ability to satisfy the Mills' requirements for Processing
Services during the Mill's Unscheduled Outage is not thereby diminished and (ii)
such shutdown will not last longer than the duration of the Unscheduled Mill
Outage as communicated by the affected Mill. Such a shutdown by Mobile Energy is
not deemed an Outage for purposes of the Master Operating Agreement and,
therefore, does not affect Mobile Energy's usage of any Outage Allowance.

                                      I-14

<PAGE>

     Mobile Energy's actual utilization of Outage Allowances for 1997 was as
follows:

                              1997                           Maximum
  Category        Allowance   Utilization         Unused      Carryover
  Steam
    (MMBTU's)       32,140    32,140                 0         21,327
  Liquor
    (MMLBs)             50        11                39             25
  Electricity
    (MWHs)          15,385     3,218            12,167         10,360

During 1997, outages at the Energy Complex caused Mobile Energy to use all of
its Outage Allowances for Steam Processing Services and to incur liquidated
damage penalties and reduction in Demand Charges for Steam Processing Charges
totalling approximately $60,000.

The Outage Allowances available to Mobile Energy for 1998 are as follows:

                             1998
Category            Carryover          Total
  Steam
     (MMBTU's)             0          10,874
  Liquor
     (MMLBs)              25              50
  Electricity
     (MWHs)           10,360          15,540

Through March 25, 1998, the Energy Complex experienced outages that used all of
Mobile Energy's Outage Allowances for Steam Processing Services for 1998 and
incurred liquidated damage penalties and reductions in its Demand Charges for
Steam Processing Services totalling approximately $80,000. If additional outages
occur at the Energy Complex during 1998 that affect Mobile Energy's provision of
Steam Processing Services to the Mills and that are not otherwise excused under
the terms of the Master Operating Agreement, then Mobile Energy will be liable
to the Mill Owners for additional liquidated damages and its Demand Charges for
Steam Processing Services will be further reduced. While Mobile Energy is
undertaking corrective actions to minimize the occurrence of further outages at
the Energy Complex, no assurance can be provided that additional outages will
not occur.


SUMMARY OF PRINCIPAL CONTRACTS

The following summaries of selected provisions of the principal Project
Contracts are qualified in their entirety by reference to the full text of the
actual agreements, copies of which have previously been filed as exhibits to the
1995 Form 10-K.

                           Energy Services Agreements
                         and Master Operating Agreement

Mobile Energy is party to a Pulp Mill Energy Services Agreement with the Pulp
Mill Owner, a Tissue Mill Energy Services Agreement with the Tissue Mill Owner,
a Paper Mill Energy Services Agreement with the Paper Mill Owner and a Master
Operating Agreement with each of Kimberly-Clark Tissue, the Pulp Mill Owner, the
Tissue Mill Owner and the Paper Mill Owner. These agreements set forth the
obligations of Mobile Energy, Kimberly-Clark Tissue and the Mill Owners to sell
and purchase Liquor Processing Services, Steam Processing Services and Power
Processing Services, to deliver or dispose of certain waste products or
by-products produced by the Energy Complex and the Pulp Mill, and to manage the
operations of the Energy Complex and the Mills. Mobile Energy entered into these
agreements with Kimberly-Clark Tissue and S.D. Warren acting in their capacities
as the various Mill Owners so as to facilitate the sale by Kimberly-Clark Tissue
of one or more of its Mills during the terms of the agreements by clearly
designating the rights and obligations associated with each of the Mills. See
"-Transfer and Assignment."

Term

The Energy Services Agreements and the Master Operating Agreement each have an
initial term of 25 years, which began on the Acquisition Closing Date. Mobile
Energy has the right to extend the terms of all of these agreements by five
years, but cannot exercise such right to extend with respect to less than all of
these agreements, unless any agreement not extended was earlier terminated in
accordance with its terms. In addition, the Mill Owners, acting collectively,
have an option to extend the terms of all of these agreements by five years. The
Mill Owners may not extend these agreements, except with the concurrence of
Mobile Energy, if less than all of the agreements are in effect at the end of
the initial 25-year term. If these agreements are so extended by either Mobile
Energy or the Mill Owners, the terms of certain other Project Contracts
(including the Water Agreement, the Common Services Agreement, the Ash Agreement
and the Mill Environmental Indemnity Agreements) will also be extended for five
years.

                                      I-15
<PAGE>


Processing Services

General Purchase and Supply Obligations

During the term of each of the Energy Services Agreements, Mobile Energy is
required to provide Steam Processing Services and Power Processing Services to
each of the Mill Owners, and Liquor Processing Services to the Pulp Mill Owner.
With regard to each Mill, Mobile Energy is obligated to dedicate the portion of
the Energy Complex's capacity to provide each Processing Service to that Mill
equal to that Mill's Demand for that Processing Service. Each Mill Owner is
obligated to purchase its entire requirements for Processing Services, up to the
Maximum Capacities, from Mobile Energy unless Mobile Energy fails to satisfy
such requirements due to capacity constraints or for any other reason. Mobile
Energy is obligated to supply the Mills' requirements for the Processing
Services, up to the Aggregate Demand for each Processing Service.

    The Aggregate Demand levels are fixed by the Master Operating Agreement
until December 1999 and, thereafter, are reset periodically in accordance with
the Master Operating Agreement to reflect the Mills' actual aggregate usage of
Processing Services. Regardless of usage, the Aggregate Demand levels cannot
exceed the Maximum Capacity associated with each Processing Service. The Maximum
Capacities are stipulated, technological capacity constraints associated with
the provision of Processing Services by the Energy Complex, and can be modified
to reflect the results of certain metering and testing activity, additions to or
modifications of the Energy Complex or the Mills, and Demand that has been
relinquished or forfeited by the Mill Owners in accordance with the Master
Operating Agreement.

    Generally, although a Mill's Demand can be decreased only on specific dates
set forth in the Master Operating Agreement, a Mill's Demand can be increased at
any time (either voluntarily by the Mill Owner upon notice to Mobile Energy and
the other Mill Owners, or automatically due to a peak in usage by a Mill that
exceeds its then current Demand) if Aggregate Demand for a Processing Service is
less than the Energy Complex's Maximum Capacity for that Processing Service.

    On the last day of the first five-contract year period (the "Initial Demand
Period") and on the last day of each subsequent Demand Period, any Mill Owner
whose peak usage of a particular Processing Service was below the low end of a
range established for such Mill under the Master Operating Agreement with
respect to such Processing Service (each such range a "Demand Band") has the
option to reset its Demand for such Processing Service to a level not less than
its peak usage during the Demand Period then ended. If a Mill's peak usage of a
Processing Service was within the applicable Demand Band, the Mill's Demand
cannot be reset to a lower level on the Demand Anniversary Date.

    Mobile Energy believes that since the Acquisition Closing Date, the Mills
have, from time to time, required and utilized, in the aggregate, Steam
Processing Services and Power Processing Services, and the Pulp Mill has
required and utilized Liquor Processing Services, in amounts such that the
Aggregate Demand levels for Steam Processing Services, Power Processing Services
and Liquor Processing Services will not, pursuant to the terms of the Master
Operating Agreement, be permitted to be decreased at the conclusion of the first
Demand Period in December 1999. Therefore, pursuant to the Master Operating
Agreement, unless there is a Mill Closure or certain casualty or force majeure
events occur, Mobile Energy believes that the aggregate Demand Charges payable
by the Mill Owners for Steam Processing Services, Power Processing Services and
Liquor Processing Services are not subject to reduction by the Mill Owners until
at least the conclusion of the second Demand Period in December 2001. However,
there can be no assurance that a Mill Closure, casualty or force majeure event
will not occur, or that such aggregate Demand Charges will remain in effect
after December 2001.

    By contrast, a Mill's Demand level will automatically be increased at any
time (whether or not on a Demand Anniversary Date) if the Mill's usage of a
Processing Service peaks above its Demand level for that Processing Service, as
long as the increase would not cause the Aggregate Demand for the Processing
Service to exceed the Maximum Capacity for the Processing Service. Because the
Aggregate Demands were set at their respective Maximum Capacities on the
Acquisition Closing Date, there will be no increases in the Aggregate Demand for
any Processing Service due to increased usage until there occurs a reduction in
Aggregate Demand or an increase in Maximum Capacity. A Mill desiring to increase
its Demand level for any Processing Service before the first reduction in
Aggregate Demand can do so only by agreeing to take a portion of another Mill's
Demand for that Processing Service in accordance with the Demand reallocation



                                      I-16
<PAGE>


provisions set forth in the Master Operating Agreement. The Master Operating
Agreement allows the Mills to reallocate the Aggregate Demand for Steam
Processing Services or Power Processing Services on the first day of each
contract year. Any such reallocation must reflect actual peak usage by the
reallocating Mills during the preceding contract year or sufficiently
demonstrated anticipated usage by the reallocating Mills during the upcoming
contract year. Furthermore, any such reallocation cannot cause the relevant
Aggregate Demand to exceed its respective Maximum Capacity and cannot decrease
the relevant Aggregate Demand then in effect. The Mill Owners do not have the
right to compel Mobile Energy to increase the capacity of the Energy Complex if
the Mills' aggregate requirements increase above the capacity of the Energy
Complex; however, if the Mill Owners were to request, Mobile Energy would be
required in such circumstance to negotiate in good faith with the Mill Owners to
determine whether an expansion of the Energy Complex would be mutually
advantageous. If Mobile Energy does increase the capacity of the Energy Complex,
the Maximum Capacities for the Processing Services would increase only upon the
mutual agreement of Mobile Energy and the Mill Owners.

    In addition to the automatic increases in Demand described above, each Mill
Owner may at any time, upon notice to Mobile Energy and the other Mill Owners,
voluntarily increase its Demand for a Processing Service up to the difference
between the Aggregate Demand then in effect for the relevant Processing Service
and the applicable Maximum Capacity. If such increase is not on a Demand
Anniversary Date (or, if on a Demand Anniversary Date, is in excess of the
Mill's peak Demand during the then just ended Demand Period), then Mobile Energy
shall have a reasonable amount of time (consistent with specified prudent plant
operating standards) in which to prepare the Energy Complex to provide the
higher level of Processing Services and the resetting Mill Owner will be
required to reimburse Mobile Energy for all costs incurred by Mobile Energy in
connection with such preparations.

Daily Supply Obligations

The Master Operating Agreement provides an operating structure for informing
Mobile Energy of each Mill's maximum requirements for the Processing Services
during specified intervals and determining Mobile Energy's supply obligations
during such specified intervals. Each morning, each of the Mill Owners is
required to inform Mobile Energy of the maximum amount of Steam Processing
Services it will require in any given hour during that day and the maximum
amount of Power Processing Services it will require in any given 15-minute
period during that day (each such amount, a "Current Nomination"). Taken
together, the sum of the Current Nominations of the three Mills for Steam
Processing Services and Power Processing Services cannot exceed the applicable
Aggregate Demand for such Processing Service. In addition, each Friday morning,
the Pulp Mill Owner is required to inform Mobile Energy of the amount of weak
black liquor that Mobile Energy will be required to accept the following week
(such amount also a "Current Nomination"). During any given 15-minute, hourly or
weekly interval, as applicable, Mobile Energy is obligated to provide the
applicable Processing Services to each Mill Owner in an amount not to exceed the
Mill Owner's Current Nomination of the applicable Processing Service.

    If a Mill Owner's requirement for a Processing Service exceeds its Current
Nomination for that Processing Service during the course of a day, the Mill
Owner may request that Mobile Energy provide the Mill Owner with an increased
amount of the Processing Service (a "Requested Change"). Mobile Energy is
obligated to implement the Requested Change only if, and to the extent that, (i)
the Requested Change would not cause the Mill Owner's Current Nomination for
that Processing Service to exceed its Demand for that Processing Service and
(ii) the Requested Change would not cause the amount of that Processing Service
provided by Mobile Energy to exceed the applicable Aggregate Demand. If any or
all of a Requested Change is not implemented by Mobile Energy due to capacity
constraints, the Mill Owner seeking a Requested Change may obtain the right to
receive a portion of another Mill Owner's Current Nomination of such Processing
Service on such terms as such Mill Owners may mutually agree to. Upon joint
notification in writing to Mobile Energy by such Mill Owners, Mobile Energy is
required to implement the service change, unless it is not technologically
feasible to do so in light of prudent operating standards.

    The Master Operating Agreement prohibits any Mill from using more than its
Current Nomination with respect to any Processing Service (unless it has
increased its Current Nomination in accordance with the procedures described in
the preceding paragraph). If Mobile Energy has provided the aggregate Current
Nomination for a Processing Service and a Mill takes more than its Current

                                      I-17

<PAGE>

Nomination of the Processing Service (such excess usage being the "Overuse
Amount"), Mobile Energy will not be liable to the other Mill Owners for failing
to provide their Current Nominations of that Processing Service to the extent of
the Overuse Amount.

    If the Mills' aggregate requirement for any Processing Service is less than
the aggregate Current Nomination for that Processing Service during the course
of any day, Mobile Energy is obligated to follow (in accordance with prudent
operating standards) all changes in the Mills' aggregate requirement for that
Processing Service as it increases or decreases from time to time (to the extent
that such changes in aggregate requirements are consistent with prudent
operating standards). As such, the Master Operating Agreement prevents Mobile
Energy from receiving Processing Charges for Processing Services provided to the
Mill Owners in excess of the Mill Owners' requirements.

Sales to Third Parties

The Energy Services Agreements permit Mobile Energy to sell to any person, on an
as-available, fully interruptible basis, any of the services or products that
the Energy Complex is capable of producing in excess of the Mills' requirements
for such services or products at any given time. Mobile Energy is required to
satisfy its obligations to provide Processing Services under the Energy Services
Agreements before making any Processing Services available to any other person.

Air Compressors

The air compressors and related facilities that service the compressed air needs
of the Mills and the Energy Complex (the "Air Compressors") are owned by
Kimberly-Clark Tissue and located on the property leased by Kimberly-Clark
Tissue to Mobile Energy. Pursuant to the Master Operating Agreement, Mobile
Energy is required to operate and maintain Kimberly-Clark Tissue's Air
Compressors in good working order in accordance with prudent operating
standards; however, Mobile Energy is not responsible for the replacement or
refurbishment of the Air Compressors unless the need for such replacement or
refurbishment is a direct result of Mobile Energy's failure to operate the Air
Compressors in accordance with prudent operating standards. The Mill Owners are
obligated to reimburse Mobile Energy for all costs Mobile Energy reasonably
incurs in connection with such Operation and Maintenance services.

Fuel and Other Mill Products

Of the five fuels used to operate the Energy Complex (weak black liquor,
biomass, sludge, gas and coal), three (weak black liquor, biomass and sludge)
are provided by the Pulp Mill Owner pursuant to the Pulp Mill Energy Services
Agreement, one (gas) is procured from third parties by the Tissue Mill Owner
pursuant to the Master Operating Agreement, and one (coal) is procured by Mobile
Energy pursuant to short-term coal contracts.

    Weak black liquor is provided to Mobile Energy by the Pulp Mill Owner in
quantities consistent with the Current Liquor Processing Nomination in effect
from time to time. The processing of weak black liquor by the Energy Complex
requires certain other items (such as weak wash) that the Pulp Mill Owner is
obligated to provide, and produces certain by-products (such as soap) that the
Pulp Mill Owner is obligated to accept. Each such item provided or accepted by
the Pulp Mill Owner is provided or accepted at no charge to Mobile Energy.

    The Pulp Mill Owner is obligated to provide solid waste (as such term is
defined in the Internal Revenue Code and the regulations promulgated thereunder,
generally consisting of biomass and sludge having certain characteristics, and
as more particularly defined in the Pulp Mill Energy Services Agreement, "Solid
Waste") to Mobile Energy in quantities not less than the an amount equal to the
minimum amount of Solid Waste required to be disposed of in the Number 7 Power
Boiler (as hereinafter defined) on an annual basis to maintain the tax-exempt
status of the Tax-Exempt Bonds ("Required Solid Waste Amount") and not greater
than approximately 132 short tons of Solid Waste per hour (as further defined in
the Master Operating Agreement, the "Maximum Solid Waste Capacity"). However,
the Pulp Mill Owner's failure to provide Mobile Energy the Required Solid Waste
Amount does not constitute an event of default under the Pulp Mill Energy
Services Agreement, and Mobile Energy's remedies against the Pulp Mill Owner in
such event are limited to those described in "-Mobile Energy's Supply
Obligations in the Event of a Mill Product Shortfall" below.

    Mobile Energy is obligated to accept from the Pulp Mill Owner all Solid
Waste that is derived from the Pulp Mill's debarking operations. In addition,
Mobile Energy is required to accept from the Pulp Mill Owner all Solid Waste
that is derived from sources other than the debarking operations and that is

                                      I-18
<PAGE>

delivered in accordance with a delivery schedule periodically agreed upon by
Mobile Energy and the Pulp Mill Owner. Finally, Mobile Energy may request that
the Pulp Mill Owner obtain (as agent for Mobile Energy) additional quantities of
biomass ("Agency Biomass"). Mobile Energy reimburses the Pulp Mill Owner for its
cost of procuring Agency Biomass from third parties and these costs are then
incorporated into the three Mill Owners' Processing Charges.

    Mobile Energy has no obligation to obtain biomass from sources other than
the Pulp Mill Owner. However, if Mobile Energy chooses to obtain biomass from
sources other than the Pulp Mill Owner, Mobile Energy may charge the Mill Owners
an amount not to exceed the lower of (i) Mobile Energy's actual cost or (ii) the
lowest price of coal or gas then available to the Energy Complex, based upon the
"energy equivalent value" of such fuels.

    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). Although a failure by the Pulp Mill Owner to deliver Solid Waste or
weak black liquor to the Energy Complex should not cause Mobile Energy to
default upon its obligations to the Mill Owners under the Project Agreements,
such failure 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. No assurance can be given that the Pulp Mill will
continue to operate at historical levels (or at all), that it will continue to
provide the Energy Complex with historical levels of black liquor to process, or
that the Pulp Mill Owner can or will perform its obligations under the Pulp Mill
Energy Services Agreement with respect to the delivery of the Required Solid
Waste Amount.

    Gas is procured by the Tissue Mill Owner on behalf of Mobile Energy and each
of the Mill Owners. The Tissue Mill Owner is responsible for negotiating,
executing and administering all gas supply and transportation contracts, and has
final authority with respect to such matters, and Mobile Energy and the Mill
Owners are required to indemnify the Tissue Mill Owner against all claims
arising out of or related to the Tissue Mill Owners' negotiation, execution and
administration of gas supply and transportation contracts. Mobile Energy and the
other Mill Owners have the right to review all amendments, modifications or
extensions of any gas supply and transportation contracts in effect on the
Acquisition Closing Date, and any new gas supply and transportation contracts
entered into thereafter, prior to the Tissue Mill Owner's execution thereof. The
Tissue Mill Owner is obligated to use its best efforts to maintain gas
deliveries, based upon anticipated usage information provided by Mobile Energy
and the other Mill Owners. Mobile Energy is obligated to pay the Tissue Mill
Owner for Mobile Energy's pro rata share of gas at a rate equal to the weighted
average cost of all gas supply and transportation charges incurred by the Tissue
Mill Owner in any given month. As described below, these costs are then
incorporated into the Mill Owners' Processing Charges..

    Mobile Energy is required by the Master Operating Agreement to secure a
reliable source of delivered coal in such quantities as may be required to
provide the Processing Services given the availability of other fuel sources,
prudent operating standards, technical constraints and the fuel limitations
imposed upon the Number 7 Power Boiler by the solid waste disposal requirements
of the Internal Revenue Code. As described below, Mobile Energy's delivered coal
costs are incorporated into the Mill Owners' Processing Charges.. In
incorporating Mobile Energy's coal costs into the Processing Charges, the Master
Operating Agreement assumes that Mobile Energy acquires all coal at a specified
fixed price that escalates in accordance with an escalator based upon the market
price for coal mined east of the Mississippi River and sold to specified
utilities across the United States. Therefore, all delivered coal costs incurred
by Mobile Energy in excess of this "assumed" price will not be incorporated into
the Processing Charges and will be for Mobile Energy's account. As such, Mobile
Energy bears price risk with respect to coal purchases. Conversely, if Mobile
Energy's coal costs are less than the "assumed" amount, Mobile Energy is still
permitted to charge the Mill Owners for the "assumed" amount.

Mobile Energy's Supply Obligations in the Event of a Mill Product Shortfall

Under the Master Operating Agreement, Mobile Energy is entitled to reduce the
amount of Processing Services provided to the Mill Owners (in accordance with

                                      I-19

<PAGE>

the appropriate load shedding plan set forth in the Master Operating Agreement)
if (1) the Pulp Mill fails to provide Mobile Energy with enough black liquor to
run the Number 7 and Number 8 Recovery Boilers in accordance with prudent
operating standards, and Mobile Energy is using coal, gas and biomass in
accordance with prudent operating standards, (2) the Pulp Mill fails to provide
Mobile Energy with (a) enough Solid Waste to run the Number 6 and Number 7 Power
Boilers in accordance with prudent operating standards or (b) the Required Solid
Waste Amount and, in each such case, Mobile Energy is using coal and gas in
accordance with prudent operating standards or (3) Mobile Energy determines that
the Pulp Mill Owner will be unable to provide Mobile Energy with the Required
Solid Waste Amount in any calendar year, and Mobile Energy is using coal and gas
in accordance with prudent operating standards.

    Furthermore, if a Mill fails to supply Mobile Energy with certain products
produced or procured by a Mill and provided to Mobile Energy under the Project
Agreements (including process water, waste water treatment service, boiler ash
service but excluding black liquor and biomass) (the "Mill Products") or fails
to take any of the stripped condensate, evaporator clean condensate, soap, hot
process water, stripper off gases or noncondensible gases (each a "Mobile Energy
Processing By-Product") that it is required to take, then (i) Mobile Energy is
permitted to reduce the level of Processing Services that it supplies to the
Mill Owners to a level consistent with the amount of Processing Services Mobile
Energy is able to provide given the reduced amounts supplied by or taken by that
Mill and (ii) Mobile Energy may (but is not obligated to) find another source to
supply the Mill Product in question, in which case the Mill Owner responsible
for the supply failure will be obligated to reimburse Mobile Energy for (x) the
difference between the cost of the replacement Mill Product and the cost of the
Mill Product (if any) otherwise due and payable by Mobile Energy and (y) all
reasonable costs and expenses incurred by Mobile Energy in obtaining the
replacement Mill Product.

Charges

The Energy Services Agreements and the Master Operating Agreement obligate each
Mill Owner to pay Mobile Energy a Demand Charge for each of the Processing
Services that such Mill Owner is entitled to receive under its Energy Services
Agreement and a Processing Charge for the Processing Services the Mill Owner
actually receives. All such charges are invoiced, and are required to be paid,
on a monthly basis.

    The Demand Charges are based upon the Demand levels in effect from time to
time as determined pursuant to the procedures described above. See "-Processing
Services-General Purchase and Supply Obligations." For each monthly billing
period, a Mill Owner's then current Demand for a particular Processing Service
is multiplied by a fixed rate for that Processing Service (that escalates over
the term of the Energy Services Agreements according to a composite escalator
reflecting inflation-based indices for capital equipment, labor and intermediate
materials) (such fixed rate, the "Demand Rate"). The Pulp Mill's Demand Charges
are then adjusted to credit the Pulp Mill for certain Mill Products that the
Pulp Mill Owner provides to the Energy Complex. The Demand Charges may be
reduced in the event there is a shortfall in the provision of Processing
Services by Mobile Energy that is not excused by the Project Agreements. See
"-Liquidated Damages and Demand Charge Reductions."

    The Processing Charges are based upon each Mill's actual monthly usage of
Processing Services. 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, and to credit
the appropriate Mills for certain energy value attributable to condensate flow
that is provided by the Mills to the Energy Complex. There can be no assurance,
however, that the Processing Charges will at all times cover such costs,
including variable costs such as fuel related expenses. The Pulp Mill's
Processing Charges are also adjusted to credit the Pulp Mill for certain biomass
and weak black liquor that the Pulp Mill Owner provides to the Energy Complex.
Costs incurred by the Pulp Mill in providing biomass and weak black liquor to
Mobile Energy are allocated among all the Mills through the Processing Charges.

     The Master Operating Agreement provides for Mobile Energy and the Mill
Owners to develop the Process Model to be used to calculate the fuel cost
component of the Processing Charges in accordance with certain principles set
forth in the Master Operating Agreement. The Master Operating Agreement provides
that once the Process Model is implemented, Mobile Energy will be permitted to
charge the Mill Owners, as a component of the Processing Charges, for only those
quantities of coal as are calculated by the Process Model to be efficient
quantities and for only those quantities of gas as are determined by the Process


                                      I-20

<PAGE>

Model to be in accordance with the specified protocol for boiler dispatch.
Therefore, under the Process Model computations, Mobile Energy will be rewarded
for operating the Energy Complex more efficiently than the standards set forth
in the Process Model and will bear the risk of operating the Energy Complex less
efficiently than those standards. The Process Model has not yet been developed;
therefore, the provisions applicable to the Interim Period are currently in
effect.

    During the Interim Period, Mobile Energy is allowed to charge the Mills for
any and all quantities of coal used by the Energy Complex to provide the
Processing Services. In addition, Mobile Energy is allowed to charge the Mills
for any and all quantities of gas used by the Energy Complex to provide the
Processing Services, unless (i) Mobile Energy uses (in any given month) more
than 110% of the amount of gas used during the same month in 1993 and (ii) such
excess use was not in accordance with prudent operating standards. Other
modifications to the formulas used to calculate the Processing Charges will also
remain in effect until the end of the Interim Period, in order to facilitate the
calculation of the Processing Charges until new meters are installed by Mobile
Energy.

    Both during the Interim Period and thereafter, the unit charge payable by
the Mill Owners for coal used by the Energy Complex to provide the Processing
Services is contractually fixed and escalated in accordance with an escalator
based upon the market price for coal mined east of the Mississippi River and
sold to specified utilities across the United States. Thus, Mobile Energy
receives the benefit of, and bears the burden of, any difference between Mobile
Energy's actual coal costs and the contractual coal prices. The unit charge
payable by the Mill Owners for gas used by the Energy Complex to provide the
Processing Services is Mobile Energy's actual "all in" per unit gas cost, both
during the Interim Period and thereafter.

    In addition, for the first twelve monthly billing periods following the
adoption of the Process Model (if adopted), the Master Operating Agreement
provides a range of allowable charges for coal and gas, which range places upper
and lower limits on the Mill Owners' payment obligations with respect to coal
and gas charges in the event of a dispute between the parties during such time
period.

Financial Adjustments

The Master Operating Agreement entitles Mobile Energy to request an increase in
the amounts payable to Mobile Energy (a "Financial Adjustment") if, subject to
certain conditions set forth in the Master Operating Agreement, (A) a federal
energy tax on fuels used in the generation of electricity or steam (and not
based upon the income of Mobile Energy) is imposed on Mobile Energy or the
Energy Complex at any time during the first seven years following the
Acquisition Closing Date in connection with the transactions contemplated by the
Master Operating Agreement or the Energy Services Agreements or (B) Mobile
Energy must incur capital or operational expenditures at the Energy Complex
because (i) of a modification of or change in operations at a Mill (which
modification or change occurred for any reason other than due to a breach by
Mobile Energy of its obligations under the Master Operating Agreement or any of
the Energy Services Agreements), (ii) any Mill Product becomes characterized as
a hazardous material for any reason other than a change in any law or permit
applicable to the Energy Complex or the Mills (a "Change of Law") or an action
or omission by Mobile Energy or (iii) the Cluster Rule or Combustion Rule (and
certain related regulations) become effective (clauses (A) and (B)(i) through
(B)(iii) each a "Financial Adjustment Event").

    The designation of a Mill Product as a hazardous material due to a change of
law will not excuse Mobile Energy from its obligations under the Project
Agreements to accept such Mill Product. Therefore, if a Mill Product is so
designated due to a change of law, Mobile Energy will bear the costs associated
with the proper handling and disposal of the hazardous Mill Product.

    Mobile Energy will not be entitled to a Financial Adjustment unless (a) the
capital expenditures incurred by Mobile Energy as a result of all Adverse
Financial Effects of Financial Adjustment Events exceeds $500,000, as escalated
from the Acquisition Closing Date (the "Capital Change Threshold"), which amount
shall take into account only individual capital expenditures in excess of
$200,000, as escalated from the Acquisition Closing Date or (b) the operational
expenditures incurred by Mobile Energy as a result of all Adverse Financial
Effects of Financial Adjustment Events exceeds $100,000, as escalated from the
Acquisition Closing Date (the "Operational Change Threshold"), which amount
shall take into account only individual operational expenditures in excess of

                                      I-21
<PAGE>

$25,000, as escalated from the Acquisition Closing Date. Once these thresholds
have been met and a Financial Adjustment is made with respect to a Financial
Adjustment Event or group of Financial Adjustment Events, no additional
Financial Adjustments can be made until the aggregate dollar amount of Adverse
Financial Effects exceeds the applicable threshold.

    The Mill Owner (or Mill Owners) responsible for a Financial Adjustment has
the right to satisfy such obligation by paying Mobile Energy, in each monthly
billing period, Mobile Energy's actual costs with respect to the Adverse
Financial Effects of the Financial Adjustment Event during such billing period.
In addition, such Mill Owner(s) have the right to satisfy their obligations by
paying Mobile Energy in accordance with any of the following payment options
which may be proposed by Mobile Energy: (i) within 30 days of the resolution of
any dispute regarding the Financial Adjustment, the present value of the full
amount of the Financial Adjustment; (ii) at the earlier of the end of the Demand
Period or the time at which all costs of the Adverse Financial Effect have
ceased to accrue, the full amount of the Adverse Financial Effect over such
period of time; (iii) in each monthly billing period, through an adjustment of
the Demand Charges due to Mobile Energy by such Mill Owner(s); or (iv) in
accordance with any combination of the payment options in this paragraph.

Site Operating Committee

As required by the Master Operating Agreement, Mobile Energy and the Mill Owners
have established the Site Operating Committee to coordinate and integrate the
operations of the Mills and the Energy Complex. The Site Operating Committee is
comprised of one representative from each of the Mills and the Energy Complex.
Each member of the Site Operating Committee is required to have substantial
practical experience in the day-to-day operations of the facility that he or she
represents and is required to have the authority to make binding decisions (with
respect to matters delegated to the Site Operating Committee pursuant to the
Project Agreements) on behalf of the party that he or she represents. The Site
Operating Committee meets once a week (or, if necessary, more frequently) to
address scheduled and unscheduled events that affect the Services, Mill Products
and Mobile Energy Processing By-Products, the operating systems, the Common
Facilities (as hereinafter defined) or the safety and integrity of the Site. The
Master Operating Agreement charges the Site Operating Committee to work on a
cooperative basis to ensure that the Energy Complex and each of the Mills are
operated and maintained in a manner that will optimize, in accordance with the
Project Agreements, the performance of the Energy Complex and the Mills as
integrated facilities. The Site Operating Committee, among other things, (i)
coordinates the delivery of Services, Mill Products and Mobile Energy Processing
By-Products pursuant to the Project Agreements, (ii) coordinates Scheduled
Outages and Major Maintenance Outages, (iii) develops and modifies emergency
operating and shutdown procedures, (iv) endeavors to resolve disputes among the
parties (in accordance with the dispute resolution procedures discussed below)
and (v) supervises and/or directs the performance of the Essential Common
Services (as hereinafter defined) in accordance with the Common Services
Agreement.

    Except as described below, all decisions of the Site Operating Committee are
required to be made by the unanimous agreement of all members present (in person
or by telephone), and are binding on each of the Mill Owners and Mobile Energy.
The senior management of the Mill Owners and Mobile Energy may, by unanimous
agreement, overrule any decision of the Site Operating Committee. Any such
determination to overrule a Site Operating Committee decision applies
prospectively only, and no party will be in breach or default of any of its
obligations or duties under the Project Agreements as a result of having taken
or omitted to take an action in compliance with, or in reliance on, such
decision prior to the date such decision is overruled. Mobile Energy is not
entitled to participate in any decision by the Site Operating Committee
concerning (i) the allocation among the Mill Owners of the Current Steam
Processing Nominations or the Current Power Processing Nominations, (ii) the
determination of any Mill Owner to elect (in accordance with the procedures set
forth in the Master Operating Agreement) a revised Steam Processing Demand,
Power Processing Demand or Conversion Demand, (iii) the granting of (or refusal
to grant to Mobile Energy) any additional hours of Scheduled Energy Complex
Outages or Major Maintenance Outages, (iv) any decision or dispute with respect
to the payment of any charge or other amount due from one Mill Owner to another
Mill Owner pursuant to any Project Contract, (v) the allocation of pulp between
the Tissue Mill and the Paper Mill or the existence of any breaches and
enforcement of remedies under the Pulp Supply Agreement between Pulp Mill Owner
and Paper Mill Owner, (vi) the allocation of charges payable by the Mill Owners


                                      I-22
<PAGE>

to Alabama Power for Back-Up Power, Maintenance Power and Supplemental Power
pursuant to the 1983 Alabama Power Contract and the 1986 Alabama Power Contract
(except that Mobile Energy will have the right to participate in all such
decisions if Mobile Energy is required to bear any of such charges) and (vii)
the allocation of Liquidated Damages among the Mill Owners. In addition, no
party to the Master Operating Agreement is entitled to participate in any
decision by the Site Operating Committee (or any committee appointed by it) that
(x) could not reasonably be expected to adversely affect in any material respect
such party's condition (financial or otherwise), properties, assets,
liabilities, permits or licenses, operations or prospects with respect to the
business or businesses conducted by such party at the Site, (y) would not
increase the amount of payments to be made by such party under any of the
Project Agreements and (z) would not impose or create obligations that would
make such party's performance under any of the Project Agreements more
burdensome. However, the applicable representatives of any non-voting party are
entitled to be present at all meetings at which such decisions are made.

Force Majeure

Each party is excused from failure to perform its obligations under the Project
Agreements if, and to the extent that, such failure is due to a Force Majeure
Event (as defined below), whether such Force Majeure Event is suffered directly
by such party's Mill or Energy Complex or otherwise causes an interruption of
operations at the Site. The affected party is obligated to provide prompt notice
to the other parties upon becoming aware of the Force Majeure Event, and is
obligated to make all reasonable efforts to remedy the Force Majeure Event, if
practicable, and to mitigate the adverse effects of the Force Majeure Event. The
suspension of any obligation due to a Force Majeure Event does not affect any
rights or obligations under the Project Agreements that accrued prior to such
suspension.

    "Force Majeure Events" include acts of God, acts of the public enemy, wars,
blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes,
volcanoes, fires, storms, floods, disasters, civil disturbances, sabotage, the
binding order of any Governmental Authority that has been resisted in good faith
by all reasonable legal means, Changes of Law (except as provided in the
Financial Adjustment Events with respect to the Cluster Rule, the Combustion
Rule and federal energy taxes or in the Mill Environmental Indemnity
Agreements), labor disputes (excluding strikes by and other labor disputes with
respect to (i) in the case of Mobile Energy, employees of Mobile Energy or
Southern Energy or (ii) in the case of a Mill Owner, employees of such Mill
Owner) or any other event or circumstance not within the control of such party
that prevents such party from performing its obligations under any Project
Contract (but not including governmental actions (including but not limited to
any binding order of any Governmental Authority) that such party could have
prevented by compliance with appropriate laws, regulations and standards). Force
Majeure Events expressly exclude (A) a party's financial inability to perform
and (B) any failure to perform, and the effects of such failure, that could have
been prevented, overcome or remedied by the exercise, by the party claiming
force majeure, of prudent plant operating standards. For purposes of the
definition of "Force Majeure Event," (x) if a Change of Law requires the
permanent closure of the Energy Complex or any Mill, such Change of Law shall
constitute a Force Majeure Event and (y) if a Change of Law does not require
such a permanent closure, only the period of time reasonably required to comply
with such Change of Law shall constitute a Force Majeure Event. As such, unless
a Change of Law requires the permanent closure of the Energy Complex, Mobile
Energy will not be excused of its performance obligations if Mobile Energy fails
to comply with the Change of Law within a reasonable amount of time.

    If a Force Majeure Event were to cause the Actual Energy Complex Capacity to
fall below the Aggregate Demand (whether or not such Force Majeure Event has
also affected any of the Mills), then the provisions in the Master Operating
Agreement with respect to the payment by Mobile Energy of Liquidated Damages and
the incurrence by Mobile Energy of Demand Charge Reductions (as described below)
would not apply. Instead, each Mill Owner's obligation to pay Demand Charges
would be reduced to a level consistent with such Mill Owner's capability, if
any, to use all or a portion of the Actual Energy Complex Capacity available to
it following such Force Majeure Event. As a result, although Mobile Energy would
not be subject to the Liquidated Damages and Demand Charge Reduction provisions
of the Master Operating Agreement if a Force Majeure Event caused the Actual
Energy Complex Capacity to fall below the Aggregate Demand, the Demand Charges
payable by the Mill Owners would be reduced if the Mill Owners were unable to


                                      I-23

<PAGE>

use any portion of the available Energy Complex capacity. Thus, if a Mill were
unable to operate a paper machine because a Force Majeure Event rendered the
Energy Complex unable to provide the full amount of Steam Processing Services
required to operate the paper machine, the Mill Owner would not be required to
pay Demand Charges on that portion of Energy Complex capacity that the Energy
Complex was able to provide to that paper machine, but that the paper machine
was unable to use. Therefore, although the existence of a Force Majeure Event
would excuse Mobile Energy from performance, it could also diminish the Demand
Charges received by Mobile Energy.

    In addition, if a Force Majeure Event were to affect only the Mills or the
Mill Owners, each affected Mill Owner would be required to continue to pay
Demand Charges (at a level consistent with its Demand for each applicable
Processing Service immediately prior to such Force Majeure Event) for six months
after the occurrence of the Force Majeure Event; thereafter, each affected Mill
Owner would be required to pay Demand Charges at a level consistent with such
Mill Owner's capability, if any, to use all or a portion of the Actual Energy
Complex Capacity available. Thus, if a Force Majeure Event were to render a
paper machine inoperable for more than six months, the affected Mill Owner would
not be required to pay Demand Charges with respect to the capacity that the
inoperable paper machine was unable to utilize after the six months had expired.
As such, Mobile Energy bears risk with respect to Force Majeure Events that
affect only the Mills or the Mill Owners.

    If a Force Majeure Event, other than a Force Majeure Event resulting in a
Casualty (as hereinafter defined), renders the Energy Complex unable to produce
more than 20% of the then current maximum liquor processing capacity of the
Energy Complex (the "Maximum Liquor Processing Capacity") and seven percent of
the then current maximum steam processing capacity of the Energy Complex (the
"Maximum Steam Processing Capacity") and is not cured within three years of its
occurrence, then the Mill Owners will be permitted to terminate the Master
Operating Agreement and the Energy Services Agreements pursuant to the
provisions of the Master Operating Agreement with respect to termination of
these agreements upon a Mill Closure. If (i) a Force Majeure Event causes
physical loss of or damage to the Mills so as to result in any Aggregate Demand
being set at a level which is less than the minimum Demand associated with a
Processing Service and (ii) such physical loss or damage is not capable of being
repaired or restored within four years of the occurrence of the Force Majeure
Event, then Mobile Energy will be permitted to terminate the Energy Services
Agreements following the first six months after such Force Majeure Event unless
the Mill Owners pay Mobile Energy in each monthly billing period the sum of
$834,000 (multiplied by a specified escalator) plus $3,333,400. "Minimum
Conversion Demand" is 20% of the then current Maximum Liquor Processing
Capacity; "Minimum Steam Processing Demand" is seven percent of the then current
Maximum Steam Processing Capacity; and "Minimum Power Processing Demand" is 30%
of the then current specified maximum power processing capacity of the Energy
Complex (the "Maximum Power Processing Capacity").

Outages

In each contract year, Mobile Energy is entitled to (i) a specified number of
days of Scheduled Energy Complex Outages and (ii) a specified amount of
Unscheduled Energy Complex Outages. In addition, Mobile Energy is entitled to a
specified number of days of Major Maintenance Outages. Major Maintenance Outages
are designed to accommodate life cycle replacement and refurbishment of
equipment, and can generally be anticipated with sufficient lead time to be
added to the Outage Allowance for a particular contract year. However, Major
Maintenance Outages were not allocated to particular contract years as of the
Acquisition Closing Date in order to give Mobile Energy the flexibility to
schedule such outages on an as-needed basis. As such, Major Maintenance Outages
will be scheduled by the Site Operating Committee for particular contract years
over the course of the term of the Master Operating Agreement. If the outages
experienced by the Energy Complex in a contract year do not exceed the Outage
Allowances applicable to that contract year (including the allowances for
Scheduled Outages, Unscheduled Outages and, if scheduled for that contract year,
Major Maintenance Outages), Mobile Energy will not be deemed to be in default
under the Energy Services Agreements or the Master Operating Agreement, will not
be liable for Liquidated Damages, and will not incur Demand Charge Reductions.
By contrast, if the outages experienced by the Energy Complex for a particular
contract year do exceed the Outage Allowances applicable to that contract year,
Mobile Energy could, subject to the applicable provisions of the Master
Operating Agreement and Energy Services Agreements, be deemed to be in default
under such agreements, be liable for Liquidated Damages and incur Demand Charge
Reductions. See "-Events of Default" and "-Liquidated Damages and Demand Charge
Reductions."

                                      I-24

<PAGE>

    The Outage Allowance to which Mobile Energy is entitled for Liquor
Processing Services can be reduced under certain circumstances as a result of
unscheduled interruptions of electrical power to the Pulp Mill if (i) Mobile
Energy causes an unscheduled interruption of electrical power to the Pulp Mill
that curtails the Pulp Mill from delivering weak black liquor to the Energy
Complex in accordance with the Pulp Mill's current request for Liquor Processing
Services, (ii) Mobile Energy's Outage Allowance for Liquor Processing Services
is greater than zero at the time of the interruption of electrical power, and
(iii) the amount of Liquor Processing Services provided by MESC in the week in
which the interruption of electrical power occurs does not exceed the lessor of
(A) the average daily amount of Liquor Processing Services provided by Mobile
Energy during the 365 days immediately preceding that week multiplied by seven,
(B) the amount of Liquor Processing Services requested by the Pulp Mill for that
week, and (C) the Pulp Mill Owner's then current Demand for Liquor Processing
Services, then the Outage Allowance for Liquor Processing Services will be
reduced. The amount of the reduction will be equal to (a) the average daily
amount of Liquor Processing Services provided by Mobile Energy during the 365
days immediately preceding that week divided by (b) 24 and then multiplied by
(c) the duration of the interruption of electrical power (expressed in hours and
rounded up to the nearest hour); provided that the Outage Allowance for Liquor
Processing Services shall not be reduced below zero.

    The Mill Owners have the right to take an unlimited number of outages for
any duration, provided that the Mill Owners continue to pay Demand Charges and
any other amounts due under the Project Agreements during a Mill outage.

    Each year, the Site Operating Committee is required to prepare a timetable
(the Yearly Outages Schedule) for Scheduled Outages and, if applicable, Major
Maintenance Outages for the following contract year based upon schedules
proposed by Mobile Energy and each of the Mill Owners. To the maximum extent
practicable, the Site Operating Committee is required to coordinate the timing
of Scheduled Outages among the Energy Complex and the Mills so as to maximize
the availability of Services. At the request of Mobile Energy or any Mill Owner,
the Yearly Outages Schedule may be revised by the Site Operating Committee.
    If any part of the Outage Allowance for Scheduled Outages is not used by
Mobile Energy in the year to which the allowance is allotted by the Master
Operating Agreement, such unused portion is carried forward into subsequent
contract years until used by Mobile Energy (unless such carry forward would
cause the number of outage days being carried forward to exceed the maximum
amounts set forth in the Master Operating Agreement). Similarly, with respect to
equipment to which more than one Major Maintenance Outage is allotted by the
Master Operating Agreement, if Mobile Energy completes the inspection, repair or
maintenance it is to perform during a Major Maintenance Outage in less time than
allotted by the Master Operating Agreement, the unused time is carried forward
and may be used by Mobile Energy during a subsequent Major Maintenance Outage
for the applicable piece of equipment (provided that no such carry forward can
increase the maximum number of Major Maintenance Outages allowed for a
particular piece of equipment, as opposed to the duration of such outages).
Finally, unused portions of the Outage Allowances for Unscheduled Energy Complex
Outages for each contract year are carried forward to the next contract year,
subject to specified minimum and maximum quantities of permitted unscheduled
shortfalls of each Processing Service (measured in MMlb virgin dry black liquor
solids/year, MMBTU/year or MWh/year, as applicable) for each contract year.

    Mobile Energy may (i) adjust the Outage Allowances for Scheduled Outages and
Major Maintenance Outages to reflect the annual or life cycle maintenance
required by any additional Energy Complex equipment acquired by Mobile Energy
after the Acquisition Closing Date due to a Change of Law or a Financial
Adjustment Event and (ii) with the approval of the Site Operating Committee
(which approval may not be unreasonably withheld), adjust the Outage Allowances
for Scheduled Outages and Major Maintenance Outages to reflect the annual or
life cycle maintenance required by any additional Energy Complex equipment
acquired by Mobile Energy after such date for any reason other than those
specified in clause (i). If Mobile Energy or any Mill Owner anticipates that its
facility may experience an Unscheduled Outage, or (if an outage is
unanticipated) following the occurrence of an Unscheduled Outage, the applicable
party is obligated to notify the other parties of the expected effect that the
Unscheduled Outage will have on its ability to provide Processing Services or
Mill Products (as applicable). In addition, any Mill Owner whose Mill
experiences an Unscheduled Outage is obligated to inform Mobile Energy and the

                                      I-25

<PAGE>

other Mill Owners of the expected effects that such Unscheduled Outage will have
on the affected Mill's Current Nomination and short-term future requirements for
any Processing Service, process water or compressed air. If a Mill suffers an
Unscheduled Outage, Mobile Energy may shut down any item of equipment or
machinery at the Energy Complex for maintenance or inspection as long as (i)
Mobile Energy's ability to satisfy the Mills' requirements for Processing
Services during the Mill's Unscheduled Outage is not thereby diminished and (ii)
such shutdown will not last longer than the duration of the Unscheduled Mill
Outage as communicated by the affected Mill. Such a shutdown by Mobile Energy is
not deemed an Outage for purposes of the Master Operating Agreement and,
therefore, does not affect Mobile Energy's usage of any Outage Allowance.

Liquidated Damages and Demand Charge Reductions

Subject to the following sentence, if Mobile Energy fails to provide any
Processing Service as specified in the Energy Services Agreements and the Master
Operating Agreement and any Mill Owner suffers damages as a result of such
failure, Mobile Energy will be liable to such Mill Owner for the Liquidated
Damages and Demand Charge Reductions set forth in the following paragraphs.
However, if the actual capacity of the Energy Complex to provide the Processing
Services is less than the Aggregate Demand at any time due to (i) an Energy
Complex Outage that does not exceed the applicable Outage Allowances, (ii) a
Force Majeure Event or (iii) a breach by Kimberly-Clark Tissue or any of the
Mill Owners of a material obligation under any Project Contract, then Mobile
Energy will not be liable to the Mill Owners for Liquidated Damages or any other
form of damages and will not incur any Demand Charge Reductions ("Excused
Performance").

    If at any time (and unless there is Excused Performance) (1) Actual Liquor
Processing Capacity is less than Conversion Demand, (2) the Pulp Mill's
requirement for Liquor Processing Services is at or below the Current Liquor
Processing Nomination and Mobile Energy cannot satisfy such requirement and (3)
Mobile Energy requests that the flow of weak black liquor to the Energy Complex
be curtailed by the Pulp Mill or the Pulp Mill is unable to deliver weak black
liquor to Mobile Energy due to an operational circumstance caused by Mobile
Energy (upon the satisfaction of the conditions set forth in clauses (1), (2)
and (3), a "Liquor Processing Shortfall Event"), then (x) Mobile Energy will be
obligated to pay the Pulp Mill Owner an amount equal to $10,000 (as escalated
from the Acquisition Closing Date in accordance with a formula based upon a
composite escalator comprised of inflation-based indices for capital equipment,
labor and intermediate materials) per Liquor Processing Shortfall Event (the
"Liquor Processing Liquidated Damages") and (y) the Conversion Demand Charge
will be reduced by an amount equal to (i) the Conversion Demand Charge for the
week in which the Liquor Processing Shortfall Event occurred multiplied by (ii)
the sum of the aggregate amount of all such curtailments for the week divided by
the then Current Liquor Processing Nomination (such amount the "Conversion
Demand Charge Reduction").

    If at any time (and unless there is Excused Performance) (1) the Aggregate
Steam Processing Requirement does not exceed the Aggregate Demand for Steam
Processing Services, (2) the Actual Steam Processing Capacity is less than the
Aggregate Demand for Steam Processing Services, (3) the Actual Steam Processing
Capacity is less than the aggregate Current Steam Processing Nomination, (4) the
steam energy flow to a particular Mill is less than that Mill's requirement for
Steam Processing Services (the "Steam Processing Deficiency Amount") (and such
deficiency is not due to another Mill using Steam Processing Services in excess
of its Current Steam Processing Nomination) and (5) Mobile Energy has
implemented its steam load-shedding plan, causing a reduction in Steam
Processing Services provided to a Mill (upon the satisfaction of the conditions
set forth in clauses (1) through (5), a "Steam Processing Shortfall Event"),
then Mobile Energy will be obligated to pay the affected Mill Owner an amount
equal to $5,000 (as escalated from the Acquisition Closing Date in accordance
with a formula based upon a composite escalator comprised of inflation-based
indices for capital equipment, labor and intermediate materials) per Shortfall
Hour (the "Steam Processing Liquidated Damages") and (y) the affected Mill's
Demand Charges for Steam Processing Services will be reduced, for each Shortfall
Hour, by an amount equal to (i) the affected Mill's charges for Steam Processing
Demand for such Shortfall Hour multiplied by (ii) the applicable Steam
Processing Deficiency Amount divided by the then Current Steam Processing
Nomination for the affected Mill (the "Steam Processing Demand Charge
Reduction").

    If at any time (and unless there is Excused Performance) (1) the Aggregate
Power Processing Requirement does not exceed the Aggregate Demand for Power
                                      I-26

<PAGE>

Processing Services, (2) the Actual Power Processing Capacity is less than the
Aggregate Demand for Power Processing Services, (3) the Actual Power Processing
Capacity (together with all power being supplied by Alabama Power) is less than
the Aggregate Power Processing Requirement, (4) Alabama Power is not providing
the Mills power pursuant to the terms and conditions of the 1983 Alabama Power
Contract and the 1986 Alabama Power Contract and (5) Mobile Energy has exceeded
its usage allowance of Back-Up Power (the "Back-Up Power Usage Allowance") (upon
the satisfaction of the conditions set forth in clauses (1) through (5), a
"Power Processing Shortfall Event"), then (x) Mobile Energy will be obligated to
pay the Mill Owners an amount equal to $5,000 (as escalated from the Acquisition
Closing Date in accordance with a formula based upon a composite escalator
comprised of inflation-based indices for capital equipment, labor and
intermediate materials) for each Shortfall Hour (the "Power Processing
Liquidated Damages") and (y) the charges for Power Processing Demand will, for
each Shortfall Hour, be reduced by an amount equal to (i) the charges for Power
Processing Demand for the Shortfall Hour multiplied by (ii) the difference
between the power flow to the Mills and the Mills' requirements for power
divided by the then Current Power Processing Nomination for the three Mills (the
"Power Processing Demand Charge Reduction").

    If the total megawatt hours of Back-Up Power purchased by the Mill Owners
from Alabama Power in a contract year exceed the Back-Up Power Usage Allowance
for that contract year, then Mobile Energy will be obligated to pay each Mill
Owner such Mill Owner's proportionate share of the incremental cost of the
megawatt hours and megawatt demand for Back-Up Power purchased from Alabama
Power in excess of the megawatt hours in the Back-Up Power Usage Allowance (the
"Back-Up Power Liquidated Damages"). Furthermore, any monthly difference between
the allowance of Long Term Maintenance Power calculated by the Process Model and
the actual amount of Long Term Maintenance Power purchased by the Mill Owners
from Alabama Power will be charged or credited, as appropriate, to Mobile Energy
on a monthly basis. Finally, any monthly difference between the amount that the
Process Model indicates should have been purchased from Alabama Power as
Supplemental Power and the actual amount of Supplemental Power purchased by the
Mill Owners also will be charged or credited, as appropriate, to Mobile Energy
on a monthly basis.

    Notwithstanding that Liquidated Damages may accrue with respect to more than
one Processing Service or Mill Owner, in no event can the Liquidated Damages for
all of the Processing Services and all of the Mill Owners exceed (and in no
event will Mobile Energy be liable to pay to the Mill Owners collectively) more
than $10,000 a day (as escalated from the Acquisition Closing Date in accordance
with a formula based upon a composite escalator comprised of inflation-based
indices for capital equipment, labor and intermediate materials). However,
Demand Charge Reductions are not subject to any such limitations.

Insurance

Each of the Mill Owners and Mobile Energy is obligated to maintain (i) workers'
compensation insurance, including employer's liability insurance in the minimum
amount of $1,000,000 per occurrence and in the aggregate, (ii) comprehensive
general liability insurance with a $1,000,000 minimum limit per occurrence for
combined bodily injury and property damage with an aggregate of $2,000,000,
(iii) comprehensive automobile liability insurance with a $1,000,000 minimum
limit per occurrence for bodily injury and property damage and $2,000,000
minimum limit per occurrence for combined bodily injury and property damage,
(iv) aircraft and watercraft liability insurance, each having a $25,000,000
minimum limit per occurrence for property damage and bodily injury and (v)
umbrella liability or excess insurance with a $24,000,000 minimum limit per
occurrence and a $24,000,000 aggregate annual limit. In addition, Mobile Energy
is required to maintain (a) property damage insurance in a minimum aggregate
amount of $350,000,000 or Mobile Energy's outstanding obligations with respect
to the financing or refinancing of the Energy Complex, whichever is greater, (b)
boiler and machinery insurance in a minimum aggregate amount equal to the
maximum foreseeable loss and expediting expenses in the amount of $2,500,000 and
(c) business interruption and extra expense insurance covering as a minimum
amount all fixed expenses and debt service for a period of 12 months arising
from certain insured losses and (unless waived by the Site Operating Committee)
is required to cause its subcontractors to maintain workers' compensation
insurance, comprehensive general liability insurance and comprehensive
automobile liability insurance. Each policy required to be maintained by Mobile
Energy must name the Mill Owners as additional insureds and each policy required
to be maintained by a Mill Owner must name Mobile Energy as an additional

                                      I-27
<PAGE>

insured. If it is commercially unreasonable for Mobile Energy or any Mill Owner
to obtain any such insurance policy, Mobile Energy and the Mill Owners are
obligated by the Master Operating Agreement to devise, in good faith, an
equitable and mutually agreeable allocation of risk (that may include
self-insurance).

    There can be no assurance that the insurance coverages required by the
Master Operating Agreement will be available to Mobile Energy in the future on
commercially reasonable terms or at commercially reasonable rates or that the
amounts for which Mobile Energy is insured or amounts that Mobile Energy
receives under such insurance coverage will cover all losses. In the event there
is a total or partial loss of the Energy Complex, there can be no assurance that
the insurance proceeds received by Mobile Energy in respect thereof will be
sufficient to satisfy all indebtedness of Mobile Energy.

Casualty

The following is a description of the provisions set forth in the Master
Operating Agreement with respect to the use of the proceeds of insurance
maintained by Mobile Energy (the "Mobile Energy Proceeds"). However, in the Mill
Owner Consents to Assignment, Kimberly-Clark Tissue and the Mill Owners have
agreed that Mobile Energy Proceeds will be disposed of pursuant to the terms of
the Mill Owner Consents to Assignment.

    If any part of the Energy Complex were to suffer physical loss or
destruction (a "Casualty") and the cost of repairing the damage to the Energy
Complex caused by such Casualty does not exceed $7,500,000 (as escalated from
the Acquisition Closing Date, the "Mobile Energy Contribution Amount"), then
Mobile Energy is obligated to repair the damage, whether or not the Casualty (or
the circumstance that caused the Casualty) is covered by any insurance policy
required to be maintained by Mobile Energy.

    Generally, if the Energy Complex were to suffer a Casualty for which Mobile
Energy is required by the Master Operating Agreement to maintain insurance but
the Mills were not materially affected by a Casualty (other than the indirect
effects of the Casualty affecting the Energy Complex), and if the sum of the
Mobile Energy Proceeds and Mobile Energy Contribution Amount were sufficient to
restore the Energy Complex to the level specified by the Master Operating
Agreement, then Mobile Energy would be required to rebuild the Energy Complex so
that it can once again provide the level of Processing Services specified by the
Master Operating Agreement, as follows: (i) if the Energy Complex experienced
any Casualty other than a Total Casualty (as defined below) or any Casualty that
results in less than $7,500,000 in damages (a "Partial Casualty"), Mobile Energy
would be required to restore the Energy Complex to substantially its condition
immediately prior to the Partial Casualty; (ii) if the Energy Complex
experienced any Casualty that results in more than $150,000,000 in damages or
that cannot be repaired within 24 months of the Casualty (a "Total Casualty") on
or before December 16, 2011 and the Aggregate Demands for each of the Processing
Services immediately prior to the Total Casualty exceeded certain minimum levels
set forth in the Master Operating Agreement, Mobile Energy would also be
required to restore the Energy Complex to substantially its condition
immediately prior to the Total Casualty; and (iii) if the Energy Complex
experienced a Total Casualty after December 16, 2011 and the Aggregate Demands
for each of the Processing Services immediately prior to the Total Casualty
exceeded 50% of each of the Maximum Capacities in effect on the Acquisition
Closing Date, Mobile Energy would be required to restore the Energy Complex so
that it could produce the Aggregate Demands in effect immediately prior to the
Total Casualty.

    Generally, if (i) the Energy Complex were to suffer any Casualty for which
Mobile Energy is required by the Master Operating Agreement to maintain
insurance, (ii) the Mills also were materially affected by a Casualty (other
than the indirect effects of the Casualty affecting the Energy Complex), (iii)
the sum of Mobile Energy Proceeds and Mobile Energy Contribution Amount were
sufficient to restore the Energy Complex, and (iv) the Demand for each of the
Processing Services were (or upon the completion of any restoration of the Mills
undertaken by the Mill Owners would be) greater than the Minimum Economic Demand
associated with such Processing Service and at least 50% of Reserved Demand (as
hereinafter defined) in effect immediately before the occurrence of such
Casualty (unless terminated by the applicable Mill Owner within sixty (60) days
of the occurrence of the Casualty) shall continue to be reserved, then Mobile
Energy would be required to restore the Energy Complex to a condition necessary
to produce the Aggregate Demands and Reserved Demand in effect immediately prior
to such Casualty. If Mobile Energy has no obligation under the Master Operating
Agreement to restore or rebuild the Energy Complex because (a) the amount of
Mobile Energy Proceeds plus Mobile Energy Contribution Amount is insufficient to



                                      I-28
<PAGE>

restore or rebuild the Energy Complex to the operating levels required above, or
(b) because the criteria set forth in clause (iv) of the preceding sentence have
not been satisfied, then Mobile Energy is required, upon the request of any Mill
Owner, to negotiate in good faith for a reasonable period of time (in any event
not to exceed 90 days), in order to, in the case of clause (a), develop an
acceptable arrangement under which Mobile Energy would use the available Mobile
Energy Proceeds to restore or rebuild the Energy Complex to an operating level
commensurate with the amount of Mobile Energy Proceeds available for such
restoration or rebuilding (without accounting for any Mobile Energy Contribution
Amount) or, in the case of clause (b), develop arrangements regarding the future
provision of Processing Services and other services at the Mobile Facility.
Mobile Energy has no obligation to the Mill Owners under this paragraph other
than to negotiate for a reasonable period of time (in any event not to exceed 90
days).

    If Mobile Energy is required to, or otherwise decides to, restore the Energy
Complex following a Casualty, and the restoration work is structural in nature
or the cost thereof, as estimated by Mobile Energy, exceeds $5,000,000 (as
escalated from the Acquisition Closing Date), then the restoration work is
required to be in the charge of an architect or engineer selected by Mobile
Energy and reviewed by the Mill Owners (such review not to be unreasonably
delayed) and the Mill Owners must be given a reasonable period to review the
plans and specifications before the restoration work begins (such review not to
be unreasonably delayed).

    If Mobile Energy is not required to restore the Energy Complex because the
sum of Mobile Energy Proceeds and Mobile Energy Contribution Amount is
insufficient for the required level of restoration, the Mill Owners (or any of
them) may compel Mobile Energy to restore the Energy Complex to such level by
paying all restoration costs that exceed the sum of Mobile Energy Proceeds and
Mobile Energy Contribution Amount. The Master Operating Agreement provides that
no Mill Owner so contributing to the restoration of the Energy Complex will have
any claim on or ownership interest in the Energy Complex assets so restored, and
Mobile Energy will have no obligation to repay a contributing Mill Owner for any
costs incurred or payments made by such Mill Owner for the restoration of the
Energy Complex. If the Mill Owners fail to pay the difference between the
restoration costs and the sum of Mobile Energy Proceeds and Mobile Energy
Contribution Amount, the consequences set forth in the following paragraph will
apply.

    If the applicable conditions set forth in the Master Operating Agreement are
not satisfied (i) Mobile Energy will have no obligation under the Master
Operating Agreement to restore the Energy Complex and (ii) the Energy Services
Agreements and related rights and obligations under the Master Operating
Agreement will terminate as of the date of the Casualty. In addition, Mobile
Energy Proceeds will be distributed as follows:

         (a) first, Mobile Energy will receive that portion of Mobile Energy
     Proceeds that is equal to the present value of the amount Mobile Energy
     would have received as Demand Charges and Demand Reservation Charges (as
     hereinafter defined) for the remainder of the term if the Conversion
     Demand, Aggregate Steam Processing Demand, Aggregate Power Processing
     Demand and Reserved Demand in effect immediately prior to such Casualty
     remained in effect for the remainder of the term. If the Maximum Liquor
     Processing Capacity, the Maximum Steam Processing Capacity and the Maximum
     Power Processing Capacity (reduced by any Demand that had been relinquished
     by any Mill Owner pursuant to the Master Operating Agreement ("Relinquished
     Demand") prior to the date of the Casualty and any Demand that had been
     forfeited by any Mill Owner pursuant to the Master Operating Agreement
     ("Forfeited Demand") and that had not yet been claimed by a Mill Owner
     pursuant to the Master Operating Agreement) are greater than the Aggregate
     Demands and Reserved Demand in effect immediately prior to the Casualty,
     these adjusted Maximum Capacities will be substituted for the Aggregate
     Demands and Reserved Demand for purposes of calculating the amounts to be
     received by Mobile Energy. The present value will be calculated using a
     discount rate that, during the first 15 contract years following the
     Acquisition Closing Date, is 11%, and, during the remainder of the term, is
     12%. The calculation of the amount Mobile Energy would have received as
     Demand Charges and Demand Reservation Charges for the remainder of the term
     will exclude any portion of the Demand Charges and Demand Reservation
     Charges covering fixed operations and maintenance expenses and sustaining
     capital expenses that Mobile Energy would not actually incur as a result of
     the Casualty and the termination of the Master Operating Agreement and the
     Energy Services Agreements pursuant to clause (ii) of the preceding
     sentence;

                                      I-29

<PAGE>

         (b) second, the Mill Owners will receive the lesser of (A) the
     remaining Mobile Energy Proceeds or (B) that portion of Mobile Energy
     Proceeds that is equal to the difference between (x) the Mill Owners' costs
     of acquiring Processing Services from Mobile Energy pursuant to the Project
     Agreements for the remainder of the term and (y) the Mill Owners' costs of
     acquiring electricity, steam and green liquor from sources other than the
     Energy Complex for the remainder of the term. For purposes of calculating
     the costs referred to in clauses (x) and (y), the Master Operating
     Agreement assumes that the Conversion Demand, Aggregate Steam Processing
     Demand, Aggregate Power Processing Demand and Demand Reservation Charges
     (as hereinafter defined) in effect immediately prior to the Casualty would
     have remained in effect for the remainder of the term. The Master Operating
     Agreement also provides that for purposes of calculating the costs referred
     to in clauses (x) and (y), the Maximum Liquor Processing Capacity, the
     Maximum Steam Processing Capacity and the Maximum Power Processing Capacity
     (reduced by any Relinquished Demand that had been relinquished prior to the
     date of the Casualty and any Forfeited Demand that had not yet been claimed
     by a Mill Owner pursuant to the Master Operating Agreement) in effect
     immediately prior to the Casualty will be substituted for the Aggregate
     Demands and Demand Reservation Charges in effect immediately prior to the
     Casualty if such adjusted Maximum Capacities are greater than the Aggregate
     Demands and Demand Reservation Charges; and

         (c) third, Mobile Energy will receive the remainder of Mobile Energy
Proceeds, if any.

As noted above, Mobile Energy and the Mill Owners have agreed that the
provisions with respect to insurance proceeds set forth in the Mill Owner
Consents to Assignment will override the provisions described above to the
extent such provisions are inconsistent with one another.

    There can be no guarantee that the amounts received by Mobile Energy from
insurers will be sufficient to satisfy Mobile Energy's outstanding indebtedness
in the event of a Casualty.

    The Mill Owners have no obligation under the Master Operating Agreement to
restore any portion of any Mill affected by a Casualty. Except as provided in
the provisions concerning Force Majeure Events and the termination of an Energy
Services Agreement upon a Mill Closure, a Casualty with respect to a Mill
relieves a Mill Owner of its obligations to pay Demand Charges only if, and to
the extent that, the Energy Complex was also affected by such Casualty.

Events of Default

The following constitute events of default on the part of Mobile Energy under
the Energy Services Agreements and the Master Operating Agreement (each a
"Mobile Energy Event of Default"): (a) non-payment by Mobile Energy of any
payment due by Mobile Energy to the applicable Mill Owner under its Energy
Services Agreement or the Master Operating Agreement (if such non-payment
continues for 10 days after written notice of non-payment has been given to
Mobile Energy by the Mill Owner entitled to payment); (b) non-performance by
Mobile Energy of any covenant, obligation or agreement of Mobile Energy to the
applicable Mill Owner under its Energy Services Agreement or the Master
Operating Agreement (if such non-performance continues for 60 days (or if 60
days is insufficient, 180 days) after written notice of non-performance is given
to Mobile Energy by the Mill Owner entitled to performance); (c) certain
bankruptcy events with respect to Mobile Energy; (d) transfer of the Energy
Complex by Mobile Energy in contravention of the transfer restrictions imposed
by the Master Operating Agreement; (e) failure by Southern to comply in any
material respect with any covenant, obligation or agreement in the Environmental
Guaranty; and (f) failure by Mobile Energy or Southern to comply with their
respective obligations under the Mill Owner Maintenance Reserve Account
Agreement (as hereinafter defined) if such failure is not remedied within 10
days.

    The following constitute events of default on the part of each Mill Owner
under such Mill Owner's Energy Services Agreement and the Master Operating
Agreement, and, subject to the satisfaction of any applicable conditions set
forth in such agreements, entitle Mobile Energy to exercise its remedies against
the defaulting Mill Owner (each a "Mill Owner Event of Default"): (a)
non-payment by a Mill Owner of any payment due by the Mill Owner to Mobile
Energy under its Energy Services Agreement or the Master Operating Agreement (if
such non-payment continues for 10 days after written notice of non-payment has

                                      I-30

<PAGE>

been given to the defaulting Mill Owner by Mobile Energy); (b) non-performance
by a Mill Owner of any covenant, obligation or agreement of the Mill Owner under
its Energy Services Agreement or the Master Operating Agreement (if such
non-performance continues for 60 days (or if 60 days is insufficient, 180 days)
after written notice of non-performance is given to the defaulting Mill Owner by
Mobile Energy); and (c) certain bankruptcy events with respect to the Mill
Owner. Finally, the following constitute events of default on the part of each
Mill Owner under the Master Operating Agreement and, subject to the satisfaction
of any applicable conditions set forth in the Master Operating Agreement,
entitle the other Mill Owners to exercise their remedies against the defaulting
Mill Owner (each an "Inter-Mill Event of Default"): (a) non-payment by a Mill
Owner of any payment due by the Mill Owner to another Mill Owner under any
Project Contract (if such non-payment continues for 10 days after written notice
of non-payment has been given to the defaulting Mill Owner by the Mill Owner
entitled to payment, or the cure period specified in the applicable Project
Contract has elapsed); and (b) non-performance by a Mill Owner of any covenant,
obligation or agreement of the Mill Owner under the Master Operating Agreement
(if such non-performance continues for 60 days (or if 60 days is insufficient,
180 days) after written notice of non-performance is given to the defaulting
Mill Owner by the Mill Owner entitled to performance).

    Any non-defaulting Mill Owner may, within the applicable cure periods set
forth above and upon notice to the defaulting Mill Owner and Mobile Energy,
attempt to cure a default by another Mill Owner, unless such attempt to cure
will interfere with the defaulting Mill Owner's diligent attempt to cure. In
addition, any Mill Owner (or, if acting in concert, more than one Mill Owner)
may, upon notice to Mobile Energy, attempt to cure a default by Mobile Energy
under any one of a specified list of contracts to which Mobile Energy is a party
(which contracts do not include the Financing Documents or the Project
Contracts), unless such attempt to cure will interfere with Mobile Energy's
diligent attempt to cure. A Mill Owner curing a default by Mobile Energy may
deduct the reasonable costs incurred by such Mill Owner in effecting the cure
from amounts owed by such Mill Owner to Mobile Energy under its Energy Services
Agreement and the Master Operating Agreement.

    If Mobile Energy or any Mill Owner disputes the occurrence or existence of a
particular event of default or the availability of any particular remedy in
respect thereof, then the applicable parties are obligated to attempt to resolve
the dispute (in accordance with the dispute resolution procedures set forth in
the Master Operating Agreement) before the non-defaulting party may exercise any
of the remedies set forth below (other than Mill Owner Step-In Rights (as
hereinafter defined) or Mobile Energy Step-In Rights (as hereinafter defined),
which are subject to a separate, expedited dispute resolution mechanism).
Institution of such dispute resolution procedures suspends the running of the
cure periods until the final resolution of the dispute.

Remedies

General Remedies

Upon the occurrence and during the continuation of a Mobile Energy Event of
Default or a Mill Owner Event of Default, any Mill Owner (or Mobile Energy, as
applicable) is entitled to do any or all of the following: (a) terminate the
applicable Energy Services Agreement (and the rights and obligations under the
Master Operating Agreement that are related to such Energy Services Agreement)
(unless the event of default was a default with respect to the non-performance
of any covenant, obligation or agreement, and the non-performance did not have a
Mill Material Adverse Effect or a Mobile Energy Material Adverse Effect, as
applicable); (b) obtain specific performance; and (c) pursue all other remedies
available at law or in equity, subject to the arbitration provisions set forth
in the Master Operating Agreement. Upon the occurrence and during the
continuation of an Inter-Mill Event of Default, any non-defaulting Mill Owner
may do any or all of the following: (i) obtain specific performance; (ii) seek
any applicable remedy available to the non-defaulting Mill Owner under the other
Project Agreements; and (iii) pursue all other remedies available at law or in
equity, except that, without the prior written consent of Mobile Energy, no Mill
Owner can exercise any right to terminate the Master Operating Agreement due to
an Inter-Mill Event of Default.

     If a Mill Owner terminates its Energy Services Agreement due to a Mobile
Energy Event of Default, such Mill Owner will stop accruing Demand Charges and
Processing Charges as of the date of the termination.

    The exercise of remedies by Mobile Energy does not limit a defaulting Mill
Owner's obligation to pay (for the remainder of the initial term of its Energy
Services Agreement) any Demand Charges that accrue under the Energy Services

                                      I-31
<PAGE>

Agreement (to the extent that the Demand Charges constitute costs to and
expenses of and the return of capital to Mobile Energy, as opposed to lost
profits, loss of use of capital or revenue, or any other incidental, special or
consequential losses or damages). However, if a Mill Owner provided notice of a
Mill Closure before its event of default, such Mill Owner will not be obligated
to pay Demand Charges as described in the preceding sentence, but instead will
be obligated to pay the Demand Charges imposed by the Master Operating Agreement
in the event of a Mill Closure.

Mill Owner Step-In Rights

The Master Operating Agreement provides that upon the occurrence of an Energy
Complex Triggering Event (as hereinafter defined), and provided that
Kimberly-Clark Tissue and the Mill Owners are in compliance with all of their
material obligations to Mobile Energy under the Project Agreements, the Mill
Owners may, upon unanimous agreement of the Mill Owners, notify Mobile Energy
and Mobile Energy's lenders that are financing the Energy Complex or the
Acquisition (the "Lenders") in writing of their intention to assume operational
responsibility for the Energy Complex in place of, and as agent for, Mobile
Energy, in order to undertake to cure the Energy Complex Triggering Event and to
operate and maintain the Energy Complex in accordance with the Project
Agreements (the "Mill Owner Step-In Rights"). The Mill Owners may exercise the
Mill Owner Step-In Rights until the earlier to occur of the following events:
(1) such Energy Complex Triggering Event is so cured or has otherwise ceased to
exist; (2) Mobile Energy presents a cure plan (the "Mobile Energy Cure Plan")
that contains a reasonably expeditious and reasonably technically and
economically feasible means for curing the Energy Complex Triggering Event
within the time period specified therein; (3) any Mill Owner no longer supports
the exercise of the Mill Owner Step-In Rights (and gives 30 days notice of such
failure of support to Mobile Energy and the other Mill Owners); (4) subject to
the satisfaction of the conditions set forth in the Mill Owner Consents to
Assignment with regard to foreclosure, the Lenders have foreclosed upon the
Energy Complex and have designated another reasonably qualified and experienced
person to operate and maintain the Energy Complex (which person has submitted a
cure plan that satisfies the conditions described above to which Mobile Energy
Cure Plan is subject); and (5) subject to the satisfaction of the conditions set
forth in the Mill Owner Consents to Assignment, the Lenders have foreclosed upon
the Energy Complex without foreclosing upon the Project Agreements. While the
Mill Owners are exercising the Mill Owner Step-In Rights, Mobile Energy would
have neither the right nor the obligation to operate the Energy Complex (other
than the obligation to permit the Mill Owners to use the Energy Complex
employees in the operation of the Energy Complex). The Mill Owners may not,
however, exercise the Mill Owner Step-In Rights with respect to any Mobile
Energy Event of Default after any Mill Owner has begun to exercise any other
remedy with respect to such Mobile Energy Event of Default.

    "Energy Complex Triggering Events" consist of any of the following
occurrences that are not the result of a Force Majeure Event, Permitted Energy
Complex Outage, or Mobile Energy receiving an insufficient amount of any Mill
Product: (i) a failure by Mobile Energy to provide the Processing Services
pursuant to the Energy Services Agreements which (a) has a Mill Material Adverse
Effect and (b) is a Mobile Energy Event of Default; (ii) the availability factor
for Steam Processing Services (as calculated pursuant to the Master Operating
Agreement) is less than 90% for any consecutive 10-day period during the term;
(iii) the availability factor for Steam Processing Services (as calculated
pursuant to the Master Operating Agreement) is less than 90% for any 10 days
within a 20-day period; (iv) an Unscheduled Outage of the entire Pulp Mill,
Paper Mill and Tissue Mill for any consecutive five-day period during the term
due to a shortfall in Processing Services; (v) an Unscheduled Outage of the
entire Pulp Mill, Paper Mill and Tissue Mill for any five-days within a 20-day
period during the term due to a shortfall in Processing Services; (vi) one (1)
paper machine or one (1) wet lap machine is out of service for any consecutive
15-day period due to a shortfall in a Processing Service; (vii) one paper
machine or one wet lap machine is out of service for any 15 days within a 30-day
period due to a shortfall in a Processing Service; (viii) the occurrence of four
or more Unit Trips during any 20-day period during the term; or (ix) an
Abandonment of the Energy Complex has occurred.

    If Mobile Energy disputes the existence of an Energy Complex Triggering
Event or if the Mill Owners fail to accept a Mobile Energy Cure Plan, Mobile
Energy may submit the dispute to a technical expert pursuant to the dispute
resolution provisions of the Master Operating Agreement, who is required to
resolve the dispute in accordance with the expedited timetable set forth in the
Master Operating Agreement for the resolution of disputes regarding step-in
rights.

                                      I-32
<PAGE>


    While exercising the Mill Owner Step-In Rights, the Mill Owners are
obligated to, in consultation with Mobile Energy, diligently pursue a cure of
the Energy Complex Triggering Event so as to enable Mobile Energy to resume
operation of the Energy Complex as soon as is practicable. The Mill Owners may
use funds in the Mill Owner Maintenance Reserve Account (as hereinafter defined)
established by Mobile Energy under the Master Operating Agreement in order to
cure the Energy Complex Triggering Event. However, the Mill Owners are not
required to incur out-of-pocket costs or to assume or guarantee any liabilities.
While exercising the Mill Owner Step-In Rights, the Mill Owners are obligated to
continue to pay Mobile Energy all Demand Charges, Processing Charges and other
charges due and payable to Mobile Energy under the Project Agreements (subject
to any rights of set-off or reduction including for Liquidated Damages or Demand
Charge Reductions). Mobile Energy will be required to distribute such revenues
(i) first, to the Mill Owners, as reimbursement for all reasonable expenses
actually incurred by the Mill Owners in exercising the Mill Owner Step-In Rights
and curing the Energy Complex Triggering Event (including, without limitation,
capital expenditures incurred in exercising the Mill Owner Step-In Rights and in
curing the Energy Complex Triggering Event, to the extent such capital
expenditures are reasonable and are either in accordance with past practice at
the Energy Complex or are consistent with the Energy Complex's annual operating
plan) and (ii) second, to Mobile Energy.

    Exercise of the Mill Owner Step-In Rights suspends the running of any of the
cure periods (other than for the payment of money) for Mobile Energy Events of
Default and prevents the Mill Owners from exercising any termination rights and,
subject to the other terms of the Project Agreements, from suspending the
provision of any Mill Product.

    No Mill Owner will have any liability to Mobile Energy in connection with
the exercise of the Mill Owner Step-In Rights, except for (i) direct damages
arising out of such Mill Owner's failure to operate the Energy Complex in
accordance with specified prudent operating standards, taking into account the
circumstances giving rise to the Mill Owner Step-In Rights and (ii) direct
damages arising out of such Mill Owner's failure to make reasonable efforts to
otherwise operate the Energy Complex in accordance with the Project Agreements.

    If an Energy Complex Triggering Event were to occur and if the Mill Owners
were to exercise the Mill Owner Step-In Rights and assume control of the Energy
Complex, Mobile Energy and Southern Energy would cease to control the operation
of the Energy Complex and the Energy Complex may be controlled by Mobile
Energy's customers. There can be no assurance that an Energy Complex Triggering
Event will not occur or that the Mill Owners would effectively operate the
Energy Complex in a manner sufficient to permit Mobile Energy to continue to pay
its fixed costs, including principal of and interest on debt.

Company Step-In Rights

The Master Operating Agreement provides Mobile Energy comparable step-in rights
(the "Mobile Energy Step-In Rights") with respect to the Process Water Plant,
the Waste Water Treatment Plant, the Air Compressors (if any of the Mill Owners
are operating the Air Compressors at the time of a Pulp Mill Triggering Event
(as hereinafter defined)) and the Pulp Mill's truck scales (each of such
facilities, the "Pulp Mill Step-In Equipment"). Such Mobile Energy Step-In
Rights are exercisable upon the occurrence of a Pulp Mill Triggering Event and
do not require the consent of the non-defaulting Mill Owners (though, during the
exercise of Mobile Energy Step-In Rights, Mobile Energy is obligated to consult
with the Tissue Mill Owner and the Paper Mill Owner as to the Operation and
Maintenance of the Process Water Plant and the Waste Water Treatment Plant).
During the exercise of Mobile Energy Step-In Rights, the Pulp Mill Owner is
obligated to deliver all revenues from the Pulp Mill Step-In Equipment to Mobile
Energy, which will hold such revenues in trust for the benefit of the Pulp Mill
Owner and will distribute such revenues in accordance with the priorities set
forth in the Master Operating Agreement. Otherwise, Mobile Energy Step-In Rights
are substantially similar to the Mill Owner Step-In Rights. No assurance can be
given that Mobile Energy Step-In Rights are legally enforceable or that Mobile
Energy will be able successfully to exercise Mobile Energy Step-In Rights.

    "Pulp Mill Triggering Events" consist of any of the following occurrences
that are not the result of a Force Majeure Event: (i) failure of the Pulp Mill
Owner to perform any of its obligations under the Water Agreement or to operate
the Pulp Mill Step-In Equipment in accordance with specified prudent operating

                                      I-33
<PAGE>

standards which, (a) has a Mobile Energy Material Adverse Effect and (b) is a
Mill Owner Event of Default by the Pulp Mill; and (ii) abandonment of the Pulp
Mill or a Mill Closure with respect to the Pulp Mill, except that neither clause
(i) nor clause (ii) shall constitute a Pulp Mill Triggering Event if (x) the
Mill Owners, or any of them, continue to pay Mobile Energy all Demand Charges
due to Mobile Energy by all of the Mill Owners despite any reduction of the
capacity of the Energy Complex to provide Processing Services to the Mills due
to the failure by the Pulp Mill Owner to perform any of its obligations under
any of the Project Agreements and (y) each of the Mill Owners waives any Mobile
Energy Event of Default caused by the failure of the Pulp Mill Owner to perform
any of its obligations under any of the Project Agreements.

Claiming Demand and Reserving Demand upon Termination due to an Event of Default

Following the termination of an Energy Services Agreement by Mobile Energy due
to a Mill Owner Event of Default, the non-terminated Mill Owners can claim as
Demand all or any part of the Demand or Reserved Demand (as hereinafter defined)
of the terminated Mill Owner. If none of the non-terminated Mill Owners claims
as Demand the terminated Mill Owner's Demand or Reserved Demand, then the
non-terminated Mill Owners can reserve such Demand (thus converting such Demand
into "Reserved Demand") or Reserved Demand by paying Mobile Energy an amount
equal to Mobile Energy's shutdown, mothballing and startup costs reasonably
incurred in order to reserve such Demand for such Mill Owner (a "Demand
Reservation Charge"). If the terminated Mill Owner's Demand or Reserved Demand
is not claimed or reserved by a non-terminated Mill Owner within the applicable
time periods set forth in the Master Operating Agreement, that Demand or
Reserved Demand will no longer be available to the Mill Owners, and Mobile
Energy will have the right to supply the Processing Service related to that
Demand or Reserved Demand to any other person. The reservation of Demand could
have a material adverse effect on Mobile Energy.

    Any Mill Owner which has purchased Reserved Demand from Mobile Energy may,
at any time, notify Mobile Energy that such Mill Owner wishes to convert such
Reserved Demand (or any portion thereof) (the "Converted Demand") into the
applicable Demand. Upon receiving such written notice, Mobile Energy is required
to provide such Mill Owner, within a reasonable time, with an estimate of the
costs, if any, Mobile Energy expects it will incur, and the time Mobile Energy
expects it will take, to increase the Aggregate Demand by an amount equal to the
Converted Demand. If the Mill Owner directs Mobile Energy to proceed, (x) Mobile
Energy will be required to promptly prepare the Energy Complex to provide
Processing Services at levels commensurate with both the then existing Demand
and the Converted Demand and (y) the Mill Owner will be required to pay Mobile
Energy all the costs Mobile Energy reasonably incurs in connection with the
foregoing preparations (which costs (i) are required to be determined assuming
Mobile Energy used prudent operating standards in shutting down, mothballing and
maintaining the equipment in question, (ii) may be audited by such Mill Owner
and (iii) are not permitted to be greater than the estimate provided to such
Mill Owner by Mobile Energy). Mobile Energy is required to notify the Mill
Owners when the preparations described in the preceding sentence are completed.
Upon such notification by Mobile Energy, such Converted Demand will be deemed to
constitute Demand and the applicable Mill Owner will be required to begin paying
Demand Charges which reflect the addition of the Converted Demand to Demand.

Mill Closure and Termination of Agreements by Mill Owners

Each Mill Owner has the right to terminate its Energy Services Agreement upon a
Mill Closure with respect to such Mill Owner's Mill. A terminating Mill Owner is
obligated to provide Mobile Energy and the other Mill Owners six months prior
written notice of its intention to terminate its Energy Services Agreement;
termination is deemed to occur upon the expiration of such six-month period. The
terminating Mill Owner is obligated to pay Mobile Energy such Mill's Demand
Charges (at the levels in effect immediately prior to the giving of notice) for
the greater of (i) six months from the date of termination or (ii) the remainder
of the then current Demand Period. All obligations incurred by the terminating
Mill Owner prior to the termination of its Energy Services Agreement (and all
obligations to pay Demand Charges pursuant to the preceding sentence) survive
the termination, and must be timely performed or paid by the terminating Mill
Owner. In addition, the terminating Mill Owner must 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 will
have no liability or other monetary obligation to Mobile Energy if such business
opportunities are not available or are not created.
                                      I-34


<PAGE>

    The Mill Owners have each granted Mobile Energy an irrevocable license to
use (in accordance with specified prudent operating standards) any asset of the
Tissue Mill or the Paper Mill and the Pulp Mill Step-In Equipment if, following
a Mill Closure, the closed Mill stops providing any Mill Product or Shared
Service to Mobile Energy. Mobile Energy's exercise of any of these licenses will
be at Mobile Energy's sole cost and expense. No assurance can be given that
Mobile Energy's use of any of these licenses will be economically beneficial to
Mobile Energy.

    The Master Operating Agreement provides that, notwithstanding the
termination of a Mill Owner's Energy Services Agreement, if a closing Mill Owner
or any of its successors or assigns recommences operations on its Mill site that
require green liquor, steam or electricity, that person must (at least one year
prior to the recommencement of operations on the property) request that Mobile
Energy reinstate the applicable Energy Services Agreement on terms identical to
those contained therein (but without any extension of the term thereof due to
the Mill Closure). Upon receipt of such notice, Mobile Energy will have the
right, but not the obligation, to reinstate the applicable Energy Services
Agreement. If Mobile Energy exercises this right, the applicable Mill Owner is
required to pay all costs incurred by Mobile Energy to remobilize the Energy
Complex so that it may be operated in accordance with the Project Agreements.
The Master Operating Agreement provides that all of the obligations of the Mill
Owners described in this paragraph survive the termination of the Master
Operating Agreement and any applicable Energy Services Agreement.

Claiming Demand and Reserving Demand upon a Mill Closure

Following a Mill Closure, the closing Mill Owner can preserve its rights to all
or any portion of its Demand by either (i) not terminating its Energy Services
Agreement or (ii) notifying Mobile Energy on or prior to the Mill Closure that
the closing Mill Owner will continue, for the period during which the Mill Owner
desires to preserve such rights, to pay Demand Charges with respect to the
Demand such Mill Owner desires to preserve.

    If the closing Mill Owner does not preserve its rights to its Demand, any
other Mill Owner may claim all or any portion of the closing Mill Owner's Demand
by notifying Mobile Energy and the other Mill Owners at any time during the
period in which the closing Mill Owner is paying Demand Charges, provided,
however, that a Mill Owner may do so only if Mobile Energy has no additional
Demand available to provide to the Mill Owner (because Aggregate Demand for the
applicable Processing Service is equal to the Maximum Capacity for that
Processing Service). The closing Mill Owner would stop paying Demand Charges on
any portion of its Demand so claimed by another Mill Owner. If, however, the
closing Mill Owner does preserve its rights to its Demand, and if the Aggregate
Demand for the applicable Processing Service is equal to its Maximum Capacity,
the closing Mill Owner may allow another Mill Owner to "buy" any or all of its
Demand, on terms agreed upon by such Mill Owners. Thus, if a Mill Owner plans to
close its Mill only temporarily, such Mill Owner can give another Mill Owner the
right to (and the obligation to pay for) the closing Mill's Demand for a limited
time period, while retaining the closing Mill's right to once again have access
to its Demand when it recommences production. In any event, if Aggregate Demand
is less than Maximum Capacity, any Mill Owner that wants to increase its Demand
is obligated to obtain its additional Demand from Mobile Energy; the non-closing
Mill Owners cannot absorb the Demand of the closing Mill Owner if Aggregate
Demand is less than Maximum Capacity.

    If neither the closing Mill Owner nor any other Mill Owner claims the
closing Mill Owner's Demand, the closing Mill Owner may reserve that Demand by
paying Mobile Energy a Demand Reservation Charge (equal to Mobile Energy's
shutdown, mothballing and startup costs reasonably incurred in order to reserve
such Demand for such Mill Owner). If the closing Mill Owner does not reserve its
Demand, any other Mill Owner may do so by paying Mobile Energy a Demand
Reservation Charge.

    If the closing Mill Owner also maintained Reserved Demand prior to the Mill
Closure, the closing Mill Owner can claim such Reserved Demand as Demand by
first converting it to Demand (in accordance with the provisions set forth in
the Master Operating Agreement) and then claiming it as described above. If the
closing Mill Owner does not convert its Reserved Demand into Demand and claim it
as Demand, the closing Mill Owner may continue to reserve its Reserved Demand by
continuing to pay its Demand Reservation Charge.

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<PAGE>

    However, if the closing Mill Owner stops paying its Demand Reservation
Charge (or otherwise terminates its Reserved Demand in accordance with the
Master Operating Agreement), then such Reserved Demand may be claimed by any
other Mill Owner as Demand. If no Mill Owner claims such Reserved Demand as
Demand, any such Mill Owner can assume the Reserved Demand by paying Mobile
Energy a Demand Reservation Charge.

    Mobile Energy may use the Processing Services related to any Reserved Demand
or sell such Processing Services to another Mill Owner or to any other Person on
an as-available, fully interruptible basis.

    Any Mill Owner which has purchased Reserved Demand from Mobile Energy may,
at any time, notify Mobile Energy that such Mill Owner wishes to convert such
Reserved Demand to Converted Demand. Upon receiving such written notice, Mobile
Energy is required to provide such Mill Owner, within a reasonable time, with an
estimate of the costs, if any, Mobile Energy expects it will incur, and the time
Mobile Energy expects it will take, to increase the Aggregate Demand by an
amount equal to the Converted Demand. If the Mill Owner directs Mobile Energy to
proceed, (x) Mobile Energy will be required to promptly prepare the Energy
Complex to provide Processing Services at levels commensurate with both the then
existing Demand and the Converted Demand and (y) the Mill Owner will be required
to pay Mobile Energy all the costs Mobile Energy reasonably incurs in connection
with the foregoing preparations (which costs (i) are required to be determined
assuming Mobile Energy used prudent operating standards in shutting down,
mothballing and maintaining the equipment in question, (ii) may be audited by
such Mill Owner and (iii) are not permitted to be greater than the estimate
provided to such Mill Owner by Mobile Energy). Mobile Energy is required to
notify the Mill Owners when the preparations described in the preceding sentence
are completed. Upon such notification by Mobile Energy, such Converted Demand
will be deemed to constitute Demand and the applicable Mill Owner will be
required to begin paying Demand Charges which reflect the addition of the
Converted Demand to Demand.

    The reservation of Demand could have a material adverse effect on Mobile
Energy.

Sale of Relinquished Demand to Third Parties

The Master Operating Agreement provides that if Demand is not claimed or
reserved by a Mill Owner following a Mill Closure or the termination of an
Energy Services Agreement by Mobile Energy due to a Mill Owner Event of Default,
the Demand of the closed Mill is deemed to be relinquished, and may be sold by
Mobile Energy to third parties. However, there can be no assurance that
alternative customers would be willing or able to enter into long- or short-term
energy service contracts with Mobile Energy following the termination of an
Energy Services Agreement due to a Mill Closure or a Mill Owner Event of
Default. 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 are not
anticipated to be readily available following the termination of an Energy
Services Agreement. In general, sales to other customers may require Mobile
Energy to significantly modify (i) the charges currently received by Mobile
Energy or (ii) 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 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 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
the approval of, the Alabama PSC. Any modifications of the Energy Complex or its
regulatory structure could increase Mobile Energy's projected capital and
operational expenditures. 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. Overall, failure by Mobile Energy to find a
suitable long-term customer to replace one of the Mills after a Mill Closure or
termination of an Energy Services Agreement could have a material adverse effect
on Mobile Energy's financial condition.

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Minimum Demand and Termination of Agreements by Mobile Energy

Mobile Energy has the right to terminate the Energy Services Agreements if (a)
Conversion Demand is less than Minimum Conversion Demand, (b) Aggregate Demand
for Steam Processing Services is less than Minimum Steam Processing Demand, (c)
Aggregate Demand for Power Processing Services is less than Minimum Power
Processing Demand, or (d) the Direct Lease (as hereinafter defined) or any
Easement Deed (as hereinafter defined) is terminated and, as a result, Mobile
Energy is unable to perform its obligations under the Energy Services Agreements
or the Master Operating Agreement. All obligations incurred by Mobile Energy
prior to the termination of the Energy Services Agreements survive the
termination, and must be timely performed or paid by Mobile Energy.

    Unlike the Mill Owners, Mobile Energy does not automatically have the right
to terminate an Energy Services Agreement upon a Mill Closure. A Mill Closure
would give Mobile Energy the right to terminate an Energy Services Agreement
only if that Mill Closure caused any Demand to fall below the applicable Minimum
Demand. For example, if the Pulp Mill closed, thereby decreasing Conversion
Demand to a level less than the Minimum Conversion Demand, Mobile Energy would
have the right to terminate all of the Energy Services Agreements. However, if,
for example, the Paper Mill closed, thereby decreasing the Aggregate Demand for
Steam Processing Services or the Aggregate Demand for Power Processing Services,
but the demands for Steam Processing Services and the demands for Power
Processing Services of the Pulp Mill and the Tissue Mill were collectively
greater than the corresponding Minimum Demands, Mobile Energy would not have the
right to terminate any of the Energy Services Agreements.

    Mobile Energy's right to terminate the Energy Services Agreements is not
tied to its ability to pay principal of and interest on its outstanding
indebtedness. Operating the Energy Complex at or above the Minimum Demand levels
will not necessarily generate sufficient revenues to enable Mobile Energy to pay
the principal of and interest on its outstanding indebtedness.

Additions to and Modifications of the Energy Complex and the Mills

Mobile Energy may, upon 60 days notice to the Mill Owners, change or modify the
Energy Complex (A) at any time, if such changes or modifications, in Mobile
Energy's judgment based on prudent operating standards, enhance, or (i) do not
decrease the Maximum Capacity of the Energy Complex, except any such decrease
that is required by a Change of Law, (ii) do not result in a reduction in the
Energy Complex's capacity to burn Solid Waste, on an annual basis, below the
average amount of Solid Waste burned by Scott in the 12 month period prior to
the Acquisition Closing Date (unless and to the extent that Mobile Energy agrees
to pay all reasonable costs incurred by the Pulp Mill Owner in connection with
the disposal of all Solid Waste produced by the Pulp Mill that cannot be burned
because of such changes) or (iii) are not reasonably expected to have a Mill
Material Adverse Effect with respect to any Mill or (B) as a result of the
creation of Reserved Demand, Relinquished Demand or Forfeited Demand. Each Mill
Owner has the right to approve any changes to or modifications of the Energy
Complex that are not in accordance with the preceding sentence. Each Mill Owner
may, upon 60 days prior written notice to Mobile Energy, change or modify its
Mill if such changes or modifications, in the Mill Owner's reasonable judgment
based on prudent operating standards, will not materially and adversely affect
the ability of any of the Mill Owners to comply with the terms of the Project
Agreements, except as specifically provided therein. The Mill Owners will not be
entitled to a pricing adjustment or modification of any Project Agreement (other
than with respect to technical specifications) as a result of such changes or
modifications.

    If the Mill's aggregate requirements for any of the Processing Services
exceed the capacity of the Energy Complex to provide such Processing Service
under the Energy Services Agreements, the Mill Owners may request that Mobile
Energy negotiate (which negotiation is required to be conducted in good faith by
each of the parties thereto) to determine whether an expansion of the Energy
Complex would be mutually advantageous. This obligation to negotiate does not
automatically entitle Mobile Energy to provide the Mill Owners with Processing
Services in excess of the applicable Maximum Capacity. If the Mill Owners and
Mobile Energy fail to agree to any such expansion of the Energy Complex within
60 days of receipt of such request, the Mill Owners will have the right to build
new facilities or to contract with another person in order to satisfy the
portion of their requirements for Processing Services which Mobile Energy is
unable to provide.

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Transfer and Assignment

Each Mill Owner has the right to transfer its Mill (i) without the consent of
Mobile Energy (A) if such Mill Owner continues to be responsible for its
obligations under the Projects Agreements or (B) in connection with a merger,
consolidation or sale of substantially all of the Mill Owner's assets or the
sale, lease, or the transfer of 50% or more of the ownership of the Mill, if the
transferee or an affiliate thereof has substantial expertise in operating and
managing facilities similar to the Mill and there is reasonable basis to
conclude that the operations at the Mill will be conducted in accordance with
specified prudent operating standards or (ii) with the consent of Mobile Energy,
which may not be unreasonably withheld (each, a "Mill Permitted Transfer"). Any
person to whom a Mill is transferred in conjunction with a Mill Permitted
Transfer is required to become a party to various applicable Project Agreements
by assuming the obligations of the Mill Owner whose Mill has been transferred.
Any Mill Owner transferring its Mill would be released from its obligations
under the Project Agreements (except in the case of a Mill Permitted Transfer
pursuant to clause (A) above, in respect of which no such release would be
contemplated) only upon the assumption of such obligations by the person to whom
its Mill is transferred. The Pulp Mill Owner cannot transfer or otherwise
dispose of its interest in the Process Water Plant and the Waste Water Treatment
Plant, except as part of a Mill Permitted Transfer of all or substantially all
of the Pulp Mill, without the unanimous written consent of Mobile Energy and the
other Mill Owners.

    Mobile Energy may (A) upon prior written notice to, but without the prior
consent of, the Mill Owners, (i) transfer all of the Energy Complex or permit to
be transferred any interest in Mobile Energy to a direct or indirect wholly
owned subsidiary of Southern, (ii) subject to certain conditions set forth in
the Master Operating Agreement, transfer portions of the Energy Complex or
permit to be transferred portions of Mobile Energy, so as to enable the Energy
Complex to be a Qualifying Facility under PURPA, (iii) assign, pledge, mortgage
or grant security interests in the Energy Complex and Mobile Energy's interests
in the Energy Complex, and permit to be pledged any ownership interest in Mobile
Energy, to a Lender (provided that the Lender executes a consent substantially
in the form attached to the Master Operating Agreement) and (iv) transfer
portions (by way of undivided interests) of the Energy Complex or permit to be
transferred portions of Mobile Energy (which must in each case be less than 10%)
(so long as Southern directly or indirectly retains ownership of at least 50% of
Mobile Energy and Mobile Energy remains in control of the management of the
Energy Complex) and (B) transfer all or substantially all of the Energy Complex,
or permit to be transferred all or a portion of the ownership interest in Mobile
Energy, with the prior written consent of the Mill Owners, which consent may not
be unreasonably withheld (each such transfer, a "Mobile Energy Permitted
Transfer"). All transfers pursuant to clause (A) must be to persons who (x) are
not direct competitors of Kimberly-Clark Tissue or the Mill Owners (or
Affiliates of such competitors), (y) agree to be bound by the Confidentiality
Agreement and (z) by making such purchase, will not implicate or otherwise
conflict with the Alabama Territorial Law ("Qualified Purchasers"). If Southern
Energy and/or Holdings elected to sell any of its or their interests in Mobile
Energy in order to qualify the Energy Complex as a Qualifying Facility under
PURPA, then, pursuant to PURPA and the applicable regulations and restrictions
thereunder, Southern may be required to forego some or all of its indirect
control of the management and operations of Mobile Energy, and such control (or
portion thereof) so foregone by Southern could become vested in the person(s) or
entity(ies) acquiring such interests in Mobile Energy. As such, Southern may
cease to control the management and operations of Mobile Energy and Mobile
Energy may, in the future, be controlled and partially owned by a third party
that is not affiliated with Southern. There can be no assurance that any such
third party would control, or participate in the control of, the management and
operations of Mobile Energy as effectively as companies affiliated with
Southern.

    The Master Operating Agreement provides that upon a Mill Permitted Transfer
or a Mobile Energy Permitted Transfer, the transferee must assume the
obligations of the transferor under the applicable Project Agreements. Upon the
assumption in writing by the transferee of the transferor's rights and
obligations under the Project Agreements (or the portion of the transferor's
rights and obligations corresponding to the portion of its Mill or Energy
Complex that it has assigned, sold or otherwise transferred), the transferor
will be released of its obligations under the Project Agreements, to the extent
assigned and assumed, arising on or after the date of assignment and assumption.

Dispute Resolution

All disputes arising under any of the Operative Documents will be referred
initially to the Site Operating Committee. If the Site Operating Committee is

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<PAGE>

unable to resolve the dispute within 15 days, the senior management of the
applicable parties will have 15 days to resolve the dispute. All disputes that
the parties to the dispute agree are essentially technical in nature ("Technical
Disputes") that cannot be resolved by the Site Operating Committee or senior
management will be referred to a technical expert, who will be selected by the
parties from a list appended to the Master Operating Agreement, and all other
disputes that cannot be resolved by the Site Operating Committee or senior
management will be resolved by an arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association.

Mill Owner Maintenance Reserve Account

Pursuant to the Master Operating Agreement, Mobile Energy is required to provide
for a "Mill Owner Maintenance Reserve Account" with a balance not to exceed
$2,000,000. Mobile Energy may use the funds in such account for the payment of
debt service or operations and maintenance costs and expenses, and (as discussed
above) the Mill Owners may use such funds if they are exercising the Mill Owner
Step-In Rights. The Mill Owner Maintenance Reserve Account cannot be subject to
any lien or encumbrance pursuant to the Financing Documents. Kimberly-Clark
Tissue and S.D. Warren have agreed that Mobile Energy may satisfy all of its
obligations under the Master Operating Agreement with respect to the Mill Owner
Maintenance Reserve Account by causing Southern to execute an agreement in favor
of Mobile Energy, Kimberly-Clark Tissue and the Mill Owners (the "Mill Owner
Maintenance Reserve Account Agreement") that would require Southern to deposit
up to $2,000,000 in the aggregate in the Mill Owner Maintenance Reserve Account
in the circumstances described in such agreement.

Operator

The Energy Services Agreements provide that Mobile Energy may at any time
replace Southern Energy as the operator of the Energy Complex with any person
who is a wholly owned, direct or indirect subsidiary of Southern (the "Southern
Energy Operator"). Mobile Energy may not replace Southern Energy with any person
other than a Southern Energy Operator without the prior written consent of the
Mill Owners, which consent is not permitted to be unreasonably withheld or
delayed. The Energy Services Agreements provide that if the proposed replacement
operator is reasonably qualified and experienced in the operation of facilities
similar to the Energy Complex, there is to be a presumption that the Mill
Owners' consent to the proposed replacement operator should not be withheld.

Miscellaneous Provisions

The Master Operating Agreement provides that Mobile Energy and the Mill Owners
will only be liable to the other parties for direct damages as a result of a
breach or default by such party under any Operative Document. In no event will
Mobile Energy or the Mill Owners be liable for claims of non-party customers,
cost of money, loss of profits, loss of use of capital or revenue or any other
incidental, special or consequential loss or damage, or for punitive or
exemplary damages. However, any party may be liable to any other party for third
party claims (other than the claims of non-party customers) against such other
party.

    Each of the Mill Owners and Mobile Energy has agreed to indemnify the others
(and certain related parties) from losses incurred by an indemnified party due
to or resulting from (i) the breach by the applicable indemnifying party of any
of its covenants under any of the Project Agreements (in the absence of any
excuse therefor as set forth in the applicable Project Agreement) or (ii) the
negligence or willful misconduct of the applicable indemnifying party.

    Until the Energy Services Agreements have been terminated, Mobile Energy may
not, without the prior written consent of the Mill Owners (which consent cannot
be unreasonably withheld), change or expand the nature of its business beyond
that which is contemplated by the Project Agreements.

    The Energy Services Agreements and the Master Operating Agreement state that
they are governed by the laws of the State of New York.

                      Operations and Maintenance Agreement

Mobile Energy and Southern Energy are parties to the O&M Agreement pursuant to
which Southern Energy is obligated to assume responsibility for the Operation
and Maintenance of the Energy Complex and provide certain related administrative
and management services to Mobile Energy. On the Acquisition Closing Date,
Southern Energy hired approximately 119 employees of Scott who were previously
dedicated to the operations of the Energy Complex (the "Energy Complex
Employees"). The O&M Agreement requires Southern Energy to operate and maintain


                                      I-39
<PAGE>

the Energy Complex using the Energy Complex Employees and such additional
employees of Southern Energy or of third-party subcontractors as may be required
from time to time.

Term

The term of the O&M Agreement commenced on the Acquisition Closing Date and will
terminate on December 16, 2019, unless earlier terminated in accordance with its
terms. If the Energy Services Agreements are extended, Mobile Energy and
Southern Energy are obligated to endeavor to extend the term of the O&M
Agreement for a period equal to such extension period under the Energy Services
Agreements. See, however, "-Termination."

Termination

Either party may terminate the O&M Agreement upon 30 days written notice in the
event of a material breach of any material provision, unless the breach is cured
within 30 days of receipt of such notice; however, the defaulting party will
have up to an additional 90 days to cure such default if the defaulting party
diligently pursues a cure, the breach is not reasonably susceptible to
correction within 30 days, and the non-defaulting party is not, as a result of
the continuation of the breach, in breach of a material provision of any other
agreement. Either party may also terminate the agreement (i) following total
casualty of the Energy Complex, (ii) following a Force Majeure Event that
continues for more than 12 months, or (iii) for any other reason, with or
without cause, upon (in the case of termination by Southern Energy) 180 days
written notice or upon (in the case of termination by Mobile Energy) 30 days
written notice.

Obligations of Southern Energy

Southern Energy is responsible for operating and maintaining the Energy Complex
at Mobile Energy's expense in accordance with the requirements of the Energy
Services Agreements, the Master Operating Agreement, specified prudent operating
standards, operating manuals provided by Mobile Energy, all applicable
governmental requirements and the annual operating plan for the Energy Complex.
The operating and maintenance services include procuring all supplies, parts and
equipment on behalf of Mobile Energy, performing all routine maintenance
activities in connection with outages of the Energy Complex, making capital
improvements, handling and disposing of wastes (to the extent not covered under
agreements between Mobile Energy and other parties), and coordinating operations
of the Energy Complex with Alabama Power and the Mill Owners with respect to the
scheduling of back-up and supplemental electric service and Scheduled Outages.

    Southern Energy also is obligated to provide various administrative and
management services to Mobile Energy, including administration of all Project
Agreements to which Mobile Energy is a party (to the extent that they relate to
the Operation and Maintenance of the Energy Complex), collection of payments to
Mobile Energy under the Energy Services Agreements, administration of Mobile
Energy's bank accounts and payment of Mobile Energy's expenses from such
accounts, maintaining Mobile Energy's books and records, assisting Mobile Energy
in obtaining and renewing all required permits and licenses, preparation of
regulatory, financial and other reports required of Mobile Energy, and procuring
and maintaining on Mobile Energy's behalf the insurance coverages required under
the Project Agreements and Financing Documents. In addition, Southern Energy has
designated an employee to serve as Mobile Energy's representative on the Site
Operating Committee.

Obligations of Mobile Energy

Mobile Energy is responsible for providing, at its expense, all supplies, parts,
stores, inventories (including, without limitation, black liquor, biomass,
supplemental fuel, water, lubricants, and chemicals) necessary in connection
with the Operation and Maintenance of the Energy Complex. Mobile Energy also is
required to provide to Southern Energy and its subcontractors access to and use
of facilities, equipment, vehicles, office equipment, warehouses, and employee
amenities (parking, lavatories, dining facilities, etc.) necessary for the
Operation and Maintenance of the Energy Complex.

Compensation of Southern Energy; Annual Budget

The services to be performed by Southern Energy under the O&M Agreement are
provided on a full cost reimbursement basis in accordance with the rules of the
SEC under PUHCA. Mobile Energy is obligated to pay, or reimburse Southern Energy
for, all Operation and Maintenance costs incurred in connection with Southern
Energy's performance, including all labor costs, and all other expenses that are
included in the annual operating plan and budget (the "Operating Plan and
Budget") prepared by Southern Energy, as it may be amended from time to time,

                                      I-40
<PAGE>

costs and expenses of additional services that may be requested by Mobile
Energy, and legal and other costs incurred by Southern Energy on Mobile Energy's
behalf and at Mobile Energy's request in connection with enforcing the Project
Agreements and in complying with applicable laws.

    Labor costs include the direct payroll costs associated with the Energy
Complex Employees, including wages, salaries, direct payroll overheads such as
pension and employee benefits, payroll taxes, bonuses, insurance, and holiday,
sick leave and vacation accruals; and the direct payroll costs of Southern
Energy's employees other than the Energy Complex Employees, as identified
through a work order system, including an allocable share of such employees'
direct payroll overhead costs, plus an allocable share of Southern Energy's
general and administrative expenses.

    Southern Energy is obligated to prepare and submit for Mobile Energy's
approval at least 150 days prior to the start of each contract year a proposed
form of Operating Plan and Budget, which Mobile Energy is required to approve or
disapprove within 60 days after submission. The Operating Plan and Budget is
required to include, among other cost items, projected labor costs and other
costs of operation and routine and scheduled major maintenance of the Energy
Complex, projections of liquor, steam and electricity production, and fuel
consumption. If Mobile Energy objects to Southern Energy's proposed Operating
Plan and Budget, and such objections cannot be resolved through discussions,
then an interim operating budget will go into effect for the following contract
year which will be equal to the prior year's operating budget, except that the
labor cost, operating expense and maintenance expense categories of the prior
year's budget will be escalated in accordance with the U.S. Producers Price
Index, and any expenses incurred in connection with scheduled outages and major
maintenance will be reimbursed in full. Mobile Energy also is obligated to pay
or reimburse Southern Energy in full for all additional operating costs
attributable to force majeure events, the execution of new energy services
agreements or any amendment to the existing Energy Services Agreements, among
other events.

Force Majeure

Force majeure events that excuse performance by either party to the O&M
Agreement include any circumstance beyond the reasonable control of a party,
including but not limited to acts of God, unusually severe weather conditions,
accident, fire, strikes, war, riots, actions of governmental authorities, and
change of law. As to Southern Energy, force majeure does not include any labor
dispute at the Energy Complex or involving the Energy Complex Employees. The
party claiming force majeure is required to take steps to mitigate or limit
damage to the other party.

Miscellaneous Provisions

Southern Energy is required to obtain automobile liability insurance,
comprehensive general liability insurance and umbrella liability insurance, each
of which must name Mobile Energy as the named insured, and workers' compensation
insurance. Mobile Energy is required to obtain and maintain workers'
compensation insurance, automobile liability insurance and all risk physical
damage/business interruption insurance.

    Southern Energy's sole liability for non-conforming services shall be to
correct such non-conforming services. Neither Southern Energy nor Mobile Energy
shall be liable to the other party for any claim for any special, incidental, or
consequential loss or damage of any nature.

    Mobile Energy is obligated to indemnify, save harmless and defend Southern
Energy and its officers, directors, employees, agents and affiliates from and
against all losses arising out of or related to the acts or omissions of Mobile
Energy or to the services to be performed by Southern Energy, but only to the
extent not caused by any indemnified party's gross negligence or willful
misconduct.

    The O&M Agreement states that it is governed by the laws of the State of
Georgia.

                                  SCS Agreement

Services

Mobile Energy and SCS are party to an agreement (including any amendments
thereto the "SCS Agreement"), pursuant to which SCS has agreed, as and to the
extent required by Mobile Energy, to keep itself and its personnel available and
competent to perform for Mobile Energy, or to advise and assist Mobile Energy
with respect to, (i) general administrative and advisory services, (ii) general
engineering, including system production and transmission studies, preparation
and analysis of electrical apparatus specifications, distribution studies and


                                      I-41

<PAGE>

standards, civil engineering and hydraulic studies, fuel supply studies and
operations analyses, (iii) design engineering, (iv) purchasing, including the
coordination of group purchasing, (v) accounting and statistical services,
including appearances before regulatory commissions, internal audits and
preparation and analyses of financial and operating reports, (vi) finance and
treasury services, including securities matters, banking matters and investment
of surplus funds, (vii) tax matters, including preparation of tax returns,
(viii) insurance and pension matters, (ix) corporate matters, including
maintenance of corporate records and arrangements for stockholders' meetings,
(x) rate analyses, (xi) construction and operating budgets and procedures, (xii)
business promotion and public relations, (xiii) employee relations, including
recruitment, placement, training, compensation, safety, labor relations and
health, welfare and employee benefits and (xiv) other matters with respect to
Mobile Energy's business and operations that Mobile Energy may request and SCS
may be able to perform.

Charges

The SCS Agreement provides that SCS will be reimbursed by Mobile Energy for the
costs SCS incurs in providing any of the foregoing services to Mobile Energy,
including (i) direct costs incurred by SCS in the performance of a particular
transaction for Mobile Energy and (ii) costs incurred by SCS that cannot be
allocated directly to one client or transaction, which costs shall be
distributed in a fair and equitable manner as set forth in SCS's cost allocation
procedures.

Term

The SCS Agreement became effective on July 14, 1995 and will remain in effect
until terminated by mutual agreement of the parties, except that SCS has the
right to terminate the SCS Agreement upon six months notice at any time
following the transfer of the Energy Complex.

                                  Direct Lease

Mobile Energy and Kimberly-Clark Tissue are party to a lease  (including  any
amendments thereto, the "Direct Lease") covering land owned by
Kimberly-Clark Tissue located in Mobile County,  Alabama on which Mobile
Energy owns, uses, operates, repairs and maintains the Energy Complex and
any additions or modifications thereto.

Leased Premises

The Direct Lease covers two lots ("Lot 7" and "Lot 9") comprising approximately
6.9 acres (the "Leased Premises") within the property owned by Kimberly-Clark
Tissue (the "Real Property"). The Direct Lease is a ground lease relating solely
to the land comprising the Leased Premises. In connection with obtaining
financing through the Industrial Development Board of the City of Mobile,
Alabama (the "IDB") for certain components of the Energy Complex located on Lot
9, Kimberly-Clark Tissue previously leased Lot 9 to the IDB pursuant to a lease
(the "Scott-IDB Lease") and the IDB subleased Lot 9 back to Kimberly-Clark
Tissue pursuant to a sublease (the "IDB-Scott Sublease"). Concurrently with the
Acquisition, Scott assigned its rights and obligations under the IDB-Scott
Sublease arising after the Acquisition Closing Date to Holdings, and Holdings
subsequently assigned such rights and obligations to Mobile Energy. As such,
Mobile Energy currently is subleasing Lot 9 from the IDB pursuant to the
IDB-Scott Sublease. The Direct Lease and the IDB-Scott Sublease exist and
operate concurrently. If, and to the extent that, Mobile Energy's obligations
under the Direct Lease with respect to Lot 9 conflict or are inconsistent with
Mobile Energy's obligations under the IDB-Scott Sublease, then the Direct Lease
does not apply to Lot 9 with respect to such obligations.

Term

The term of the Direct Lease commenced on the Acquisition Closing Date, and will
expire at 11:59 p.m. on December 15, 2019. Provided that all of the Energy
Services Agreements are extended and renewed pursuant to such agreements, the
Direct Lease will be automatically extended and renewed for a single five year
term beginning on December 16, 2019 and expiring at 11:59 p.m. on December 15,
2024. Mobile Energy and Kimberly-Clark Tissue may, but are not required to,
otherwise agree to extend the term of the Direct Lease.

Rent

Base rent during the term of the Direct Lease is $1 per year. In addition,
Mobile Energy is required to pay all expenses related to or arising from the
Leased Premises or Mobile Energy's activities thereon, except as expressly
provided otherwise in the Direct Lease. Subject to the applicable provisions of
the Operative Documents, Mobile Energy is required to pay all utility charges
related to Mobile Energy's use of the Leased Premises and the expenses of
installation, maintenance, use and service connected with such utilities. Mobile
Energy is also required to pay all real estate taxes and assessments

                                      I-42

<PAGE>

("Impositions") related to the Direct Lease, the Leased Premises or the
improvements located thereon. Should Mobile Energy fail to pay any Imposition
when due and payable, and if such failure continues for 14 days after notice
from Kimberly-Clark Tissue, Kimberly-Clark Tissue may pay the Imposition and the
amount paid by Kimberly-Clark Tissue will be deemed additional rent payable by
Mobile Energy within five days of Kimberly-Clark Tissue notifying Mobile Energy
of Kimberly-Clark Tissue's payment of such Impositions. Mobile Energy will not
be responsible for taxes or imposts on Kimberly-Clark Tissue's income, including
the base rent, nor for Impositions attributable to periods prior to the
commencement or subsequent to the expiration or termination of the Direct Lease.

Purchase Options

Mobile Energy Options

Mobile Energy has an option to purchase the Leased Premises for a purchase price
of $10 at various times. One such option held by Mobile Energy (the "Transfer
Option") becomes effective if Kimberly-Clark Tissue elects, during the term of
the Direct Lease, to transfer its interest in the Leased Premises to a third
party other than another then Mill Owner. In such event, Kimberly-Clark Tissue
is obligated to first give Mobile Energy three months notice of the proposed
transfer. Mobile Energy will then have 45 days within which to exercise its
Transfer Option to purchase the Leased Premises from Kimberly-Clark Tissue. In
addition, Mobile Energy has an option to purchase the Leased Premises at the end
of the Lease term for a purchase price of $10 (the "End of Term Option"). The
End of Term Option is exercisable (a) if not all of the Energy Services
Agreements have been renewed and extended on or before September 16, 2014, by
notice from Mobile Energy to Kimberly-Clark Tissue delivered between June 16,
2014 and October 16, 2014 (the "Earlier Option Exercise Period"); (b) if all of
the Energy Services Agreements timely have been renewed and extended, by notice
from Mobile Energy to Kimberly-Clark Tissue delivered between June 15, 2019 and
October 15, 2019 (the "Later Option Exercise Period"); or (c) if the Direct
Lease is terminated prior to the expiration of the Earlier Option Exercise
Period or the Later Option Exercise Period, as applicable, and Mobile Energy
shall not have exercised its End of Term Option, by notice from Mobile Energy to
Kimberly-Clark Tissue delivered within 30 days after the date on which the
Direct Lease shall have terminated.

    If Mobile Energy timely and properly exercises any of its options to
purchase the Leased Premises, and provided that, in the case of Mobile Energy's
exercise of its End of Term Option, Kimberly-Clark Tissue does not void such
exercise by exercising and consummating Kimberly-Clark Tissue's purchase option
(described below), then Kimberly-Clark Tissue is obligated to sell the Leased
Premises to Mobile Energy for $10. The closing of the purchase, in the case of
Mobile Energy's exercise of its Transfer Option, would occur on or before the
date on which Kimberly-Clark Tissue's proposed transfer to the third party
closes or would have closed. The closing of the purchase, in the case of Mobile
Energy's exercise of its End of Term Option, would occur on the last day of the
Direct Lease term unless the term shall have terminated prior to Mobile Energy's
exercise of its End of Term Option, in which event the closing would occur
within 30 days of such exercise of the End of Term Option.

Kimberly-Clark Tissue Option

As described below, Kimberly-Clark Tissue has an option to repurchase the Energy
Complex from Mobile Energy at the end of the term of the Direct Lease (the
"Repurchase Option"), which may occur at different points in time.
Kimberly-Clark Tissue may give Mobile Energy notice of its intention to exercise
the Repurchase Option: (a) if the Direct Lease is not automatically renewed and
extended, between July 16, 2014 and November 16, 2014 (the "Earlier Repurchase
Option Period"); (b) if the Direct Lease is automatically renewed and extended,
between July 15, 2019 and November 15, 2019 (the "Later Repurchase Option
Period"); or (c) if the Direct Lease is terminated prior to the expiration of
the Earlier Repurchase Option Period or the Later Repurchase Option Period, as
applicable, and Kimberly-Clark Tissue shall not have exercised its Repurchase
Option, within 30 days after the date on which the Direct Lease shall have
terminated. If Kimberly-Clark Tissue were to exercise the Repurchase Option, it
would not have the right or obligation to assume any debt of Mobile Energy;
however, pursuant to the Consents to Assignment relating to the Direct Lease and
the Supplementary Lease (as hereinafter defined), Kimberly-Clark Tissue has
agreed that the Senior Secured Parties have no obligation to release the lien of
the Financing Documents until all obligations secured thereby have been repaid
in full.

                                      I-43

<PAGE>

    If Kimberly-Clark Tissue shall timely deliver its repurchase notice to
Mobile Energy, then (a) if Mobile Energy previously shall have exercised its End
of Term Option, such exercise shall be void and of no further force and effect,
unless Kimberly-Clark Tissue fails timely to pay the purchase price for the
Energy Complex, and (b) (i) by June 15, 2019, if the Direct Lease shall expire
by its terms on December 15, 2019, or (ii) by June 15, 2024, if the Direct Lease
shall expire by its terms on December 15, 2024, or (iii) otherwise, within 10
days of Mobile Energy's receipt of Kimberly-Clark Tissue's repurchase notice,
Kimberly-Clark Tissue and Mobile Energy will jointly select an independent real
estate appraiser to determine the fair market value of the Energy Complex. If
Kimberly-Clark Tissue and Mobile Energy fail timely to select an appraiser, an
appraiser will be appointed pursuant to the arbitration provisions of the Master
Operating Agreement.

    The appraiser, within 30 days of its selection or appointment, must give
written notice to Mobile Energy and to Kimberly-Clark Tissue of the appraiser's
determination of the price that a ready and willing buyer would pay, as of the
date of the appraiser's selection or appointment, for property comparable to the
Energy Complex if the Energy Complex were offered for sale on the open market,
taking into account the location of the Energy Complex at the Leased Premises
and the purposes for which the Energy Complex may be used, including, without
limitation, in conjunction with the Project Agreements and the services and fees
provided and obtained thereunder, to the extent that Project Agreements actually
or effectively (with respect to documents under which Mobile Energy provides
services to Kimberly-Clark Tissue which Kimberly-Clark Tissue could, subsequent
to the repurchase, supply to itself) would continue in effect subsequent to the
repurchase. The appraiser's determination of the fair market value of the Energy
Complex will be the purchase price to be paid by Kimberly-Clark Tissue to Mobile
Energy, provided that (a) if the Direct Lease terminates on December 15, 2019,
the determined value cannot exceed $69,080,000 or be less than $50,240,000, and
(b) if the Direct Lease terminates between December 15, 2019 and December 15,
2024, the determined value cannot exceed $30,000,000 or be less than
$22,000,000.

    Kimberly-Clark Tissue is obligated to pay the purchase price for the Energy
Complex to Mobile Energy by wire transfer on or before the date that is the
later of the last day of the Direct Lease term and 5 days after the appraiser
delivers its determination of the fair market value for the Energy Complex. If
Kimberly-Clark Tissue fails timely to pay the purchase price, and if Mobile
Energy previously exercised its End of Term Option, then Mobile Energy's
exercise of its End of Term Option again becomes effective and Mobile Energy may
purchase the Leased Premises from Kimberly-Clark Tissue for $10.

Early Termination of Direct Lease

The Direct Lease may be terminated (1) by either party as a result of the
occurrence of an event of default by the other party under the Direct Lease (a
"Lease Event of Default"), (2) automatically as a result of the total and
permanent taking of the Leased Premises in Condemnation (as hereinafter
defined), (3) by Mobile Energy as the result of a partial taking of the Leased
Premises in Condemnation that has a Mobile Energy Material Adverse Effect, or
(4) by the mutual agreement of Mobile Energy and Kimberly-Clark Tissue, and not
by any other cause or for any other reason whatsoever.

Default

The following acts or omissions by either party constitute Lease Events of
Default: (i) failure to pay any sum required to be paid under the Direct Lease,
which failure continues for 10 days after written notice has been delivered to
the nonpaying party (a "Monetary Default"); and (ii) failure to comply in any
material respect with any material term, provision or covenant of the Direct
Lease, other than the payment of sums due under the Direct Lease, which failure
continues for 30 days after written notice has been delivered to the
nonperforming party, or, if such failure cannot reasonably be cured within 30
days, if the nonperforming party shall not have begun to cure the failure within
such 30-day period or shall not thereafter proceed with all reasonable due
diligence and good faith to cure such failure within a reasonable longer period
necessary to cure such failure (a "Non-Monetary Default"); provided that if a
Non-Monetary Default on the part of Mobile Energy occurs through no act or
omission of Mobile Energy and such Non-Monetary Default is not reasonably
curable, so long as such Non-Monetary Default does not have a Mill Material
Adverse Effect with respect to Kimberly-Clark Tissue, such Non-Monetary Default
shall not be deemed a Lease Event of Default.

    Upon the occurrence and during the continuation of any Lease Event of
Default, the non-defaulting party may: (a) terminate the Direct Lease, (b)



                                      I-44
<PAGE>

enforce its rights under the Direct Lease without reentering or resuming
possession of the Leased Premises and without terminating the Direct Lease, (c)
perform any obligation or make any payment required to cure the Lease Event of
Default after at least 10 days' notice (except in case of emergency when action
is required to protect lives or property) to the defaulting party of the
nondefaulting party's intent to pursue this remedy if the defaulting party does
not cure the Lease Event of Default within such time period, and (d) exercise
any other rights it has at law or in equity.

    In addition to the foregoing, subject to the rights of the Leasehold
Mortgagee(s) (as hereinafter defined) under the Direct Lease or pursuant to the
Estoppel and Consent attached as Exhibit D to the Direct Lease (the "Estoppel
and Consent"), either party may terminate the Direct Lease, effective
immediately, if a bankruptcy event occurs with respect to the other party.

Condemnation

If the Leased Premises are totally and permanently taken by (i) the exercise of
any governmental power, whether by legal proceedings or otherwise, by any public
or quasi public authority, or private corporation or individual having the power
of condemnation or (ii) the voluntary sale or transfer by Kimberly-Clark Tissue
or Mobile Energy to any condemnor, either under threat of condemnation or while
legal proceedings for condemnation are pending ("Condemnation"), the Direct
Lease will terminate on the effective date of the Condemnation (the "Date of
Taking"). If a portion of the Leased Premises is taken by Condemnation and such
partial Condemnation has a Mobile Energy Material Adverse Effect, Mobile Energy
may elect to terminate the Direct Lease upon 30 days notice to Kimberly-Clark
Tissue delivered to Kimberly-Clark Tissue not more than 30 days after the Date
of Taking, which termination will be effective on the later of (i) the Date of
Taking and (ii) 30 days after delivery of such termination notice to
Kimberly-Clark Tissue. In either case, if the Direct Lease terminates, Mobile
Energy will be entitled to receive that portion of any award attributable to the
value of the Energy Complex and its interest in the Direct Lease and the
Leasehold Premises ("Leasehold Interest"), each to the extent taken; and
Kimberly-Clark Tissue will be entitled to receive that part of any award
attributable to the value of the Leased Premises, exclusive of the Leasehold
Interest, to the extent taken.

    If a portion of the Leased Premises are taken by Condemnation and such
partial Condemnation does not have a Mobile Energy Material Adverse Effect, or
if Mobile Energy does not elect to terminate the Direct Lease despite such
Condemnation having a Mobile Energy Material Adverse Effect, the Direct Lease
will remain in effect, and Mobile Energy, at its cost, is obligated to restore
the Energy Complex as necessary, provided that Mobile Energy will not be
required to expend an amount exceeding the amount of the entire award paid in
compensation for such taking (all of which award will be paid to Mobile Energy).

    If all or any portion of the Leased Premises are taken by any public
authority for a period of six months or less, such taking will not constitute a
Condemnation, and during such temporary taking, all of the provisions of the
Direct Lease will remain in full force and effect.

Assignment and Subletting

Mobile Energy, without the consent of Kimberly-Clark Tissue, may encumber its
Leasehold Interest, or any portion thereof, with one or more mortgages (each, a
"Leasehold Mortgage") for the benefit of lenders providing financing to Mobile
Energy (each such lender, a "Leasehold Mortgagee"). Kimberly-Clark Tissue has
agreed to permit Mobile Energy to mortgage the Leasehold Interest pursuant to
the Financing Documents, and Kimberly-Clark Tissue has entered into the Estoppel
and Consent with the Collateral Agent under the Financing Documents. Mobile
Energy also may transfer its Leasehold Interest, or a portion thereof, in
connection with a Mobile Energy Permitted Transfer. Otherwise, Mobile Energy may
not (i) sublet, assign, pledge or otherwise transfer the Leased Premises without
the prior written consent of Kimberly-Clark Tissue, which consent cannot be
unreasonably withheld or (ii) assign or transfer a portion of its Leasehold
Interest.

    Kimberly-Clark Tissue, in conjunction with any Mill Permitted Transfer, may
assign, sell or otherwise transfer all or a corresponding portion of its
interests in the Direct Lease and/or the Leased Premises without the prior
written consent of Mobile Energy. Otherwise, Kimberly-Clark Tissue may assign,
sell or otherwise transfer all or a portion of its interests in the Direct Lease
and/or the Leased Premises with the prior written consent of Mobile Energy,
which consent cannot be unreasonably withheld or delayed.

    If either party effects a permitted assignment or other transfer of its
interests under the Direct Lease (other than a transfer for security purposes
unless and until such security is foreclosed upon), the permitted assignee or


                                      I-45
<PAGE>


transferee shall expressly assume, in documentation reasonably satisfactory to
the non-transferring party, all existing and future obligations of the
transferring party under the Direct Lease with respect to the transferred
interests, and the transferring party will be relieved of all further liability
under the Direct Lease with respect to the transferred interests from and after
the date of the transfer.

Leasehold Mortgages

The Direct Lease provides that no Leasehold Mortgagee will be deemed to be an
assignee or transferee or mortgagee in possession of the Leasehold Interest
unless, and only for so long as, the Leasehold Mortgagee has obtained possession
of the Leased Premises as a mortgagee or has acquired the Leasehold Interest by
foreclosure or a deed or assignment in lieu thereof ("Control of the Premises").
No Leasehold Mortgagee or purchaser at a foreclosure sale held pursuant to a
Leasehold Mortgage will be liable under the Direct Lease unless and until it
becomes, and only for so long as it remains, the owner of the Leasehold
Interest.

    If any existing or prospective Leasehold Mortgagee requires any modification
to the Direct Lease, which modification does not materially adversely affect any
of Kimberly-Clark Tissue's rights or obligations thereunder, or confirmation of
the rights of Leasehold Mortgagees under the Direct Lease, at Mobile Energy's
request, Kimberly-Clark Tissue is obligated to execute and deliver to Mobile
Energy written instruments in recordable form effecting such modifications or
confirming such rights.

    The Direct Lease provides that upon a Leasehold Mortgagee providing
Kimberly-Clark Tissue with written notice of such Leasehold Mortgagee's name and
address, then as to such Leasehold Mortgagee:

           (i) No cancellation, termination, surrender or modification of the
       Direct Lease will bind the Leasehold Mortgagee or affect the lien of its
       Leasehold Mortgage without the prior written consent of the Leasehold
       Mortgagee;

           (ii) No notice to Mobile Energy will be effective or will trigger any
       Lease Event of Default unless and until a copy of such notice has been
       given to the Leasehold Mortgagee;

           (iii) The Leasehold Mortgagee may perform any obligation of Mobile
       Energy under the Direct Lease and remedy any default, which performance
       Kimberly-Clark Tissue is obligated to accept as if performed by Mobile
       Energy;

           (iv) Upon the occurrence of a Lease Event of Default on the part of
       Mobile Energy, Kimberly-Clark Tissue is obligated to give the Leasehold
       Mortgagee additional written notice of the Lease Event of Default and
       additional time to cure such Lease Event of Default (including time to
       obtain Control of the Premises if necessary to commence or complete such
       cure) ("Mortgagee's Cure Rights"), and if the Lease Event of Default is
       properly cured (or the time for Leasehold Mortgagee to exercise
       Mortgagee's Cure Rights has not expired), the Direct Lease will continue
       in effect as if no default occurred and Kimberly-Clark Tissue may not
       exercise any of its rights or remedies under the Direct Lease by reason
       of such Lease Event of Default;

           (v) If a Leasehold Mortgagee (or its nominee or a purchaser at a
       foreclosure sale) acquires Control of the Premises and cures all Monetary
       Defaults and diligently proceeds to exercise Mortgagee's Cure Rights,
       Kimberly-Clark Tissue is obligated to recognize the Leasehold Mortgagee
       (or its nominee or assignee or the purchaser) as the lessee under the
       Direct Lease; and

           (vi) If the Direct Lease terminates for any reason prior to the
       stated expiration date, Kimberly-Clark Tissue is obligated to give notice
       to the Leasehold Mortgagee of such termination within 30 days of the
       termination, and the Leasehold Mortgagee (or its nominee) may enter into
       a new lease of the Leased Premises for the remainder of the term of the
       Lease on the same terms and conditions as the Direct Lease.

    If there is more than one Leasehold Mortgagee, the Leasehold Mortgagee most
senior in lien (as shown on a then-current title report or commitment by a
reputable company licensed to do business in Alabama) desiring to exercise
Mortgagee's Cure Rights will have the right to do so.

    The ability of the Collateral Agent to foreclose upon the Direct Lease and
the Energy Complex without foreclosing upon the other Project Contracts is
limited by the provisions of the Consents to Assignment.

                                      I-46
<PAGE>

Superiority of the Direct Lease

The Direct Lease provides that any fee mortgage granted by Kimberly-Clark Tissue
encumbering all or any portion of the Leased Premises will be required to
expressly state that it is subject and subordinate to the Direct Lease and to
any and all Leasehold Mortgages. At the request of Mobile Energy or any
Leasehold Mortgagee, Kimberly-Clark Tissue will be required to cause each fee
mortgagee to acknowledge in writing that the Direct Lease and Mobile Energy's
and the Leasehold Mortgagees' right of quiet enjoyment under the Direct Lease
are superior to and not to be disturbed by such fee mortgagee.

Liens

The Direct Lease provides that Kimberly-Clark Tissue is not permitted to commit
or omit to do any act that would cause a lien to arise with respect to the
Energy Complex, other than certain permitted liens, nor to amend any of the
"Permitted Encumbrances" listed on Exhibit C to the Direct Lease without the
consent of Mobile Energy if such amendment would affect the Leased Premises or
Mobile Energy's ability to use and operate the Energy Complex. Kimberly-Clark
Tissue is obligated to discharge or bond against any such lien that is not
permitted within 30 days of notice of the filing of such lien unless
Kimberly-Clark Tissue is contesting such lien in good faith and such contest
does not place Mobile Energy's ownership, lease or use, as applicable, of the
Energy Complex, or any portion thereof, in imminent danger of sale, forfeiture
or loss.

    The Direct Lease provides that Mobile Energy will keep the Leased Premises
and any interest therein free of all liens other than liens arising under the
Financing Documents and other specified permitted liens. Mobile Energy is
obligated to discharge or bond against any such lien that is not permitted
within 30 days of notice of the filing of such lien unless Mobile Energy is
contesting such lien in good faith and such contest does not place
Kimberly-Clark Tissue's ownership of the Pulp Mill, the Tissue Mill or the Real
Property, or any portion thereof, in imminent danger of sale, forfeiture or
loss.

    If a party (the "Responsible Party") discovers a lien required to be
discharged by it, it is required to promptly give notice of such lien to the
other party. If the Responsible Party does not timely discharge the lien
(including proper contest of such lien, if applicable), the other party may
procure the discharge of the lien by payment, deposit of the amount in dispute
in court or bonding. The Responsible Party is required to pay to the other party
any amount so paid or deposited by the other party and all related costs and
expenses, including reasonable attorneys' fees, incurred in procuring the
discharge, together with interest from the date of payment or deposit, within 15
days of demand.

Force Majeure

Neither party will be considered in default under the Direct Lease as a result
of any Force Majeure Event, so long as the party claiming a Force Majeure Event
(i) gives reasonably detailed notice to the other party promptly after becoming
aware of the Force Majeure Event and keeps the other party informed of any
changes in such circumstances, including when the Force Majeure Event ends, (ii)
makes all reasonable efforts to remedy the circumstances constituting the Force
Majeure Event and mitigate the adverse effects thereof, and (iii) promptly
resumes its performance following the end or remedy of the Force Majeure Event.

Dispute Resolution

All disputes between Kimberly-Clark Tissue and Mobile Energy that arise out of,
under or in connection with the Direct Lease are required to be resolved in
accordance with the dispute resolution procedures set forth in the Master
Operating Agreement.

Surrender

Unless Mobile Energy has exercised its option to purchase the Leased Premises
and Kimberly-Clark Tissue has not nullified such exercise by timely opting to
repurchase and consummating the repurchase of the Energy Complex from Mobile
Energy, upon termination or expiration of the Direct Lease, Mobile Energy will
surrender the Leased Premises to Kimberly-Clark Tissue, "as-is," "where-is" and
lien-free except for such liens to which Kimberly-Clark Tissue has expressly
consented to remain in effect on or after such termination. Mobile Energy will
take reasonable steps to vest title to the Energy Complex in Kimberly-Clark
Tissue. If Kimberly-Clark Tissue has not repurchased the Energy Complex within
the six months following the later of (i) the termination of the Direct Lease
and (ii) the last day on which Kimberly-Clark Tissue could have delivered its
repurchase notice to Mobile Energy, Mobile Energy may dismantle and remove the
Energy Complex from the Leased Premises. Any portion of the Energy Complex not
timely removed from the Leased Premises will be deemed surrendered to
Kimberly-Clark Tissue.

                                      I-47

<PAGE>

Indemnification

Indemnification provisions in the Direct Lease are substantially similar to
those in the Energy Services Agreements.

                               Supplementary Lease

Mobile Energy and Kimberly-Clark Tissue are party to a lease (including any
amendments thereto, the "Supplementary Lease") covering land owned by
Kimberly-Clark Tissue located at the Mobile Facility, on which Mobile Energy
will own, erect, construct, use, operate, repair and maintain a black liquor
tank and Mobile Energy's maintenance facility (collectively, the "Supplementary
Facility") and any additions or modifications thereto. The Supplementary Lease
is identical to the Direct Lease except in the following respects:

Site

The Supplementary Lease covers two portions of one lot ("Lot 11") of the Real
Property comprising approximately 3.86 acres (the "Supplementary Leased
Premises"). The Supplementary Lease is a ground lease relating solely to the
land comprising the Supplementary Leased Premises; Mobile Energy holds title to
the Supplementary Facility located on the Supplementary Leased Premises.

Term

If Mobile Energy timely exercises and consummates either its Transfer Option or
its End of Term Option to purchase the Leased Premises under and pursuant to the
Direct Lease, the term of the Supplementary Lease will automatically be renewed
for an additional period of 25 years.

Rent

If the Supplementary Leased Premises are not assessed separately but instead
assessed as part of a larger tract of land (because the Supplementary Leased
Premises comprise only a portion of Lot 11), Kimberly-Clark Tissue and Mobile
Energy will be required to apportion any Impositions resulting from such
assessment, Mobile Energy shall pay its proportionate share of the Impositions
to Kimberly-Clark Tissue, and Kimberly-Clark Tissue shall promptly deliver to
Mobile Energy proof of Kimberly-Clark Tissue's timely payment of the entire
amount of such Impositions to the applicable taxing authorities.

Purchase Option

Neither party has any purchase options under the Supplementary Lease.

Early Termination of Lease

As additional grounds for termination, the Supplementary Lease may be terminated
upon Kimberly-Clark Tissue's timely exercise and consummation of its Repurchase
Option pursuant to the Direct Lease.

Default

If a bankruptcy event shall occur with respect to Mobile Energy and in the event
that Mobile Energy timely exercises and consummates its End of Term Option
pursuant to the Direct Lease, then (i) if prior to the consummation of Mobile
Energy's End of Term Option, Kimberly-Clark Tissue exercised its right to
terminate the Supplementary Lease because of the bankruptcy event, then the
Supplementary Lease will be reinstated immediately and will continue in full
force and effect as if it had never been terminated, and (ii) after such
consummation of Mobile Energy's End of Term Option, in no event will the
occurrence and continuation of such bankruptcy event be deemed a Lease Event of
Default or give rise to the right that Kimberly-Clark Tissue otherwise would
have to terminate the Supplementary Lease because of such bankruptcy event.

Surrender

Mobile Energy has no dismantling rights under the Supplementary Lease.

                                 Easement Deeds

Mobile Energy, Kimberly-Clark Tissue and S.D. Warren are party to bilateral
easement deeds (the "Easement Deeds"), pursuant to which Kimberly-Clark Tissue
has granted Mobile Energy easements with respect to the Tissue Mill and the Pulp
Mill, S.D. Warren has granted Mobile Energy easements with respect to the Paper
Mill, and Mobile Energy has granted easements to Kimberly-Clark Tissue and S.D.

                                      I-48
<PAGE>

Warren with respect to the Energy Complex. Mobile Energy and Kimberly-Clark
Tissue are party to an easement deed (the "Supplementary Easement Deed")
pursuant to which Kimberly-Clark Tissue has granted Mobile Energy non-exclusive
easements benefiting the Supplementary Leased Premises. The easements are
non-exclusive blanket easements over the lots owned or controlled by each Mill
Owner or Mobile Energy, as applicable, which are intended to give the grantee
sufficient access, use and encroachment rights to operate its Mill or the Energy
Complex, as applicable, and to utilize the Common Facilities (as hereinafter
defined).

Easement Deeds to Mobile Energy

The term of the Easement Deeds ends upon the termination of the Direct Lease;
provided that if Mobile Energy purchases the Leased Premises from Kimberly-Clark
Tissue pursuant to the Direct Lease, the Easement Deeds will continue in
perpetuity.

    In addition, each of the Mill Owners granted Mobile Energy a non-exclusive
temporary easement (the "Interim Easements") for access to the warehousing,
receiving, storeroom and capital spares buildings and facilities (including the
use of capital spare parts, Dedicated Consumables (as hereinafter defined) and
common spare parts in accordance with the provisions of the Transition Agreement
(as hereinafter defined)), and the central drawing files. The term of the
Interim Easements ended on May 16, 1996.

    Each grantee is obligated to use its easements so as not to (a) interfere
unreasonably with the grantor's use, occupancy or enjoyment of its portion of
the Mobile Facility and (b) cause unnecessary foreseeable injury to persons or
damage to adjacent property. If a grantee undertakes any maintenance, repair or
replacement work within any easement area, upon completion, the grantee is
obligated to restore the affected area to its former condition.

    The grantors are not permitted to interfere with the easements or with the
location of a grantee's equipment, systems or facilities, the Common Facilities,
or other equipment and facilities used by the grantee located on the grantor's
portion of the Mobile Facility; provided that a grantor may relocate, at its own
expense, any of the foregoing located on the grantor's portion of the Mobile
Facility if (a) the grantor gives the grantee and the Site Operating Committee
30 days' advance written notice of the proposed relocation, (b) the grantee
gives the grantor written approval of the proposed relocation, which approval
the grantee may not unreasonably withhold, and (c) the grantor conducts
post-construction tests of the relocated equipment, system or facility as
reasonably required by the grantee.

                            Common Services Agreement

The Common Services Agreement provides for the sharing by Mobile Energy,
Kimberly-Clark Tissue, and the Paper Mill Owner of security services, major
maintenance and capital improvements to the Air Compressors, computerized data
concerning the Energy Complex and the Mills ("Data Sharing") and maintenance of
common roads (the "Essential Common Services") and medical services, the
training of new maintenance personnel ("Maintenance Training Services"),
maintenance of certain parking lots, and certain food service to employees (the
"Optional Common Services" and collectively with the Essential Common Services,
the "Common Services"), including, in each case, the cost thereof. The term of
the Common Services Agreement as to any party to it began on the Acquisition
Closing Date and will end on the date of the termination of the Master Operating
Agreement with respect to that party, unless otherwise agreed by the parties.

Performance of Common Services

Kimberly-Clark Tissue, in its capacity as either the Tissue Mill Owner or the
Pulp Mill Owner (as applicable), is required to perform the Essential Common
Services (other than Data Sharing, which is the obligation of all parties), in a
manner consistent with prudent operating standards and subject to the direction
of the Site Operating Committee.

    Kimberly-Clark Tissue, in its capacity as the Tissue Mill Owner or the Pulp
Mill Owner, is required to provide the Optional Common Services to the other
parties in substantially the same manner and according to the same standards as
Kimberly-Clark Tissue provides for its own use and benefit from time to time.
Kimberly-Clark Tissue may alter in its reasonable discretion the particulars of
any Optional Common Service, provided that any change in the costs of such
Optional Common Service will be accounted for in accordance with the Common
Services Agreement.

Outsourcing

Kimberly-Clark Tissue, after providing 30 days written notice to the other
parties (or such lesser notice as is reasonable under the circumstances), may

                                      I-49

<PAGE>

outsource any Optional Common Service to responsible third parties that, in the
good faith and reasonable judgment of Kimberly-Clark Tissue, are experienced and
competent to provide such services. With the concurrence of the Site Operating
Committee, Kimberly-Clark Tissue may outsource any of the Essential Common
Services not already outsourced as of the date of the Common Services Agreement
to experienced, competent and responsible third parties.

    Unless the parties agree otherwise, the fees payable under the Common
Services Agreement will be adjusted in accordance with the terms thereof to
account for the costs of any outsourced Common Service. To the extent permitted
under the applicable outsourcing contract, the Site Operating Committee may
adjust the fee payable to the provider of an outsourced Essential Common
Service. At Kimberly-Clark Tissue's election and if required by applicable law
and approved by the Site Operating Committee and appropriate under the
circumstances, the third party providing an outsourced Common Service may do so
by contracting directly with the parties requiring that Common Service.

    The limitations of liability set forth in the Common Services Agreement
apply to Kimberly-Clark Tissue's decision to outsource any Common Service.
However, the terms of any contract with a third-party provider of Common
Services shall control as to that third party's required standard of
performance, provided that Kimberly-Clark Tissue shall use good faith efforts to
cause each third-party provider of Essential Common Services to achieve a level
of service substantially equivalent to the specified prudent operating standard.

Termination of Particular Common Services

The Paper Mill Owner, Mobile Energy, or any new owner of the Pulp Mill may, upon
30 days written notice to the other parties, begin providing or procuring for
itself any Optional Common Service, including any outsourced Optional Common
Service. The party providing its own service shall no longer be liable to
Kimberly-Clark Tissue for the costs of the corresponding Optional Common Service
and the fees payable under the Common Services Agreement will be adjusted in
accordance with the terms thereof.
Furthermore, Kimberly-Clark Tissue will not be required to provide Maintenance
Training Services past January 1, 2000.

Facilities; Easements

All right, title and interest to the cafeteria, the compressed air facility, the
maintenance training facility, certain medical facilities and certain common
road and parking lots (the "Common Facilities") are vested solely in
Kimberly-Clark Tissue except as otherwise set forth in the Easement Deeds.
Kimberly-Clark Tissue expressly disclaims any warranty of title to or condition
of the Common Facilities. All rights of ingress, egress and access necessary for
the parties to perform their obligations under the Common Services Agreement are
set forth in the Easement Deeds.

Payments

Within ten days after the last day of each month, Kimberly-Clark Tissue is
required to deliver an invoice to each of the other parties setting forth each
party's Common Services fees for the immediately preceding month as set forth in
Schedule A to the Common Services Agreement. Each party is required to pay to
Kimberly-Clark Tissue the amount due within 15 days of receipt of the invoice.
In the case of any outsourced Common Service where the parties are not billed
separately, Kimberly-Clark Tissue is required to forward the third-party invoice
at least 10 business days before it is due (or as soon as possible) and the
other parties are required to reimburse Kimberly-Clark Tissue for their share in
accordance with the percentage allocation set forth in the second column of
Schedule A to the Common Services Agreement at least two business days before
payment is due to the third party. Overdue charges assessed by a third-party
provider shall be paid by the party whose late payment caused such charges.

    The Common Services fees and the allocations thereof set forth in Schedule A
to the Common Services Agreement are required to be adjusted immediately to
account for Kimberly-Clark Tissue outsourcing any Common Service and a party's
termination of a Common Service as to itself. The parties also are required to
review the Common Services fees and allocations at the beginning of each year to
account for changes in the cost of complying with any law affecting the
providing of a Common Service, changes to the nature of a Common Service, and
reasonably anticipated changes, based on experience or expected developments, in
Kimberly-Clark Tissue's cost of providing any Common Service.



                                      I-50
<PAGE>

Future Transfer of the Pulp Mill and/or the Tissue Mill

Until such time as Kimberly-Clark Tissue may choose to sell or otherwise
transfer the Pulp Mill, the Common Services fee allocated to the Pulp Mill
pursuant to Schedule A to the Common Services Agreement will be for the account
of Kimberly-Clark Tissue. Following such transfer, the new owner of the Pulp
Mill will become a party to the Common Services Agreement and will assume the
rights and obligations of Kimberly-Clark Tissue in its capacity as the Pulp Mill
Owner.

    The Common Services Agreement provides that if Kimberly-Clark Tissue chooses
to sell or otherwise transfer the Tissue Mill, the new owner of the Tissue Mill
will be required to assume all rights and obligations of Kimberly-Clark Tissue
in its capacity as the Tissue Mill Owner under the Common Services Agreement.

Standard of Service

Except as set forth in certain sections of the Common Services Agreement, none
of the parties makes any warranty or covenant with respect to the level or
extent of services performed by such party or by any third party engaged by such
party under the Common Services Agreement.

Miscellaneous Provisions

Each party to the Common Services Agreement has agreed to indemnify, defend and
hold harmless each other party from and against any losses incurred by an
indemnified party due to or resulting from (i) the indemnified party's
performance of any action or service to be performed for the indemnifying party
pursuant to the Common Services Agreement in the absence of any gross negligence
or willful misconduct on the part of the indemnified party, (ii) the gross
negligence or willful misconduct of the indemnifying party or (iii) the breach
by an indemnifying party of any of its representations or warranties contained
in the Common Service Agreement.

    The Common Services Agreement provides that no party will be liable for any
incidental, special or consequential damages or for punitive or exemplary
damages, provided that the foregoing limitation shall not limit any party's
obligation to indemnify the other parties for any losses occasioned by third
party claims against the indemnified party.

The provisions of the Master Operating Agreement apply with respect to the
determination of, response to and obligations arising out of any Force Majeure
Event.

    Each party may assign or transfer its rights and obligations under the
Common Services Agreement only in accordance with the Master Operating
Agreement's assignment provisions. Upon the transfer or sale of one of the Mills
or the Energy Complex, the assignment by the transferring party of its rights
and obligations under the Common Services Agreement corresponding to the portion
of the transferring party's interest in the Mill or Energy Complex being
transferred and the written assumption of such rights and obligations by the
transferee releases the transferring party from all obligations so assigned and
assumed.

    The Common Services Agreement states that it is governed by the laws of the
State of New York.

                              Transition Agreement

Mobile Energy and Kimberly-Clark Tissue are party to a Transition Agreement
(including any amendments thereto, the "Transition Agreement") which requires
Kimberly-Clark Tissue to provide certain services to the Energy Complex after
the Acquisition Closing Date in the same manner in which Scott provided such
services to the Energy Complex before the Acquisition Closing Date.

Spare Parts Services

In conjunction with the Acquisition, Scott sold to Mobile Energy certain spare
parts used in connection with the Energy Complex ("Dedicated Consumables") for
approximately $2,400,000. Kimberly-Clark Tissue also stored and managed the
Dedicated Consumables for the benefit of Mobile Energy until May 16, 1996 at
which time Mobile Energy completed and began to operate its own warehouse for
the Energy Complex.

    In addition, Kimberly-Clark Tissue may, at Mobile Energy's request, sell to
Mobile Energy any common spare part in Kimberly-Clark Tissue's warehouse at a
price equal to Kimberly-Clark Tissue's invoice cost plus taxes, freight and an
18% handling fee.

Other Services

Other services covered by the Transition Agreement include software services,
PBX services and telephone services, each of which is provided by Kimberly-Clark

                                      I-51
<PAGE>

Tissue to Mobile Energy for some period following the Acquisition Closing Date
at the prices provided in the Transition Agreement. In addition, the Transition
Agreement permits Mobile Energy to use certain maintenance facilities and
two-way radio station facilities for some time period following the Acquisition
at the prices provided in the Transition Agreement.

Miscellaneous Provisions

Mobile Energy is required to pay any invoice received from Kimberly-Clark Tissue
under the Transition Agreement within fifteen days of receipt. However, for any
service provided to Mobile Energy under the Transition Agreement for which
Kimberly-Clark Tissue receives an invoice from a third party on behalf of Mobile
Energy, Kimberly-Clark Tissue is required to forward the invoice to Mobile
Energy at least 10 business days before it is due, and Mobile Energy is
obligated to pay Kimberly-Clark Tissue the amount Mobile Energy owes at least
two business days before it is due.

    Neither Kimberly-Clark Tissue nor Mobile Energy makes any representations or
warranties by virtue of the Transition Agreement or with respect to the goods
and services to be provided under the Transition Agreement.

    Upon written notice to Mobile Energy, Kimberly-Clark Tissue may, in
connection with the sale or transfer of a Mill, assign any of its rights, duties
or obligations under the Transition Agreement to the Tissue Mill Owner or the
Pulp Mill Owner, as appropriate, provided, however, that such assignee is
capable of providing the service so assigned in the same manner as
Kimberly-Clark Tissue has provided such service. Upon such assignment,
Kimberly-Clark Tissue shall thereafter be released of any obligation with
respect to the service so assigned for events occurring after the assignment.

    Each of Kimberly-Clark Tissue and Mobile Energy has agreed to indemnify and
hold harmless the other party from all damages incurred by either indemnified
party arising from any acts of negligence or willful misconduct by such
indemnifying party with respect to the indemnifying party's performance of its
obligations under the Transition Agreement. However, Kimberly-Clark Tissue will
have no liability arising from any third party's performance of or failure to
perform any services under the Transition Agreement. Finally, the Transition
Agreement provides that neither party will be liable for any indirect, special
or consequential damages arising under the Transition Agreement or from the
performance of or the failure to perform any service under the Transition
Agreement.

    The Transition Agreement states that it is governed by the laws of the State
of New York.

                Water Procurement and Effluent Services Agreement

Mobile Energy and the Mill Owners are parties to the Water Agreement which,
among other things, defines and allocates among the Mill Owners and Mobile
Energy certain rights and obligations relating to water usage and procurement
and the provision of water treatment-related utilities and services, including
waste water treatment services. The term of the Water Agreement commenced on the
Acquisition Closing Date and will terminate with respect to each party when such
party is no longer a party to the Master Operating Agreement.

    Pursuant to the Water Agreement, Mobile Energy has appointed the Pulp Mill
Owner as its agent for purposes of (1) procurement and treatment of process
water and (2) procurement and supply of potable water, sanitary sewer service
and water for fire protection. The Pulp Mill Owner has also agreed to accept
waste water effluent from each of the Mills and the Energy Complex, so long as
the effluent meets certain specifications, caps and prohibitions set forth in
the Water Agreement, the State Indirect Discharge Permits ("SID Permits"), as
applicable, and in any other applicable Governmental Rule, and which is
discharged in accordance with those certain Rules Governing Discharge to the
Waste Water Treatment Plant (the "Rules Governing Discharge"). The Pulp Mill
Owner will treat such effluent in its Waste Water Treatment Plant for discharge
in accordance with the terms of its NPDES permit.

    If reasonably possible and consistent with its NPDES permit and other
requirements of law, the Pulp Mill Owner is required to accept and treat
effluent from any of the Mills or the Energy Complex which does not comply with
applicable specifications. In the event of a noncomplying discharge, however,
the Pulp Mill Owner may undertake one or more of the following actions: (1)
prohibit the discharge after reasonable notice and opportunity to cure; (2)
impose additional reasonable discharge conditions; (3) require reasonably
necessary pretreatment; (4) require reasonably necessary control over the
quality, quantities and rates of discharges to the Waste Water Treatment Plant;
or (5) require payment by the noncomplying discharger of the Pulp Mill Owner's
reasonable additional costs associated with the noncomplying discharge.



                                      I-52
<PAGE>


    The Pulp Mill Owner may modify the discharge specifications or prohibitions
set forth in the Water Agreement and the Rules Governing Discharge as reasonably
required to maintain compliance with its NPDES permit or other Governmental Rule
or as reasonably required by the capability of its Waste Water Treatment Plant.

    The Pulp Mill Owner is required to provide each of the other Mill Owners and
Mobile Energy a monthly invoice for the services provided during the preceding
month. The current estimated pro-rata shares of the parties for purposes of the
Water Agreement are as follows:

     Pulp Mill.................................  59.9%
     Tissue Mill...............................  19.2%
     Paper Mill................................  15.6%
     Energy Complex............................   5.3%

    Pro-rata shares are based upon, and may be adjusted annually by the Pulp
Mill Owner in accordance with changes in, percentage of total site process water
usage by the Mill Owners and actual effluent discharges by Mobile Energy.

    Each party to the Water Agreement has agreed to indemnify each other for
damages (excluding consequential damages) to the extent that they result from
such party's acts or omissions in connection with the Water Agreement or the
services used or provided thereunder.

                          Boiler Ash Disposal Agreement

Mobile Energy and the Pulp Mill Owner are party to the Ash Agreement, which,
among other things, provides for the collection and disposal of boiler ash
produced as a waste product by the operation of the Energy Complex ("Boiler
Ash").

Term

The term of the Ash Agreement commenced on the Acquisition Closing Date and,
except as provided below, will terminate when either the Pulp Mill Owner or
Mobile Energy is no longer party to the Master Operating Agreement. The term of
the Ash Agreement will automatically extend to coincide with any extension(s) of
the Master Operating Agreement to which both the Pulp Mill Owner and Mobile
Energy are parties. Mobile Energy may terminate the Ash Agreement upon 30 days
prior written notice, if Mobile Energy reasonably believes that continuation of
the services provided for under the Ash Agreement would make Mobile Energy
liable for Environmental Claims or Environmental Expenses, and Mobile Energy may
terminate the Ash Agreement for any other reason upon 180 days prior written
notice.

Boiler Ash Service

The Pulp Mill Owner is required to provide the Energy Complex with services
consisting of (1) the removal of Boiler Ash from the Energy Complex, (2)
transportation or arrangement for the transportation of Boiler Ash, and (3)
disposal of or arrangement for the disposal of Boiler Ash (collectively, "Boiler
Ash Service"). The Pulp Mill Owner is required to (i) transport and dispose, or
arrange for the transportation and disposal, of Boiler Ash in the same manner
and at the same disposal facility that the Pulp Mill Owner uses for the solid
waste streams resulting from the operation of the Pulp Mill or (ii) give or sell
Boiler Ash for use as a soil amendment aid, an additive for concrete or for
another beneficial re-use, and, in either case, to take into account all
applicable Governmental Rules.

    As reflected in the Ash Agreement, the Pulp Mill Owner has chosen and
intends, for approximately the first five years of the term of the Ash
Agreement, to dispose of Boiler Ash in the Jackson Lott Road landfill (the "Lott
Road Landfill") and thereafter at another facility or facilities of the Pulp
Mill Owner's choice. The Pulp Mill Owner is required to notify and consult with
Mobile Energy prior to using any facility other than the Lott Road landfill for
the disposal of Boiler Ash. The Pulp Mill Owner's obligations under the Ash
Agreement, however, are not conditioned on the availability of the Lott Road
Landfill.

Boiler Ash From Approved Fuels

Except as provided below, the Pulp Mill Owner is required to provide Mobile
Energy with Boiler Ash Service only with respect to Boiler Ash resulting from
the use of Approved Fuels (as defined below). Such fuels are defined by
agreement of the parties to be (i) natural gas; (ii) wood waste (biomass); (iii)
Pulp Mill sludge; (iv) coal with average sulfur content not to exceed 1.1%; (v)
black liquor; and (vi) fuel oil with a sulfur content not to exceed 1.1% (such



                                      I-53
<PAGE>

fuels constituting "Approved Fuels"). The Pulp Mill Owner is not obligated to
provide Boiler Ash Service with respect to Boiler Ash resulting from use of an
Approved Fuel, if as a result of a Change of Law, such Boiler Ash is deemed
hazardous waste under federal or state law ("Hazardous Waste"), in which case,
Mobile Energy shall be responsible for arranging for removal, transport and
disposal of such Boiler Ash. However, the Pulp Mill Owner is obligated to
continue to provide Boiler Ash Service to Mobile Energy if the Boiler Ash is
deemed to be a Hazardous Waste as a result of the Energy Complex's use of a Mill
Product. There can be no assurance that changes in existing laws or regulations
on Hazardous Waste will not occur in the future, or that other changes in
existing laws or regulations that also could have a material adverse effect on
Mobile Energy will not occur in the future.

Boiler Ash From Other Than Approved Fuels

Except as provided above, Mobile Energy is prohibited from using any fuel in the
operation of the Energy Complex that results in Boiler Ash that is deemed a
Hazardous Waste, or that fails to satisfy the Alabama Department of Agriculture
and Industry's requirements for bioash to be licensed as a soil amendment aid.
Mobile Energy is to obtain the Pulp Mill Owner's permission prior to using any
fuel other than an Approved Fuel in the operation of the Energy Complex, which
permission may not to be unreasonably withheld.

Service Charge, Billing and Recoupment

If the Pulp Mill Owner disposes of Boiler Ash at a facility owned and operated
by a third party, the Pulp Mill Owner will charge Mobile Energy for Boiler Ash
Service by computing the percentage by volume or weight, in accordance with the
disposal facility's basis for determining charges, that Boiler Ash constitutes
of the total volume or weight, as the case may be, of waste disposed of by the
Pulp Mill Owner and by charging Mobile Energy for that percentage of the Pulp
Mill Owner's total cost of removing, transporting, and disposing of Pulp Mill
waste and Boiler Ash. If the Pulp Mill Owner disposes of Boiler Ash at a
facility owned or operated by itself or an Affiliate, the Pulp Mill Owner will
charge Mobile Energy for Boiler Ash Service by computing the percentage by
volume or weight, as the case may be, that Boiler Ash constitutes of the total
volume or weight, whichever is less, of waste disposed of by the Pulp Mill Owner
and by charging Mobile Energy for that percentage of the Pulp Mill Owner's total
cost of removing, transporting, and disposing of Pulp Mill waste and Boiler Ash.
Mobile Energy may recoup the amount it is charged for Boiler Ash Service under
the Ash Agreement by allocating its charges among the Pulp Mill Owner, the Paper
Mill Owner, and the Tissue Mill Owner pursuant to the terms of the Master
Operating Agreement.

Indemnification and Limitation of Liability

Mobile Energy and the Pulp Mill Owner have agreed to indemnify, defend and hold
harmless each other against all penalties, losses, claims and damages resulting,
in whole or in part, from such party's acts or omissions in connection with the
Ash Agreement or the services used or provided thereunder. Mobile Energy is not
obligated to indemnify the Pulp Mill Owner in the case of Boiler Ash that is
deemed a Hazardous Waste as a result of the use by the Energy Complex of a Mill
Product. Additionally, the Ash Agreement obligates the parties to consult and
cooperate with each other regarding notice of, response to and defense of any
claim that may result in a claim for indemnification under the Ash Agreement.

    If the Pulp Mill fails to provide Mobile Energy with Boiler Ash Service
required by the Ash Agreement, Mobile Energy will be entitled solely to
indemnification and to compensation for the reasonable actual costs incurred by
Mobile Energy to secure such service from another source, unless such failure is
excused pursuant to the terms of the Ash Agreement. Notwithstanding the
foregoing, if the Pulp Mill Owner fails to provide Boiler Ash Service, Mobile
Energy's rights and obligations under the Energy Services Agreements and the
Master Operating Agreement will be governed by the provisions of the Master
Operating Agreement described above under "-Energy Services Agreements and
Master Operating Agreement-Mobile Energy's Supply Obligations in the Event of a
Mill Product Shortfall."

    Under the Ash Agreement, Mobile Energy and the Pulp Mill Owner are liable
only for direct damages and penalties, and not for claims of non-party
customers, cost of money, loss of profits, loss of use of capital or revenue or
any other incidental, special or consequential loss or damage of any nature.

    Mobile Energy and the Pulp Mill Owner have agreed that, notwithstanding any
other provision of the Ash Agreement, any claim for indemnification by either
Mobile Energy or the Pulp Mill Owner with respect to any Environmental Claims or
Environmental Expenses arising out of any Environmental Noncompliance or

                                      I-54
<PAGE>

Environmental Condition will be governed by the provisions of the Pulp Mill
Environmental Indemnity Agreement.

    All disputes arising under this Agreement are required to be handled in
accordance with the procedures for dispute resolution provided in the Master
Operating Agreement.

    The Ash Agreement states that it is governed by the laws of the State of New
York, except that federal law, Alabama law or the law of any other applicable
state, as applicable, is stated to govern as to compliance with permits and
other Governmental Rules.

                     Mill Environmental Indemnity Agreements

Mobile Energy is a party to agreements with each of the Pulp Mill Owner
(including any amendments thereto, the "Pulp Mill Environmental Indemnity
Agreement"), the Tissue Mill Owner (including any amendments thereto, the
"Tissue Mill Environmental Indemnity Agreement") and the Paper Mill Owner
(including any amendments thereto, the "Paper Mill Environmental Indemnity
Agreement"), pursuant to which Mobile Energy and the applicable Mill Owner are
required to indemnify each other for certain specified environmental claims
relating to certain environmental conditions, if and when any such claims arise.

Environmental Covenants

Mobile Energy has agreed not to cause, or suffer the existence of, any
Environmental Conditions or Environmental Noncompliances at the Energy Complex
that could reasonably be expected to lead to any material Environmental Claim or
Environmental Expense asserted against, or incurred by, a Mill Owner or its
Affiliates. Similarly, each Mill Owner has agreed not to cause, or suffer the
existence of, any Environmental Conditions or Environmental Noncompliances at
its Mill that could reasonably be expected to lead to any material Environmental
Claim or Environmental Expense asserted against, or incurred by, Mobile Energy
or its Affiliates.

Environmental Indemnification by Mill Owners and Mobile Energy

Each Mill Owner is required to indemnify, defend and hold harmless Mobile
Energy, its Affiliates, and its and their respective officers, directors,
agents, attorneys and employees from and against any and all Environmental
Claims brought against, and any and all Environmental Expenses imposed upon or
reasonably incurred by, such indemnified party, in connection with (1) breaches
by such Mill Owner of any representations and warranties, covenants or other
obligations in its Energy Services Agreement or the Master Operating Agreement,
or (2) any Environmental Conditions that give rise to, or could give rise to,
Environmental Claims or other liabilities, or Environmental Noncompliances
located at or otherwise relating to its Mill or associated facilities, to the
extent arising out of facts or circumstances that occur or come into existence
after December 12, 1994 (including without limitation (in the case of the Pulp
Mill Owner) any Environmental Condition or Environmental Noncompliance
associated with the present or future use of the two underground fuel-oil
storage tanks owned by Kimberly-Clark Tissue and located on Lot 7). If any Mill
Owner sells its Mill, such Mill Owner will retain all of its obligations and
liabilities under its Mill Environmental Indemnity Agreement arising out of any
facts or circumstances existing as of or prior to the date of any such sale
(whether known at the time of any such sale or thereafter discovered as having
existed as of the date thereof), and the party to whom such Mill Owner sells its
Mill will be required to assume all obligations and liabilities of such Mill
Owner arising out of facts or circumstances that occur or come into existence
after the date of any such sale.

    Mobile Energy is required to indemnify, defend and hold harmless each Mill
Owner, its Affiliates, and its and their respective officers, directors, agents,
attorneys and employees from and against any and all Environmental Claims
brought against, and any and all Environmental Expenses imposed upon or
reasonably incurred by, any of such indemnified parties, in connection with (1)
breaches by Mobile Energy of any representations and warranties, covenants or
other obligations of Mobile Energy in any Energy Services Agreement or the
Master Operating Agreement, or (2) any Environmental Conditions that give rise
to, or could give rise to, Environmental Claims or other liabilities, or
Environmental Noncompliances located at or otherwise relating to the Energy
Complex, to the extent arising out of facts or circumstances that occur or come
into existence after December 12, 1994. If any Mill Owner sells its Mill, such
Mill Owner will retain all rights of such Mill Owner arising out of any facts or
circumstances existing as of or prior to the date of any such sale (whether
known at the time of any such sale or thereafter discovered as having existed as
of the date thereof), and the party to whom the Mill Owner sells its Mill will,
upon the assumption of the relevant Mill Environmental Indemnity Agreement by
such party, assume all rights of such Mill Owner arising out of facts or
circumstances that occur or come into existence after the date of any such sale.
                                      I-55

<PAGE>


    If any Environmental Claims or Environmental Expenses arise, directly or
indirectly, in whole or in part, out of the joint or concurrent negligence of a
Mill Owner and Mobile Energy, or their respective Affiliates, officers,
directors, agents, attorneys or employees, each party's liability therefor will
be limited to such party's proportionate degree of fault. The Mill Environmental
Indemnity Agreements provide that Mobile Energy and each of the Mill Owners will
only be liable for direct damages, not for claims of non-party customers, cost
of money, loss of profits, loss of use of capital or revenue or any other
incidental, special or consequential loss or damage of any nature, or for
punitive or exemplary damages.

             Kimberly-Clark Tissue Environmental Indemnity Agreement

Mobile Energy and Kimberly-Clark Tissue are party to an environmental indemnity
agreement (including any amendments thereto, the "Kimberly-Clark Tissue
Environmental Indemnity Agreement"), pursuant to which Kimberly-Clark Tissue is
required to indemnify Mobile Energy for certain specified Environmental Claims
relating to certain Environmental Conditions, if and when any such claims arise.

Environmental Indemnification by Kimberly-Clark Tissue

Kimberly-Clark Tissue is required to indemnify, defend and hold harmless Mobile
Energy Indemnified Parties from and against any and all Environmental Claims
brought against, and any and all Environmental Expenses imposed upon or incurred
by, such Mobile Energy Indemnified Parties, in connection with (1) breaches of
any Kimberly-Clark Tissue representations and warranties, or other provisions of
the Asset Purchase Agreement, relating to or otherwise concerning Environmental
Conditions or Environmental Noncompliances relating to the Mills or Energy
Complex, or (2) any (a) Environmental Conditions that give rise to, or could
give rise to, Environmental Claims or other liabilities or (b) Environmental
Noncompliances (each with respect to applicable Governmental Rules in effect as
of December 12, 1994) located at or otherwise relating to the Mills or the
Energy Complex, or associated facilities, to the extent arising out of any facts
or circumstances existing as of or prior to December 12, 1994.

    Kimberly-Clark Tissue is liable only for direct damages, not for claims of
non-party customers, cost of money, loss of profits, loss of use of capital or
revenue or any other incidental, special or consequential loss or damage.

Employee Transition Agreement

All of the personnel who work at the Energy Complex are currently employed by
Southern Energy. Most of these employees worked for Scott at the Energy Complex
prior to the Acquisition. Pursuant to an agreement (the "Employee Transition
Agreement") entered into by Southern Energy, Mobile Energy and Scott
concurrently with the Acquisition, Southern Energy agreed to recognize United
Paperworkers International Union Local 423 and 1421 (the "UPIU") and
International Brotherhood of Electrical Workers Local 2129 (the "IBEW") as the
authorized collective bargaining agents for certain hourly Energy Complex
workers and agreed to continue in substantial and material part the terms and
conditions set forth in the collective bargaining agreements in effect between
Scott and each of the UPIU and the IBEW immediately prior to the Acquisition.
Each of these collective bargaining agreements expired on May 31, 1997. Each of
these agreements has been renegotiated and extended until the year 2002. Under
the arrangement with the UPIU, Locals 423 and 1421 will be combined into one
local, 423.

Item 2.   PROPERTIES

The Energy Complex is located at the Mobile facility on property leased by
Kimberly-Clark Tissue to Mobile Energy in accordance with the terms of the
Direct Lease and the Supplementary Lease. The Energy Complex is comprised of
three power boilers (commonly referred to as the "Number 5 Power Boiler," the
"Number 6 Power Boiler," and the "Number 7 Power Boiler"), two recovery boilers
(commonly referred to as the "Number 7 Recovery Boiler" and the "Number 8
Recovery Boiler"), three turbine generators, two black liquor evaporator sets,
and associated feedwater systems, air emissions controls, and other auxiliary
systems. These facilities are located in two separate power houses, known as the
north power house and the south power house, on approximately 11 acres leased
from Kimberly-Clark Tissue at the Mobile Facility. All of the liquor processing,


                                      I-56
<PAGE>

substantially all of the power processing and most of the steam processing
conducted at the Mobile Facility occur at the north power house. The major
components of the north power house were constructed in 1984 and 1985, and an
addition to the north power house facilities was completed in 1994. The major
components of the south power house were constructed between 1960 and 1963. The
combined facilities currently are designed to produce approximately 111 MW
(gross) of electricity and approximately 2,100,000 lbs/hr of steam. In addition,
the Energy Complex currently is designed to process up to approximately
6,350,000 lbs/day of virgin dry black liquor solids.

     In 1996, Mobile Energy completed its maintenance and storage warehouse
facility and moved all the remaining spare parts purchased from Scott/Kimberly
Clark through the Acquisition into this newly constructed facility. The facility
has 21,902 square feet of space comprised of a 3,392 square foot mechanic shop,
15,637 square feet of storage facility, and 2,873 square feet of office space

     Although a majority of the components of the Energy Complex have an
operating history ranging from 10 to 30 years, certain components (including a
recovery boiler and an evaporator train that were completed in early 1994) have
a limited operating history. Moreover, although most of the personnel currently
employed by Southern Energy to operate the Energy Complex were employed by Scott
to operate the Energy Complex prior to the acquisition, the Energy Complex has
been owned by Mobile Energy or its affiliates and has been operated as an
independent business, and Southern Energy has employed the Energy Complex
personnel and has dealt with the unions that represent many of such personnel,
only since December 1994. In general, as with any sophisticated energy and
recovery plant, operation of the Energy Complex involves many risks, including,
among other things, the risk of equipment breakdown, failure or explosion. For
example, recovery boilers such as those used at the Energy Complex may explode
under certain circumstances, such as if the smelt at the bottom of the boilers
comes into contact with water. The possibility also exists that the Energy
Complex will perform below expected levels of output or efficiency, or that
labor disputes or other events such as fires, hurricanes, floods, droughts,
changes in law or acts of eminent domain will disrupt or disable Mobile Energy's
operations. The occurrence of any such events could significantly increase the
expenses of operating the Energy Complex, and have a material adverse effect on
the financial condition of Mobile Energy. While Mobile Energy will maintain
insurance to protect against certain of these operating risks, the proceeds of
such insurance may not be sufficient to cover the Energy Complex's lost revenues
or increased expenses.

Mortgage

     Mobile Energy and the IDB, as mortgagors, have entered into a Leasehold
Mortgage, Assignment of Leases, Rents, Issues and Profits and Security Agreement
and Fixture Filing dated as of August 1, 1995 (including any amendments thereto,
the "Mortgage") and have granted to the Collateral Agent, as mortgagee, for the
benefit of the Senior Secured Parties mortgages and security interests in all
real property interests (including fee interests, easement interests and
leasehold interests, if any) of Mobile Energy to the Energy Complex and the
Easement Deeds and all fixtures, equipment and improvements thereon and personal
property now owned or hereafter acquired.

     Pursuant to the terms of the Mortgage, if any event of default under the
Intercreditor Agreement (a "Trigger Event") has occurred and is continuing and,
except in the case of any such Trigger Event that shall have resulted from a
Bankruptcy Event in respect of Mobile Energy or Holdings, the Collateral Agent
shall have received from the requisite senior creditors the notice required by
the Intercreditor Agreement, then, to the maximum extent permitted by law, the
Collateral Agent may exercise any right, power or remedy permitted to it under
the Mortgage and under certain other security documents or by law, and, without
limiting the generality of the foregoing, the Collateral Agent may, personally
or by its agents, to the maximum extent permitted by law, do any or all of the
following:

     (a) without assuming liability for the performance of any of Mobile
   Energy's obligations, enter and take possession of the mortgaged property or
   any part thereof, exclude Mobile Energy and all persons claiming under Mobile
   Energy whose claims are junior to the Mortgage wholly or partly therefrom,
   and use, operate, manage and control the same either in the name of Mobile
   Energy or otherwise as the Collateral Agent shall deem best, and upon such
   entry, from time to time at the expense of Mobile Energy, make all such
   repairs, replacements, alterations, additions or improvements to the
   mortgaged property or any part thereof as the Collateral Agent may deem
   proper and, whether or not the Collateral Agent has so entered and taken


                                      I-57
<PAGE>

   possession of the mortgaged property or any part thereof, collect and receive
   all the rents and apply the same, to the extent permitted by law, to the
   payment of all expenses that the Collateral Agent may be authorized to make
   under the Mortgage, the remainder to be applied to the payment of the
   obligations secured by the Mortgage until the same shall have been repaid in
   full; if the Collateral Agent demands or attempts to take possession of the
   mortgaged property or any portion thereof in the proper exercise of any
   rights hereunder, Mobile Energy shall promptly turn over and deliver complete
   possession thereof to the Collateral Agent;

     (b)  with or without entry:
         (i) subject to applicable law, sell all or any part of the mortgaged
     property for cash at an auction or foreclosure sale held at such place or
     places and time and upon such notice and, otherwise in such manner as may
     be required by law, or in the absence of any such requirement, as the
     Collateral Agent (acting in accordance with an opinion of counsel upon
     which the Collateral Agent may conclusively rely) may deem appropriate, and
     from time to time adjourn any such sale by announcement at the time and
     place specified for such sale or for such adjourned sale without further
     notice, except as may be required by law;
         (ii) proceed to protect and enforce its rights under the Mortgage, by
     suit for specific performance of any covenant contained in the Mortgage or
     in certain other security documents or in aid of the execution of any power
     granted in the Mortgage or in the other security documents, or for the
     foreclosure of the Mortgage (as a mortgage or otherwise) and the sale for
     cash of the mortgaged property under the judgment or decree of a court of
     competent jurisdiction, or for the enforcement of any other right as the
     Collateral Agent (acting in accordance with an opinion of counsel upon
     which the Collateral Agent may conclusively rely) shall deem most effectual
     for such purpose; provided, however, that in the event of a sale, by
     foreclosure or otherwise, of less than all of the mortgaged property, the
     Mortgage shall continue as a lien on, and security interest in, the
     remaining portion of the mortgaged property, and the Collateral Agent shall
     not be obligated to sell upon credit unless the Collateral Agent shall have
     expressly consented in writing to a sale upon credit; or
         (iii) exercise any or all of the remedies available to a secured party
     under the Uniform Commercial Code; and

     (c) if a Trigger Event shall have occurred and be continuing and, except in
   the case of any such Trigger Event that shall have resulted from a Bankruptcy
   Event in respect of Mobile Energy or Holdings, the Collateral Agent shall
   have received notice from the requisite senior creditors under the
   Intercreditor Agreement, and the Collateral Agent shall have declared the
   obligations secured by the Mortgage to be immediately due and payable, or
   upon the actual or threatened waste to any part of the mortgaged property,
   the Collateral Agent, to the maximum extent permitted by law, shall be
   entitled to the appointment of a receiver of the mortgaged property, without
   notice or demand, and without regard to the adequacy of the security for the
   obligations secured by the Mortgage or the solvency of Mobile Energy.
   Notwithstanding the foregoing, if a Trigger Event shall have occurred and be
   continuing, and the Collateral Agent shall have received notice from the
   requisite senior creditors under the Intercreditor Agreement and in the event
   of threatened waste to any part of the mortgaged property (but not actual
   waste), the Collateral Agent shall provide notice to Mobile Energy of its
   intent to appoint a receiver and shall permit Mobile Energy a reasonable
   period of time to eliminate such threatened waste prior to the appointment of
   said receiver.

     Proceeds from the exercise of remedies will be applied in accordance with
the Intercreditor Agreement.

Security Agreement

Mobile Energy has entered into the Security Agreement dated as of August 1, 1995
(including any amendments thereto the "Security Agreement") with the Collateral
Agent for the benefit of the Senior Secured Parties providing for the granting
of a security interest in all of Mobile Energy's personal property interests
including, but not limited to, all contract rights, all equipment, receivables,
insurance proceeds (other than those paid under third-party liability
insurance), eminent domain proceeds, rights pursuant to any governmental
approval (to the extent permitted by applicable law), patents and trademarks,
and certain accounts. The Security Agreement does not provide for the granting
of a security interest in Mobile Energy's rights under the Mill Owner
Maintenance Reserve Account and monies on deposit therein.

     Pursuant to the terms of the Security Agreement, the Collateral Agent may,

                                      I-58

<PAGE>

upon the occurrence of a Trigger Event and satisfaction of certain conditions
contained in the Intercreditor Agreement, take possession of all of the
foregoing capital, which also secures the Working Capital Facility.

     Proceeds from the exercise of remedies will be applied in accordance with
the Intercreditor Agreement.

The Tax-Exempt Bonds

In December 1983, the IDB issued tax-exempt bonds (the "1983 Tax-Exempt Bonds")
to finance the construction of the Number 7 Power Boiler and certain auxiliary
systems, which are "solid waste disposal facilities" as such term is defined in
the Internal Revenue Code and the regulations promulgated thereunder (the "Solid
Waste Disposal Facilities"). In December 1984, the IDB issued tax-exempt bonds
(the "1984 Tax-Exempt Bonds") to refund the 1983 Tax-Exempt Bonds. The Solid
Waste Disposal Facilities are located on the land on which the north power house
is situated, which is owned by Kimberly-Clark Tissue and leased by
Kimberly-Clark Tissue to the IDB pursuant to the Scott-IDB Lease and leased back
to Kimberly-Clark Tissue pursuant to the IDB-Scott Sublease. The IDB held, and
continues to hold, title to the Solid Waste Disposal Facilities. In December
1984, the IDB leased the Solid Waste Disposal Facilities to Scott pursuant to
the IDB-Scott Sublease (so named because the lease of the Solid Waste Disposal
Facilities to Scott was made pursuant to the same agreement by which the real
property on which the north power house is situated was subleased by the IDB to
Scott). Pursuant to a Lease Assignment and Assumption Agreement dated as of
December 12, 1994 between Scott and Holdings (the "Lease Assignment and
Assumption Agreement"), Scott assigned to Holdings all of Scott's right, title
and interest in and to the IDB-Scott Sublease and the Solid Waste Disposal
Facilities, and Holdings assumed all of Scott's obligations arising after the
Acquisition Closing Date under the IDB-Scott Sublease (although Scott remained
liable to the IDB under the IDB-Scott Sublease). Holdings subsequently assigned
to Mobile Energy all of Holdings' rights and obligations under the IDB-Scott
Sublease.

     In August 1995, the Tax-Exempt Bonds were issued by the IDB under an
Amended and Restated Trust Indenture dated as of August 1, 1995 (the "Tax-Exempt
Indenture") between the IDB and First Union National Bank of Georgia, as trustee
(the "Tax-Exempt Trustee"). The proceeds of the offering of the Tax-Exempt Bonds
were used to refund the 1984 Tax-Exempt Bonds.

     Concurrently with the issuance of the Tax-Exempt Bonds, the IDB released
Scott from liability under the IDB-Scott Sublease and the IDB and Mobile Energy
entered into an Amended and Restated Lease and Agreement with respect to the
Solid Waste Disposal Facilities (the "IDB Lease Agreement"). The IDB Lease
Agreement grants Mobile Energy the right to purchase the Solid Waste Disposal
Facilities for $10 upon the expiration thereof. Mobile Energy's obligations
under the IDB Lease Agreement are unconditionally guaranteed by Holdings (the
"IDB Lease Agreement Guaranty").

     Also in August 1995, Mobile Energy, the IDB, the Tax-Exempt Trustee and the
Collateral Agent entered into the Recognition, Cooperation and Consent Agreement
dated as of August 1, 1995 (the "Tax-Exempt Bonds Recognition Agreement")
pursuant to which the IDB will, among other things, (i) consent to the
assignment and grant of a security interest by Mobile Energy pursuant to certain
security documents in all of Mobile Energy's rights in the Energy Complex and
the IDB Lease Agreement, (ii) in the event of a filing of a bankruptcy petition
by or against Kimberly-Clark Tissue under Chapter 7 or 11 of the Bankruptcy
Code, and the election by Kimberly-Clark Tissue to reject the Scott-IDB Lease,
upon the written request of Mobile Energy and at Mobile Energy's expense,
exercise its rights under Section 365(h) of the Bankruptcy Code to retain its
rights under the Scott-IDB Lease (including, without limitation, rights relating
to the amount of timing of payment of rent and other amounts payable by it
thereunder and any right of use, possession, quiet enjoyment, subletting,
assignment or hypothecation) that are in or appurtenant to the real property
covered thereby for the balance of the term of the Scott-IDB Lease and for any
renewal or extension thereof to the extent that such rights are enforceable
under applicable non-bankruptcy law, and (iii) if, for any reason (other than
following Mobile Energy's payment in full of the Tax-Exempt Bonds and the
exercise by Mobile Energy of its purchase option under the IDB Lease Agreement),
the IDB fails or is otherwise unable to continue to have the right to sublease
Lot 9 to Mobile Energy pursuant to the IDB Lease Agreement (whether by
bankruptcy court order that Section 365(h) of the Bankruptcy Code is not
applicable or otherwise), or upon any termination of the IDB Lease Agreement,
upon the written request of Mobile Energy and at Mobile Energy's expense, lease
the Solid Waste Disposal Facilities to Mobile Energy directly pursuant to a
separate lease (with Mobile Energy agreeing to make the same rental payments to
the IDB as Mobile Energy would have otherwise been obligated to make under the
IDB Lease Agreement).


                                      I-59
<PAGE>

The Mixed-Use Bonds

In December 1984, the IDB issued a total of $172,000,000 in aggregate principle
amount of taxable Industrial Development Revenue Bonds due December 1, 2019 (the
"Mixed-Use Bonds") to finance the acquisition of certain facilities at the
Energy Complex (the "Energy Complex Equipment") and at the Pulp Mill. The IDB
holds title to the financed facilities (including the Energy Complex Equipment)
and leases them to Kimberly-Clark Tissue pursuant to a Facilities Lease and
Agreement dated as of December 1, 1984 (as amended, the "Facilities Lease and
Agreement"). The Energy Complex Equipment is located on the land on which the
north power house is situated. The term of the Facilities Lease and Agreement is
coextensive with the term of the Mixed-Use Bonds. Kimberly-Clark Tissue's rent
payment obligations under the Facilities Lease and Agreement are calculated to
pay all principal and interest on the Mixed-Use Bonds. Kimberly-Clark Tissue has
an option to purchase the Energy Complex Equipment at the end of the lease term
for $10. The Mixed-Use Bonds are secured by a security interest in all of the
IDB's right, title and interest in and to the Facilities Lease and Agreement and
all revenues accruing to the IDB thereunder. The Mixed-Use Bonds finance
facilities that are not entitled to tax-exempt treatment under the Internal
Revenue Code. However, the financing of these facilities (as well as the
facilities purchased with the Environmental Bonds and the 1994 Bonds (each as
defined below)) by the IDB were structured in order to entitle such facilities
to exemption from sales and property taxation. The Mixed-Use Bonds are held by
Three Rivers Timber Company, a wholly owned subsidiary of Kimberly-Clark Tissue
(the "Scott Subsidiary").

     Pursuant to a Sublease and Assignment Agreement dated as of December 12,
1994 (the "Sublease and Assignment Agreement"), Scott, in return for a lump-sum
payment by Holdings to Scott on the Acquisition Closing Date, (i) subleased to
Holdings the Energy Complex Equipment and (ii) assigned to Holdings its right to
purchase the Energy Complex Equipment from the IDB at the expiration of the
Facilities Lease and Agreement. Scott and Holdings also agreed to indemnify each
other for certain losses that may be incurred in connection with the Mixed-Use
Bonds, the Energy Complex Equipment or the Sublease and Assignment Agreement.
The Scott Subsidiary, the holder of the Mixed-Use Bonds, has delivered to
Holdings an agreement (the "Estoppel and Nondisturbance Agreement") pursuant to
which, among other things, the Scott Subsidiary has agreed (i) to look solely to
rent paid by Kimberly-Clark Tissue under the Facilities Lease and Agreement for
payments due in respect of the Mixed-Use Bonds and not to seek to recover any
such amounts from Holdings or any successor as sublessee or owner of the Energy
Complex Equipment, (ii) at no time to seek to take possession of, impose a lien
on, or interfere with the use or possession of the Energy Complex Equipment and
(iii) not to sell the Mixed-Use Bonds without Holdings' prior written consent.
Holdings assigned to Mobile Energy all of Holdings' rights to sublease and to
purchase the Energy Complex Equipment and all of its rights under the Estoppel
and Nondisturbance Agreement.

     In order to secure Mobile Energy's right to acquire the Energy Complex
Equipment upon the expiration of the Facilities Lease and Agreement,
Kimberly-Clark Tissue has granted to Mobile Energy a security interest in all of
Kimberly-Clark Tissue's right, title and interest in the Energy Complex
Equipment and in the Facilities Lease and Agreement as it relates to the Energy
Complex Equipment. In addition, in August 1995 Mobile Energy, the IDB, AmSouth
Bank of Alabama, the Collateral Agent and the Scott Subsidiary entered into the
Recognition, Cooperation and Consent Agreement (the "Mixed-Use Bonds Recognition
Agreement") pursuant to which the IDB has agreed (with the consent of the Scott
Subsidiary and the trustee under the indenture for the Mixed-Use Bonds) that in
the event that the Facilities Lease and Agreement is rejected by Kimberly-Clark
Tissue or otherwise terminated for any reason it will either (i) lease the
Energy Complex Equipment directly to Mobile Energy for nominal consideration
pursuant to a new facilities lease and agreement for a term equal to the term of
the Facilities Lease and Agreement (with an option of Mobile Energy to purchase
the Energy Complex Equipment at the end of the lease term for $10) or (ii) sell
the Energy Complex Equipment to Mobile Energy for nominal consideration.

The Environmental Bonds

Between 1973 and 1980, the IDB issued four series of 30-year bonds having an
aggregate principal amount of $24,000,000 (the "Environmental Bonds") to finance
the purchase of certain pollution control equipment at the Energy Complex (the
"Energy Complex Pollution Control Equipment") and the Mills. Title to the

                                      I-60
<PAGE>

pollution control equipment is held by the IDB but the equipment is subject to
sale to Kimberly-Clark Tissue pursuant to two Construction, Financing and
Installment Sale Agreements (as supplemented, the "Installment Sale
Agreements"). The Installment Sale Agreements give Kimberly-Clark Tissue sole
use and exclusive possession of the pollution control equipment and provide that
Kimberly-Clark Tissue is purchasing the equipment through fixed installment
payments that, in sum, equal the principal and interest due on the applicable
Environmental Bonds. When the applicable bonds have been fully redeemed, the IDB
is to transfer to Kimberly-Clark Tissue title to the applicable equipment. The
bonds of each series are secured by the money payable by Kimberly-Clark Tissue
to the IDB under the corresponding Installment Sale Agreement.

     A substantial portion of the Energy Complex Pollution Control Equipment
financed with the Environmental Bonds is no longer in operation.

     Pursuant to two separate Lease and Assignment Agreements, each dated as of
December 12, 1994 (collectively, the "Lease and Assignment Agreements"), Scott,
in return for a lump-sum payment, (i) leased to Holdings the Energy Complex
Pollution Control Equipment and (ii) assigned to Holdings its right and interest
in and to the Energy Complex Pollution Control Equipment arising under the
Installment Sale Agreements, including its right to receive instruments of
conveyance from the IDB pursuant to the Installment Sale Agreements, and
Holdings assumed certain obligations of Scott under the Installment Sale
Agreements. Scott and Holdings also agreed to indemnify each other for certain
losses that may be incurred in connection with the Environmental Bonds, the
Energy Complex Pollution Control Equipment and the Lease and Assignment
Agreements. Holdings subsequently assigned to Mobile Energy all of Holdings'
rights and obligations under the Lease and Assignment Agreements.

     In order to secure Mobile Energy's rights to become the owner of the Energy
Complex Pollution Control Equipment at the end of the terms of the respective
Installment Sale Agreements, Kimberly-Clark Tissue has granted to Mobile Energy
a security interest in all of Kimberly-Clark Tissue's rights in the Energy
Complex Pollution Control Equipment and in the Installment Sale Agreements as it
relates to the Energy Complex Pollution Control Equipment.

The 1994 Bonds

The construction of the Number 8 Recovery Boiler and related facilities (the
"Number 8 Recovery Boiler Facilities"), which began operation in 1994, was
financed by Scott and the IDB through the issuance of $117,000,000 principal
amount of Industrial Development Revenue Bonds (Scott Paper Recovery Boiler
Project) 1994 Series A (the "1994 Bonds") due December 1, 2014. The structure of
the 1994 Bonds transaction is similar to that for the Mixed-Use Bonds. The IDB
holds title to the Number 8 Recovery Boiler Facilities and, prior to the
Acquisition, leased it to Scott pursuant to a Recovery Boiler Lease and
Agreement dated as of December 1, 1994 (the "Recovery Boiler Lease and
Agreement"). The 1994 Bonds were purchased by the Scott Subsidiary. The Recovery
Boiler Lease and Agreement gives Kimberly-Clark Tissue the right to purchase the
Number 8 Recovery Boiler Facilities at the expiration of the lease term for $10
(or earlier upon the payment of $10 plus an amount equal to all principal,
premium, if any, and interest payable or to be payable with respect to all
outstanding 1994 Bonds).

     Pursuant to a Lease Assignment and Assumption Agreement, dated as of
December 12, 1994, between Scott and Holdings (the "1994 Bond Agreement"), Scott
assigned to Holdings, with the consent of the Scott Subsidiary, all of its
right, title and interest in the Recovery Boiler Lease and Agreement and the
Number 8 Recovery Boiler Facilities (including the right to purchase the Number
8 Recovery Boiler Facilities as provided in the Recovery Boiler Lease and
Agreement). In connection with the assignment of the Recovery Boiler Lease and
Agreement to Holdings, Scott caused the Scott Subsidiary to transfer the 1994
Bonds to Holdings pursuant to the Bond Transfer Instrument. Holdings
subsequently assigned the 1994 Bonds and all of its rights under the 1994 Bond
Agreement to Mobile Energy. Therefore, Mobile Energy is currently the holder of
the 1994 Bonds and the de facto obligor thereunder (by virtue of its obligation
to make payments under the Recovery Boiler Lease and Agreement to cover debt
service obligations on the 1994 Bonds). The 1994 Bonds have been pledged to the
Collateral Agent pursuant to the Security Agreement. The Collateral Agent is the
trustee with respect to the 1994 Bonds. Pursuant to the Intercreditor Agreement,
the Collateral Agent is authorized to make payments under the Lease and
Agreement by debiting certain Intercreditor Agreement accounts. Payments made to
Mobile Energy as the holder of the 1994 Bonds will be made immediately following

                                      I-61
<PAGE>

payments by Mobile Energy under the Lease and Agreement. The Intercreditor
Agreement provides that when Mobile Energy receives such payments on the 1994
Bonds, such monies will be credited to the account or accounts that were debited
by the Collateral Agent (to the extent of any such debit) in order to pay Mobile
Energy's obligations under the Lease and Agreement.

Item 3.   LEGAL PROCEEDINGS

Other than legal proceedings involving the application by Mobile Energy and
Holdings for various governmental approvals required to operate and finance the
Energy Complex, neither Mobile Energy nor Holdings is currently a party to any
material legal proceeding.

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Omitted pursuant to General Instruction I.


                                      I-62

<PAGE>

                                     PART II

Item 5.    MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no established public trading market for Holdings' common stock, all of
which is owned by Southern. There also is no established public trading market
for Mobile Energy's members' equity, all of which is held by Holdings and
Southern Energy.

Item 6.    SELECTED FINANCIAL DATA

Omitted pursuant to General Instruction I.

Item 7.    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
Complex at the Mobile Facility. Holdings acquired the Energy Complex and
commenced operations on December 16, 1994. 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 by the Pulp Mill. The Pulp, Paper and Tissue Mills currently obtain all of
their aggregate steam processing needs and 98 percent of their aggregate power
processing needs from the Energy Complex. In addition, the Energy Complex
processes weak black liquor delivered by the Pulp Mill Owner into green liquor,
a necessary component of the pulp making process. The conversion of weak black
liquor into green liquor involves a combustion process which provides heat that
is further used to generate steam used for Steam Processing Services. Mobile
Energy's revenues are comprised almost entirely of Demand Charges and Processing
Charges for services provided to the Mills.

     Demand Charges represent compensation to Mobile Energy for dedicating a
portion of the Energy Complex's capacity to the Mills. Demand Charges are
designed generally to cover, among other things, costs that are in the nature of
fixed costs, including debt service. Processing Charges are paid by each Mill
Owner to Mobile Energy based on formulary usage charges which vary from month to
month, based on the amount of Processing Services required by, and provided to,
each Mill Owner, and on Mobile Energy's efficiency with respect to fuel usage.
Processing Charges are designed generally to cover the balance of Mobile
Energy's costs that are not projected to be covered by Demand Charges, including
fuel expenses.

Results of Operations

Because the Energy Complex was not operated as an independent business prior to
its acquisition by Holdings, Holdings did not purchase a business from Scott
but, rather, purchased assets. Since the Acquisition, Holdings and subsequently
Mobile Energy have operated such assets as an independent business. The business
with respect to the Energy Complex commenced on December 16, 1994 when Holdings
began operations. As a consequence of the relatively short time period Holdings
and Mobile Energy have operated the Energy Complex, discussion and analysis of
their results of operations is necessarily limited in scope, and may not be
indicative of their future results of operations and financial condition. Thus,
the financial information contained herein is not necessarily representative of
the future results of operations and financial condition of Mobile Energy or
Holdings.

     The relationship between Holdings and Mobile Energy is a parent-subsidiary
relationship. Holdings' material assets are comprised solely of its ownership
interest in Mobile Energy and its rights in respect of a tax sharing agreement
(the "Southern Master Tax Sharing Agreement"), which apportions consolidated
income tax among Southern and its corporate subsidiaries, including Holdings.
Accordingly, the consolidated financial statements of Holdings reflect the
assets, liabilities, and operating results of Mobile Energy. Furthermore,
although Mobile Energy did not exist prior to July 13, 1995, the following

                                      II-1
<PAGE>

discussion of its results of operations assumes that, for purposes of
presentation, Mobile Energy was in existence and operating the Energy Complex as
of the beginning of calendar year 1995.

Comparison of Fiscal Year Ended December 31, 1997 to Fiscal Year Ended December
31, 1996

Revenues

Operating revenues for the year ended December 31, 1997 increased $2.4 million,
or 2.9%, compared to the same period in 1996. The increases are primarily due to
increased processing sales as a direct result of higher gas prices, and to a
lesser extent, increases in compressed air revenues. The level of Processing
Charges reflects utilization of the Energy Complex near capacity levels. Demand
Charges and Processing Charges for the years ended December 31, 1997 and 1996,
in thousands of dollars and expressed as a percent of total revenues were as
follows:

                            Year Ended                  Year Ended
                           December 31,1997           December 31,1996
                           Dollars  Percent        Dollars  Percent
                        (Dollars in thousands)   (Dollars in thousands)
     Demand Charges:
         Pulp Mill       $36,244     41.9%         $36,937    43.9%
         Tissue Mill      10,250     11.8%          10,105    12.0%
         Paper Mill       10,379     12.0%          10,357    12.3%
                          ------                    ------
                          56,873     65.7%          57,399    68.3%

     Processing Charges:
         Pulp Mill         6,473      7.51%          5,352     6.4%
         Tissue Mill      10,372     12.0%           9,991    11.9%
         Paper Mill       10,935     12.6%           9,974    11.9%
                         -------                    ------
                          27,780     32.1%          25,317    30.1%

     Other Revenues: (1)    1,828     1.2%           1,342    1.6%
                        ---------                   ------

     Total Revenues      $86,481    100.0%   $84,058   100.0%
                         =======             =======

 (1) Consists of compressed air fees and ash hauling revenue.

     The Mills' Peak Usage of Processing Services during the years ended
December 31, 1997 and 1996, respectively, were as follows:

                                  1997                  1996
                             ------------------  ------------------
                              Peak  Contractual  Peak   Contractual
    MillProcessing Services   Usage   Demand     Usage    Demand
   Pulp Liquor Conversion
        MMLBs/week            46.5      44.45    45.0      42.7
        Steam
        MMBTUs/hr             627.0     500.0    618.0     500.0
        Electricity
        MW/hr                  29.8      29.5     30.0      32.0
   Tissue Steam
        MMBTUs/hr             313.0     280.0    293.0     280.0
        Electricity
        MW/hr                  39.4      37.8     38.9      39.5


                                 1997                 1996
                              --------------      -----------------
                               Peak  Contractual  Peak   Contractual
    MillProcessing Services   Usage   Demand     Usage    Demand
   PaperSteam
        MMBTUs/hr              484.0     420.0    507.0     420.0
        Electricity
        MW/hr                   22.3      21.4     22.3      22.5

Based upon information obtained from new metering facilities installed in 1996
and pursuant to the terms of the Master Operating Agreement, the Maximum
Capacity of the Energy Complex to provide Power Processing Services was
decreased from 94 megawatts to 88.7 megawatts. Corresponding adjustments were
made to the Aggregate Demand for Power Processing Services. The Demand Charges
for Power Processing Services were also adjusted so that the reduction in
Maximum Capacity for Power Processing Services did not change the Demand Charges
to be paid to Mobile Energy. The Maximum Capacity for Liquor Processing Services
and the Contractual Demand of the Pulp Mill Owner for Liquor Processing Services
were also reset in 1997 pursuant to the terms of the Master Operating Agreement
from 42.7 million pounds per week to 44.45 million pounds per week. The Demand
Charges for Liquor Processing Services were also adjusted so that the increase
in the Maximum Capacity for Liquor Processing Services did not change the Demand
Charges to be paid to Mobile Energy

Expenses

Total operations and maintenance expense increased $.3 million, or 1.1%, for the
year ended December 31, 1997, compared to the same period in 1996. The increase
in operations and maintenance expense in 1997 results from a major turbine
generator outage in 1997. Fuel expense increased $1.7 million, or 23.5%, for
1997 compared to 1996. The $1.7 million increase in fuel expense resulted from
increased gas prices. Depreciation and amortization expense increased $.3
million for 1997, compared to 1996 primarily due to capital additions made in
1996 and 1997.

     Interest expense decreased $.9 million, or 3.0%, for 1997 compared to 1996.
The decrease reflects the payback of principal on the First Mortgage Bonds.

     Mobile Energy's net income for 1997 was $9.8 million, representing an
increase of $0.9 million, or 10.4%, compared to 1996.  Holdings' net income for
1997 was $6.0 million compared to  $5.1 million for 1996.

                                      II-2

<PAGE>

Comparison of Fiscal Year Ended December 31, 1996 to Fiscal Year Ended December
31, 1995

Revenues

Operating revenues for the year ended December 31, 1996 increased $1.6 million,
or 1.9%, compared to the same period in 1995. The increases are primarily due to
increased processing sales, and to a lesser extent, increases in compressed air
revenues. The level of Processing Charges reflects utilization of the Energy
Complex near capacity levels. Demand Charges and Processing Charges for the
years ended December 31, 1996 and 1995, in thousands of dollars and expressed as
a percent of total revenues were as follows:

                            Year Ended               Year Ended
                           December 31,1996         December 31,1995
                           Dollars  Percent       Dollars   Percent
                        (Dollars in thousands)(Dollars in thousands)
 Demand Charges:
         Pulp Mill       $36,937     43.9%        $38,074    46.2%
         Tissue Mill      10,105     12.0%          9,980    12.1%
         Paper Mill       10,357     12.3%         10,244    12.4%
                          ------                   ------
                          57,399     68.3%         58,298    70.7%

     Processing Charges: (1)
         Pulp Mill         5,352      6.4%     4,486     5.4%
         Tissue Mill       9,991     11.9%     9,538    11.6%
         Paper Mill        9,974     11.9%     9,563    11.6%
                          ------              ------
                          25,317     30.1%    23,587    28.6%

     Other Revenues: (2)    1,342     1.6%        612    0.7%
                        ---------         -----------

     Total Revenues      $84,058    100.0%   $82,497   100.0%
                         =======             =======

(1) Includes processing charges plus ash hauling revenue.
(2) Consists only of compressed air fees.

The Mills' Peak Usage of Processing Services during the years ended
December 31, 1996 and 1995, respectively, were as follows:

                                   1996               1995
                              Peak  Contractual  Peak   Contractual
    Mill Processing Services  Usage   Demand     Usage    Demand
   Pulp Liquor Conversion
        MMLBs/week            45.0      42.7     38.9      42.7
        Steam
        MMBTUs/hr            618.0     500.0    602.2     500.0
        Electricity
        MW/hr                 30.0      32.0     NA        32.0

   Tissue Steam
        MMBTUs/hr            293.0     280.0    239.3     280.0
        Electricity
        MW/hr                 38.9      39.5     NA        39.5

   Paper Steam
        MMBTUs/hr            507.0     420.0    506.2     420.0
        Electricity
        MW/hr                 22.3      22.5     NA        22.5

     Prior to the installation of certain electrical meters, which was completed
in February 1996, Mobile Energy could not precisely determine the peak Demands
of each Mill for Power Processing Services.

Expenses

Total operations and maintenance expense decreased $.2 million, or 0.9%, for the
year ended December 31, 1996, compared to the same period in 1995. The decrease
in operations and maintenance expense in 1996 results from the occurrence in
1995 of a scheduled maintenance outage of the entire Mobile Complex, including
the Pulp Mill, the Paper Mill and the Tissue Mill . There is not another outage
of this type scheduled until the spring of 1998. Fuel expense increased $1.1
million, or 17.8%, for 1996 compared to 1995. The $1.1 million increase in fuel
expense resulted from scheduled maintenance outages in March 1996 and September
1996, during which Mobile Energy used a standby gas-fired boiler in lieu of its
primary coal-fired boiler, which was idle during the outage. Depreciation and
amortization expense increased $1.1 million for 1996, compared to 1995 primarily
due to capital additions made in 1995 and 1996.

     Interest expense increased $11.6 million, or 62.7% , for 1996 compared to
1995. The increase reflects the issuance of $255.2 million of First Mortgage
Bonds in August 1995 bearing a coupon interest rate of 8.665% and the
amortization of swap breakage costs relative to interest rate hedging agreements
entered into in connection with the acquisition of the Energy Complex.

     Mobile Energy's net income for 1996 was $8.9 million, representing a
decrease of $12.1 million, or 57.1%, compared to 1995. The decrease is largely
due to the increase in interest expense noted above. Holdings' net income for
1996 compared to 1995 decreased 54.3%, and reflected comparable decreases in
minority interest and income taxes.
Income taxes were provided for based on a combined 38.25% state and federal rate
applied to pre-tax income.

Liquidity and Capital Resources

As of December 31, 1997, Holdings had $28.7million in cash and cash equivalents
and total debt of $343.1million. This level of liquidity (as applied to Mobile
Energy) will be affected by Mobile Energy's operating performance, capital
expenditures and dividend policies.

                                      II-3

<PAGE>

     Mobile Energy's working capital needs generally relate to Operation and
Maintenance Costs and debt service. In accordance with the Intercreditor
Agreement, Mobile Energy will reserve funds for certain Operation and
Maintenance activities in a separate account (the " Maintenance Reserve
Account") before such Operation and Maintenance activities are performed for
Mobile Energy. Operation and Maintenance Costs are budgeted at $27.9million and
$26.6million for 1998 and 1999, respectivley.

     Subject to Mobile Energy's right to incur additional indebtedness, the
indebtedness represented by the First Mortgage Bonds, the Tax-Exempt Bonds and a
revolving credit facility providing for working capital loans to Mobile Energy (
the "Working Capital Facility") currently represent Mobile Energy's only
material long-term indebtedness. The indebtedness evidenced by the First
Mortgage Bonds and the Tax-Exempt Bonds bears fixed rate interest, and the
indebtedness represented by borrowings under the Working Capital Facility, which
is limited to $15.0million, bears interest at variable rates.

     Mobile Energy's projected obligations for required payments of principal
and interest on long-term debt for calendar years 1998 and 1999 are $34.5million
and $3.9million, respectively.

     Mobile Energy's principal sources of working capital are cash flow from
operations, borrowings under the Working Capital Facility, balances in the
Maintenance Reserve Account and drawings under a Southern guaranty in respect of
the Maintenance Reserve Account and/or under any revolving credit facility
maintained by Southern to provide liquidity with respect to such Southern
guaranty. Since December 31, 1995, Mobile Energy has drawn an aggregate of
$8.5million under such a revolving credit facility maintained by Southern with
Banque Paribas, of which $7.0million had been repaid by Southern by January 2,
1998. As of December 31, 1997, a balance of $1.9millionwas outstanding (which
includes capitalized accrued interest).

     In order to provide for Mobile Energy's working capital needs, in August
1995 Mobile Energy entered into the Working Capital Facility with Banque Paribas
(the "Working Capital Facility Provider") providing working capital loans to
Mobile Energy. The Working Capital Facility provides for a maximum available
amount of $15.0million and may be drawn on by Mobile Energy from time to time.
Borrowings under the Working Capital Facility generally will be used by Mobile
Energy to pay for Operation and Maintenance costs incurred by Mobile Energy.
Each working capital loan is due and payable no later than 90 days from the date
such working capital loan was advanced to Mobile Energy, and no more than
$5.0million (to be adjusted in proportion to any adjustments to the maximum
available amount under the Working Capital Facility) of working capital loans
may be scheduled to mature during any calendar month. Mobile Energy is required
to repay each working capital loan on its due date and may, upon notice to the
Working Capital Facility Provider, repay or prepay any working capital loan on
any business day without premium or penalty, other than certain funding breakage
costs in respect of working capital loans bearing interest at the LIBOR Rate (as
defined in the Working Capital Facility). Mobile Energy is permitted to
re-borrow all amounts repaid or prepaid. Mobile Energy is required to repay all
working capital loans such that no amounts are outstanding under the Working
Capital Facility one time each year (other than 1995) for a period of five
consecutive days. Subject to earlier termination under certain circumstances and
subject to extension thereof by the Working Capital Facility Provider, the
Working Capital Facility will expire on December 31, 2001.

     Amounts payable under the Working Capital Facility are secured ratably with
all other senior debt of Mobile Energy (subject to the priority of the lien of
the Working Capital Facility Provider on receivables and fuel inventory). The
Working Capital Facility Provider is entitled to the repayment of principal,
interest, fees and other amounts scheduled to be due under the Working Capital
Facility prior to the payment of Operation and Maintenance costs (other than
certain Operation and Maintenance costs payable to the Mill Owners in connection
with the exercise of certain remedies the Mill Owners have under the Project
Agreements) and (together with, upon the occurrence and continuation of certain
bankruptcy events in respect of Mobile Energy or Holdings, all amounts due upon
the acceleration thereof) prior to any amounts payable in respect of other
senior debt, including the First Mortgage Bonds and any amounts payable under
the lease entered into in connection with the Tax-Exempt Bonds. Upon the
distribution of certain monies or proceeds of pledged collateral following
certain events of default or bankruptcy events, the Working Capital Facility
Provider is entitled to payment in full in priority to all other holders of
senior debt out of (i) Mobile Energy's receivables and (ii) the proceeds of the
sale of the Energy Complex's fuel inventory.

                                      II-4

<PAGE>

     Upon its establishment in August 1995 at the time of the issuance of the
First Mortgage Bonds and the Tax Exempt Bonds, the Maintenance Reserve Account
was credited in an amount equal to $11.0million. In lieu of funding the
Maintenance Reserve Account with cash at that time, Mobile Energy provided
instead a guaranty from Southern in an amount equal to $11.0million. Monies in
the Maintenance Reserve Account are applied to the payment of Maintenance
Expenditures.

     The Intercreditor Agreement requires Mobile Energy to make deposits into
the Maintenance Reserve Account periodically sufficient to cover projected
future Maintenance Expenditures, any shortfalls in the amounts of prior deposits
required to be made into the account by Mobile Energy, and any withdrawals in
excess of the projected Maintenance Expenditures. Mobile Energy may also make
additional, discretionary deposits into the Maintenance Reserve Account. In lieu
of funding the Maintenance Reserve Account with cash, or in replacement of
monies required to be on deposit therein, Mobile Energy may from time to time
deliver "Reserve Account Security," which is either, or any combination of, (i)
a guaranty from Southern provided Southern satisfies certain credit standards
set out in the Intercreditor Agreement, or (ii) one or more letters of credit
issued by a commercial bank or banks whose long-term unsecured debt is rated at
least "A" by Standard & Poors' Ratings Group, "A" by Fitch Investors Service,
L.P. and "A2" by Moody's Investors Service, Inc.

     Mobile Energy has established a separate account, the Mill Owner
Maintenance Reserve Account, pursuant to the Master Operating Agreement and the
Mill Owner Maintenance Reserve Account Agreement for the benefit of Mobile
Energy and, while the Mill Owners are exercising the Mill Owner Step-In Rights,
the Mill Owners. The Mill Owner Maintenance Reserve Account is currently funded
in an amount equal to $2.0million. 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 $2.0million 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 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 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
financial condition.

     The Energy Services Agreements and the Master Operating Agreement require
the Mill Owners to pay Demand Charges and Processing Charges. The Demand Charges
were designed generally to cover, among other things, Mobile Energy's projected
costs that are in the nature of fixed costs (including the payment of debt
service), assuming that certain operating performance standards are satisfied.
The Processing Charges were designed generally to cover the balance of Mobile
Energy's costs that are not projected to be covered by Demand Charges, including
variable costs such as fuel related expenses.

     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. In
1997, 65.7% of Mobile Energy's total operating revenues were attributable to
Demand Charges with almost all of the remainder attributable to Processing
Charges.

     The Demand Charges and the Processing Charges, collectively, were designed
so as to result in Mobile Energy having net income. There can be no assurance,
however, that (i) the assumptions with respect to operating performance
                                      II-5

<PAGE>

standards that underlay the design of the Demand Charges and the Processing
Charges will at all times be satisfied, (ii) the Demand Charges will at all
times cover Mobile Energy's costs that are in the nature of fixed costs,
including debt service payments, (iii) the Processing Charges will at all times
cover the costs that are not covered by Demand Charges, including variable costs
such as fuel related expenses, or (iv) the payment of Demand Charges and
Processing Charges will at all times result in Mobile Energy having net income.

     Payments of Demand Charges and Processing Charges by the Mill Owners under
the Energy Services Agreements provide virtually all of Mobile Energy's
operating revenues and are therefore the primary source of funds for the payment
of debt service. There are no significant alternative sources of funds available
to Mobile Energy to make such debt service payments (other than a debt service
reserve account established for the benefit of the holders of the First Mortgage
Bonds (the "Debt Service Reserve Account"), a debt service reserve account
established for the benefit of the holders of the Tax Exempt Bonds (the
"Tax-Exempt Debt Service Reserve Account") and, under certain circumstances,
certain other accounts). The Debt Service Reserve Account is funded in an amount
equal to $21.9million (the "Debt Service Reserve Account Required Balance").
Mobile Energy may, in whole or in part, replace monies on deposit in, or fund
amounts required to be deposited in, the Debt Service Reserve Account with
Reserve Account Security. Currently Mobile Energy has funded the Debt Service
Reserve Account with Reserve Account Security (in the form of a guaranty from
Southern) in an amount equal to the Debt Service Reserve Account Required
Balance. Currently, the Tax-Exempt Debt Service Reserve Account is funded with
Reserve Account Security (in the form of a letter of credit) in an amount equal
to $5.9million.

     If Demand Charges and Processing Charges were at any time insufficient to
cover Mobile Energy's fixed costs (including payment of debt service), Mobile
Energy could be unable to make its required debt service payments (particularly
if funds then available in the Debt Service Reserve Account, the Tax Exempt Debt
Service Reserve Account or the other accounts were also insufficient to cover
such payments) or could be unable to pay its other fixed costs.

     Mobile Energy believes that its cash flow from operations, together with
its other available sources of liquidity, will be adequate to make all required
payments of principal of and interest on its debt, to permit anticipated capital
expenditures and to fund working capital and other cash requirements for the
foreseeable future.

Environmental Matters

Mobile Energy is subject to comprehensive and dynamic federal, state and local
environmental laws and regulations, including those governing air emissions,
waste water discharges and hazardous and non-hazardous waste disposal. Mobile
Energy recognizes that both it and the Mills may incur capital and operating
costs in the future to comply with currently existing laws and regulations, new
regulatory requirements and possible new statutory requirements.

     One such regulatory requirement is the Cluster Rule, which was finalized by
the EPA in November 1997. None of the Mills is contractually obligated to Mobile
Energy to comply with the Cluster Rule or any other environmental regulation.
Thus, the Mills could choose to close entirely rather than incur the costs
imposed by the Cluster Rule. As such, the failure by the Mills to spend the
monies necessary to comply with the Cluster Rule could, indirectly, have a
material adverse impact on Mobile Energy's results of operations, to the extent
that it were to reduce the amount of Processing Services the Mills purchase from
the Energy Complex.

     Another such regulation is the Combustion Rule, which was proposed by the
EPA in November 1997. If promulgated in some form, the Combustion Rule (which
would principally apply to the Energy Complex) could require significant capital
expenditures by Mobile Energy and equipment and operational modifications to the
Energy Complex. Because the Combustion Rule has only just recently been
proposed, Mobile Energy is still in the process of studying the potential
impacts of the rule and cannot estimate the expense required to comply with such
a rule. Under the Master Operating Agreement, Mobile Energy generally is
permitted to charge the Mills the reasonable cost of capital expenditures or
Operation and Maintenance expenses incurred by Mobile Energy as a result of the
Combustion Rule or the Cluster Rule. Nevertheless, there can be no assurance
that the Mill Owners will comply with their obligations under the Master
Operating Agreement with respect to the Combustion Rule or the Cluster Rule. As

                                      II-6
<PAGE>

such, the promulgation of the Cluster Rule or the Combustion Rule, together with
the failure by the Mill Owners to comply with such obligations under the Master
Operating Agreements, could have a material adverse effect on the financial
condition of Mobile Energy.

     As regulatory agencies have not yet promulgated final standards for some
existing programs, (such as the Combustion Rule), Mobile Energy cannot at this
time reasonably estimate its costs of compliance with these additional programs
and requirements or the timing of any such costs. Nevertheless, assuming that
the current environmental regime (exclusive of any proposed or suggested
statutes, rules or regulations) remains in effect, Mobile Energy is not aware of
any environmental conditions at the Energy Complex that would reasonably be
expected to have a material adverse effect on the financial condition of Mobile
Energy.

         The EPA has proposed to adopt a new use designation for the Mobile
River. If that new use designation is adopted by EPA, the Pulp Mill Owner could
be required by ADEM to reduce or otherwise alter materially its discharges to
the Mobile River. If that occurs, the Pulp Mill Owner may modify the discharge
specifications or prohibitions applicable to Mobile Energy under the Water
Agreement and the Rules Governing Discharge as reasonably required to maintain
compliance with the Pulp Mill Owner's NPDES Permit or other Governmental Rule.
Such a modification of the discharge specifications or prohibitions applicable
to Mobile Energy could require capital expenditures by Mobile Energy and
operational modifications to the Energy Complex that would have a materially
adverse impact on Mobile Energy's financial condition. Because the redesignation
of the Mobile River has not been finally determined by EPA, and because ADEM's
actions in response to any such redesignation are at this time unknown, Mobile
Energy cannot estimate the expense that could be imposed upon it as a result of
any such redesignation by EPA of the Mobile River.

 In the event that the Lott Road Landfill or any other landfill at which Mobile
Energy's boiler ash is disposed requires remediation in the future, Mobile
Energy may be required to participate. At present, Mobile Energy cannot estimate
the amount by which its costs would increase as a result thereof. However, a
requirement to participate in landfill remediation could have a material adverse
impact on Mobile Energy.

Funding of the Maintenance Reserve Account

The Intercreditor Agreement requires Mobile Energy to make certain deposits into
the Maintenance Reserve Account, and permits Mobile Energy to make additional,
discretionary deposits into the Maintenance Reserve Account. The amount of such
required and discretionary deposits in any given fiscal year may be greater than
the maintenance expenses actually incurred by Mobile Energy in such fiscal year.
For purposes of calculating debt service coverage ratios under Mobile Energy's
Financing Documents, deposits into the Maintenance Reserve Account and the Mill
Owner Maintenance Reserve Account are deemed to be operating expenses in the
fiscal year such deposits are made, rather than in the fiscal year funds are
withdrawn from the Maintenance Reserve Account or the Mill Owner Maintenance
Reserve Account to pay maintenance expenses. The effect of deeming such deposits
to be operating expenses in the fiscal year the deposits are made (together with
the funding provisions set forth in the Intercreditor Agreement that may cause
or permit such deposits to be higher than actual maintenance expenses in any
given fiscal year) is to levelize debt service coverage ratios over the term of
the First Mortgage Bonds and the Tax-Exempt Bonds.

Tax Matters

Mobile Energy is required to comply with the provisions of federal, state and
local tax laws. Future legislative, judicial or administrative changes to or
interpretations of existing tax laws may occur that could result in Mobile
Energy becoming subject to certain taxes to which it is not currently subject.
Such changes could have a material adverse effect on the financial condition of
Mobile Energy.

     Under Alabama law, property owned by the IDB and used by a private user
pursuant to a lease or other agreement entered into prior to May 1992 (or
entitled to be used by a private user at some future time pursuant to an
inducement entered into or adopted prior to May 1992) is not subject to ad
valorem taxes. The Energy Complex equipment refinanced with the Tax-Exempt
Bonds, the 1994 Bonds, the Mixed-Use Bonds and the Environmental Bonds is all
owned by the IDB and was constructed and leased to a private user prior to May
1992 or, in the case of the equipment financed with the 1994 Bonds, pursuant to
an inducement agreement entered into prior to May 1992. Accordingly, Mobile
Energy has taken the position that such equipment is not subject to ad valorem


                                      II-7
<PAGE>

taxes (and that no such taxes have ever been paid with respect to such
equipment). In addition, Mobile Energy has received no notice or other
determination from the Alabama Department of Revenue or the County of Mobile
finding that such equipment actually is (or will be) subject to ad valorem
taxes. There can be no assurance, however, that Mobile Energy will at all times
be considered to be in compliance with all applicable tax statutes and
regulations or if such equipment were subject to ad valorem taxes, that any
action required to bring Mobile Energy into compliance with applicable tax
statutes and regulations would not materially adversely affect Mobile Energy's
financial condition.

     The State of Alabama assesses the shares of stock of domestic corporations
("Shares Tax") at 20% of their value. ("Domestic corporation" is defined as a
corporation incorporated in Alabama.) Such corporations must file a return with
the Alabama Department of Revenue.

     In January 1996, Holdings filed its Shares Tax return for the tax year
beginning October 1, 1995 and ending September 30, 1996, and subsequently paid
the tax due by December 31, 1996 for such assessment. For the tax year beginning
October 1, 1996 and ending September 30, 1997, Holdings filed its Shares Tax
return pursuant to a certification from Mobile County to the effect that the
book value of certain industrial development board assets, pollution control
assets and certain other real and personal property held by Holdings included
property held by Mobile Energy (the Alabama LLC in which Holdings is a member).
Therefore, Holdings effectively claimed a deduction for such assets in its
Shares Tax return that was filed for such year. In addition, although Holdings
initially determined to seek a refund for the tax paid for the tax period ending
September 30, 1996. Holdings has now determined that it will not seek a refund ,
therefore, Holdings has expensed this tax.

Although the Alabama Department of Revenue assessment for the tax year ending
September 30, 1997 has allowed the deduction and Holdings has received no notice
or other determination from the Alabama Department of Revenue that the
assessment will be challenged, there can be no assurance that the Alabama
Department of Revenue will continue to consider Holdings to be in compliance
with the Share Tax provision.

New Accounting Standards

In July 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which will be effective in 1998. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of the statement is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events of the
period other than transactions with owners (comprehensive income). Comprehensive
income is the total of net income and all other non-owner changes in equity. The
Company will adopt this statement in 1998.

     In July 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". This statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This Statement supersedes SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise. As this
statement is disclosure related, there is not expected to be a financial
statement impact.

Year 2000 Issue

The Year 2000 issue refers generally to the data structure problem that will
prevent systems from properly recognizing dates after the year 1999. For
example, computer programs and various types of electronic equipment that
process date information by reference to two digits rather than four to define
the applicable year may recognize a date using "00" as the year 1900 rather than
the year 2000. The Year 2000 problem could result in system failures or
miscalculations causing disruptions of operations. The Year 2000 problem may
occur in computer software programs, computer hardware systems and any device
that relies on a computer chip if that chip relies on date information. Based on
a preliminary study, Mobile Energy does not anticipate either a significant
amount of incremental expense or a disruption in service associated with the
Year 2000 issue and its impact on Mobile Energy's systems. However, there can be

                                      II-8
<PAGE>

no assurance that Mobile Energy's systems nor the systems of other companies
with whom Mobile Energy conducts business (including the Mill Owners) will be
Year 2000 compliant prior to December 31, 1999 or that the failure of any such
system will not have a material adverse effect on Mobile Energy's business,
operating results and financial condition.


Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


                                      II-9





<PAGE>



Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO 1997 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>


<S>                                                                                                       <C>
                                                                                                          Page
Mobile Energy Services Company, L.L.C.
   Report of Independent Public Accountants                                                                II-13
   Balance Sheets at December 31, 1997, 1996 and 1995                                                      II-14
   Statements of Income for the Years Ended December 31, 1997, 1996, and 1995                              II-15
   Statements of Changes in Members' Equity for the Years Ended December 31,
    1997, 1996 and 1995                                                                                    II-16
   Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and  1995                          II-17
   Notes to Financial Statements                                                                           II-18

Mobile Energy Services Holdings, Inc.  and Subsidiary
   Report of Independent Public Accountants                                                                II-28
   Consolidated Assets for the Years Ended December 31, 1997 1996 and 1995                                 II-29
   Consolidated Liabilities and Stockholders Equity for the Years Ended December 31, 1997,
    1996 and 1995                                                                                          II-29
   Consolidated Statements of Income for the Years Ended December 31, 1997 and 1996
    and 1995                                                                                               II-30
   Consolidated Statements of Changes in Stockholder's Equity for the Years Ended
    December 31, 1997 and 1996 and 1995                                                                    II-31
   Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995              II-32
   Notes to Financial Statements                                                                           II-33

</TABLE>

                                     II-10

<PAGE>












                     MOBILE ENERGY SERVICES COMPANY, L.L.C.

                                FINANCIAL SECTION



                                     II-11

<PAGE>







                     Mobile Energy Services Company, L.L.C.

          Financial Statements As of December 31, 1997, 1996, and 1995
                                  Together With
                                Auditors' Report



                                     II-12
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS






To Mobile Energy Services Company, L.L.C.:


We have audited the accompanying balance sheets of MOBILE ENERGY SERVICES
COMPANY, L.L.C. (an Alabama limited liability company) as of December 31, 1997
and 1996 and the related statements of income, changes in Members' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mobile Energy Services Company,
L.L.C. as of December 31, 1997 and 1996 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.





/s/Arthur Andersen LLP
Atlanta, Georgia
February 11, 1998

                                     II-13
<PAGE>


                     MOBILE ENERGY SERVICES COMPANY, L.L.C.


                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                 (In Thousands)



                                     ASSETS


                                                       1997           1996
                                                      -------         ------


CURRENT ASSETS:
    Cash and cash equivalents                          $ 23,131       $  19,896
    Restricted deposits                                  17,335          17,414
    Trade accounts receivable                            15,510          14,467
    Materials and supplies                                3,185           2,854
    Prepaid expenses and other                              982              30
                                                       --------       ---------
              Total current assets                       60,143          54,661
                                                       --------       ---------
PROPERTY, PLANT, AND EQUIPMENT                          377,232         374,988
    Less accumulated depreciation                       (35,091)        (23,667)
    Construction work in process                          1,676           3,568
                                                       --------        --------
              Property, plant, and equipment, net       343,817         354,889
                                                       --------        --------

DEFERRED LOAN COSTS, net of accumulated amortization
    of $1,651 and $968 at December 31, 1997 and 1996,
    respectively
                                                         13,504          14,188
                                                       --------        --------
              Total assets                             $417,464        $423,738
                                                        ========        ========

                         LIABILITIES AND MEMBERS' EQUITY


CURRENT LIABILITIES:
    Trade accounts payable                           $    1,898      $    1,287
    Accounts payable--associated company                  5,180           4,016
    Distribution payable                                 12,642          12,782
    Note payable                                         16,156          23,564
    Current portion--long-term debt                       7,885           7,350
    Accrued interest                                     13,503          13,846
    Other                                                 3,210           1,524
                                                      ---------        --------
              Total current liabilities                  60,474          64,369
                                                      ---------        --------

LONG-TERM DEBT (Note 5)                                 289,969         296,461
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)

MEMBERS' EQUITY                                          67,021          62,908
                                                       ---------       --------
              Total liabilities and Members' equity    $417,464        $423,738
                                                       ========        ========




      The accompanying notes are an integral part of these balance sheets.

                                     II-14


<PAGE>



                     MOBILE ENERGY SERVICES COMPANY, L.L.C.

                              STATEMENTS OF INCOME

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

                                 (In Thousands)







                                            1997          1996          1995
                                          --------       -------       ------


OPERATING REVENUES:

    Demand charges                         $56,873       $57,399       $58,298
    Processing sales                        27,780        25,317        23,587
    Other                                    1,828         1,342           612
                                           -------       -------       -------
              Total operating revenues      86,481        84,058        82,497
                                           -------       -------       -------
OPERATING EXPENSES:

    Operations and maintenance              26,152        25,864        26,094
    Fuel                                     9,169         7,422         6,303
    Depreciation and amortization           13,005        12,702        11,608
                                           -------       -------       -------
              Total operating expenses      48,326        45,988        44,005
                                           -------       -------       -----
OPERATING INCOME                            38,155        38,070        38,492

INTEREST EXPENSE                           (29,192)      (30,094)      (18,501)

OTHER INCOME                                   849           942         1,012
                                           -------       -------       -------
NET INCOME                                 $ 9,812       $ 8,918       $21,003
                                           =======       =======       =======


                                     II-15


       The accompanying notes are an integral part of these statements.


<PAGE>



                     MOBILE ENERGY SERVICES COMPANY, L.L.C.


                    STATEMENTS OF CHANGES IN MEMBERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995


                                 (In Thousands)








BALANCE, December 31, 1994                                           $79,750

    Net income                                                        21,003
    Capital contributions                                              3,077
    Distributions to Members                                         (37,058)
                                                                     -------
BALANCE, December 31, 1995                                            66,772

    Net income                                                         8,918
    Distributions to Members                                         (12,782)
                                                                     -------
BALANCE, December 31, 1996                                            62,908

    Net income                                                         9,812
    Distributions to Members                                          (5,699)
                                                                     -------
BALANCE, December 31, 1997                                           $67,021
                                                                     =======







        The accompanying notes are an integral part of these statements.

                                     II-16


<PAGE>

                     MOBILE ENERGY SERVICES COMPANY, L.L.C.


                            STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995


                                 (In Thousands)

<TABLE>
<CAPTION>


<S>                                                                            <C>          <C>        <C>

                                                                                1997         1996         1995


CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                                 $  9,812     $  8,918      $21,003
                                                                               --------     --------      -------
    Adjustments to reconcile net income to net cash provided by
      operating activities:
           Depreciation and amortization                                         13,005       12,702       11,608
           Changes in certain operating assets and liabilities:
              Increase in trade accounts receivable                              (1,043)        (669)      (9,568)
              Prepaid expenses and other                                           (952)       1,602         (396)
              Increase (decrease) in accounts payable--associated
                 company                                                          1,164       (1,465)      (5,238)
              (Decrease) increase in accrued interest                              (348)       3,957        9,570
              Other, net                                                          1,670         (990)       1,247
                                                                                -------      -------      -------
                     Total adjustments                                           13,496       15,137        7,223
                                                                                -------      -------      -------
                     Net cash provided by operating activities                   23,308       24,055       28,226
                                                                                -------      -------      -------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of property, plant, and equipment                                  (1,009)      (9,670)     (11,097)
                                                                                -------      -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
    (Repayments) borrowings of notes payable, net                                (7,408)       9,489     (175,925)
    (Repayments) issuance of long-term debt                                      (5,957)      (9,612)     197,238
    Payment of member distributions                                              (5,699)     (23,004)     (14,054)

                     Net cash (used in) provided by financing activities
                                                                                (19,064)     (23,127)      10,336
                                                                                -------      -------      -------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  3,235      (8,742)       27,465

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

                                                                                 19,896       28,638        1,173
                                                                                -------      -------      -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                        $23,131      $19,896      $28,638
                                                                                =======      =======      =======



SUPPLEMENTAL CASH FLOW INFORMATION:

    Cash paid during the period for:

       Interest                                                                 $27,358      $24,585      $ 8,493
                                                                                =======      =======      =======


</TABLE>


    The accompanying notes are an integral part of these statements.

                                II-17

<PAGE>



                     MOBILE ENERGY SERVICES COMPANY, L.L.C.


                          NOTES TO FINANCIAL STATEMENTS

                        DECEMBER 31, 1997, 1996 AND 1995



  1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      General

      Mobile Energy Services Company, L.L.C. ("Mobile Energy") was organized on
      July 13, 1995. Mobile Energy Services Holdings, Inc. ("Holdings"), a
      wholly owned subsidiary of The Southern Company ("Southern"), holds a 99%
      equity interest in Mobile Energy and Southern Energy Resources, Inc.
      ("SERI"), a wholly owned subsidiary of Southern and formerly known as
      Southern Electric International, Inc. and Southern Energy, Inc. (together
      with Holdings, the "Members") holds the remaining 1% equity interest.
      Mobile Energy was created to own and operate an energy and chemical
      recovery complex located in Mobile, Alabama (the "Energy Complex"),
      purchased by Holdings on December 16, 1994 (the "Acquisition") from Scott
      Paper Company ("Scott Paper"). During 1995, Scott Paper merged with
      Kimberly-Clark Tissue Company ("Kimberly-Clark Tissue"),a subsidiary of
      Kimberly-Clark Corporation. Most of the Energy Complex's fuel needs are
      met from waste and by-products generated by a pulp mill (the "Pulp Mill"),
      a paper mill (the "Paper Mill"), and a tissue mill (the "Tissue Mill" and
      together with the Pulp Mill and the Paper Mill, the "Mills") located in
      Mobile, Alabama.

      Concurrent with the Acquisition, Holdings entered into various long-term
      contracts with Scott Paper in its capacity as the owner of the Pulp Mill
      and the Tissue Mill and with S. D. Warren Company ("S. D. Warren"), a
      wholly owned subsidiary of Scott Paper, in its capacity as the owner of
      the Paper Mill (Note 3). Ownership of S. D. Warren was subsequently
      transferred to an entity unaffiliated with Scott Paper. Pursuant to the
      contracts, the Energy Complex provides substantially all of the power,
      steam, and liquor processing services required by the Mills.

      Effective July 14, 1995, Holdings contributed all of its assets (other
      than an agreement for the provision of administrative and other services
      with Southern Company Services, Inc.), liabilities, and operations (the
      "Transfer"), including the Energy Complex, to Mobile Energy in the form of
      a tax-free contribution. The Transfer has been accounted for in a manner
      similar to a pooling of interests, and accordingly, the financial
      statements for prior periods include the accounts of Holdings prior to the
      Transfer.

                                     II-18
<PAGE>

      Accounting Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.

      Presentation

      Certain prior period amounts presented in the financial statements have
      been reclassified to conform to the current period presentation.

      Property, Plant, and Equipment

      Property, plant, and equipment are recorded at cost. Depreciation is
      provided using the straight-line method over the estimated economic lives
      of the related assets (ranging from 5 to 35 years). Upon the retirement or
      sale of assets, the costs of such assets and the related accumulated
      depreciation are removed from the balance sheet and the gain or loss, if
      any, is included in income.

      At December 31, 1997 and 1996, property, plant, and equipment consisted of
      the following (in thousands):

                                                        1997          1996


                Buildings                              $  18,591     $  18,591
                Machinery and equipment                  358,641       356,397
                                                       ---------     ---------

                                                        $377,232      $374,988
                                                       =========      ========


      Long-Lived Assets

      The Financial Accounting Standards Board has issued Statements of
      Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
      Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
      This statement requires that long-lived assets be reviewed for impairment



                                     II-19
<PAGE>

      whenever events or changes in circumstances indicate that the carrying
      amount of an asset may not be recoverable. This statement also imposes
      stricter criteria for regulatory assets by requiring that such assets be
      probable of future recovery at each balance sheet date. The Company
      adopted this standard on January 1, 1996 without a material impact on the
      financial statements.

      Cash and Cash Equivalents

      Cash and cash equivalents consist primarily of highly liquid investments
      with original maturities of three months or less and are carried at cost,
      which approximates fair value.

      Restricted Deposits

      Restricted deposits consist of amounts required by debt agreements (Note
5) to be set aside for upcoming serial principal repayments.

      Fair Value of Financial Instruments

      The carrying values of financial assets and liabilities, as defined in
      Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
      About Fair Value of Financial Instruments," in the accompanying balance
      sheets approximate their fair values, except for the 8.665% and 6.95%
      bonds (Note 5), the fair values of which are based on quoted market
      prices, as follows (in millions):

                                                       Carrying       Fair
                                                     -------------  ---------
                                                        Amount        Value


                8.665% first mortgage bonds                $221         $275
                6.95% industrial revenue bonds               77           95


      Deferred Loan Costs

      Loan costs represent amounts incurred for professional services and other
      related costs for the offering of bonds discussed in Note 5. These costs
      are being amortized using the straight-line method over the life of the
      related bonds.

      Income Taxes

      As a limited liability company, Mobile Energy is not subject to federal
      and state income taxes. The taxable income or loss of Mobile Energy is
      included in the income tax returns of its Members. Accordingly, no
      provision for income taxes has been reflected in the accompanying
      financial statements.

                                     II-20

<PAGE>

      Derivatives

      In anticipation of potential interest rate risks associated with the
      acquisition (Note 2) and its related long-term financing, Mobile Energy
      entered into two interest rate swap options ("Swap Options") and two
      interest rate swaps ("Swaps") to manage such exposure by trading variable
      rate obligations for fixed rate obligations. In all cases, the Swap
      Options and Swaps related to specific portions of Mobile Energy's
      anticipated debt commitments and were of notional amounts and maturities
      that are consistent with such commitments.

      The Swap Options and Swaps were treated as hedges for the anticipated
      debt. Accordingly, the gains and losses which resulted upon the
      termination of the Swap Options and Swaps were deferred and are being
      amortized to interest expense over the period of the related debt, as are
      the premiums paid for the Swap Options and Swaps.


  2.  PURCHASE OF PROPERTY, PLANT, AND EQUIPMENT

      On December 16, 1994, Mobile Energy purchased certain property, plant, and
      equipment located near Mobile, Alabama, from Scott Paper for approximately
      $264,000,000 cash and assumed various liabilities of Scott Paper totaling
      approximately $92,000,000. The excess of the fair value of assets acquired
      over the purchase price paid was allocated among the assets purchased in
      accordance with Accounting Principles Board Opinion No. 16. The total cash
      purchase price of approximately $263,597,000 was allocated as follows (in
      thousands):

               Utility plant                                 $356,152
               Long-term obligations (Note 5)                 (85,000)
               Current liabilities                             (7,555)
                                                             --------
                                                             $263,597
                                                             ========

  3.  COMMITMENTS AND CONTINGENCIES

      Cluster and Combustion Rule

      Mobile Energy is contractually obligated under three energy service
      agreements (the "Agreements") to provide power processing services and
      steam processing services to the Mills and liquor processing services to

                                     II-21
<PAGE>

      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 is subject to dynamic federal, state, and local
      environmental laws and regulations. For example, the Environmental
      Protection Agency ("EPA") has issued (i) certain standards for the control
      of waste-water pollutants facilities and (ii) a national emission standard
      for hazardous air pollutants from facilities which would include the Mills
      (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 operation and maintenance expenses 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 nonenvironmental law or regulation) or
      would have the ability to comply with its obligations under the master
      operating agreement associated with the Combustion Rule. 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 the proposed Combustion Rule were not
      released until November 1997, Mobile Energy is unable to reasonably
      estimate the potential costs, if any, that may result from compliance with
      these additional programs.

      Lease Commitments

      In connection with the Acquisition, Mobile Energy entered into
      noncancelable 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,

                                     II-22
<PAGE>

      retention of the property is not under the control of Mobile Energy due to
      Kimberly-Clark Tissue 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 ensured
      and therefore is not considered a bargain purchase option under SFAS No.
      13, "Accounting for Leases."

  4.  RELATED-PARTY TRANSACTIONS

      Under the terms of an agreement between SERI and Mobile Energy, SERI
      provides all operations and maintenance services for the Energy Complex.
      Such services are billed to Mobile Energy at SERI's direct cost plus an
      overhead cost allocation and totaled approximately $26,152,000 and
      $24,505,000 for the years ended December 31, 1997 and 1996, respectively.

  5.  LONG-TERM DEBT

      Details of long-term debt at December 31, 1997 and 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
<S>                                                                       <C>         <C>


                                                                           1997          1996


      8.665% first mortgage bonds, due serially on a semiannual basis
      through 2017; secured by the Energy Complex, net of unamortized
      discount of $20.755 million and $22.012 million at December 31,
      1997 and 1996,
      respectively                                                       $221,210      $227,303

      Obligations incurred in connection with the sale by public
      authorities of tax-exempt industrial revenue bonds (Series
      1995), 6.95%, due serially on an annual basis beginning January
      1, 2017 and ending January 1, 2020; secured by the Energy
      Complex, net of unamortized discount of $8.356 million and
      $8.492 million at December 31, 1997 and 1996, respectively
                                                                        $  76,644     $  76,508

      Less current portion                                                  7,885         7,350
                                                                        ---------     ---------
      Long-term debt                                                     $289,969      $296,461
                                                                        =========     =========
</TABLE>



                                     II-23
<PAGE>


      On August 15, 1995, Mobile Energy issued $255,210,000 of first mortgage
      bonds, the proceeds from which were used primarily to repay Southern a
      $190,000,000 bridge loan and to terminate the Swaps (Note 1). The loss on
      termination of the related Swap of $23.6 million has been treated as a
      discount on the related debt. This discount and the rate of interest
      represent an effective interest rate, compounded monthly, of 10.037%. Also
      on August 15, 1995, Mobile Energy joined with public authorities and
      issued $85,000,000 of tax-exempt bonds, the proceeds from which were used
      to refund Series 1984 bonds of $85,000,000, which were assumed in the
      Acquisition (Note 2). The loss on termination of the related Swap of $8.7
      million has been treated as a discount on the related debt. This discount
      and the rate of interest represent an effective interest rate, compounded
      monthly, of 7.893%.

      On August 24, 1995, Mobile Energy entered into a revolving credit
      agreement expiring December 31, 2001 with Banque Paribas which allows
      Mobile Energy to draw up to $15,000,000 at an interest rate of LIBOR plus
      1% ($606,897 at 7.0%, $2,005,677 at 7.0%, $1,821,029 at 7.0%, $3,810,031
      at 7.0%, and $6,000,000 at 7.0% on December 31, 1997). Mobile Energy is
      required to have no borrowings for a period of five consecutive business
      days during each year; therefore, the borrowings under this agreement are
      classified as current in the accompanying balance sheets.

      In addition, Southern entered into a separate working capital facility
      aggregating to $16,908,000 with Banque Paribas expiring December 31, 2001
      at an interest rate of LIBOR plus .35%, under which Mobile Energy may draw
      funds but for which it has no liability to Banque Paribas. There were
      borrowings which totaled $1,912,132 at 6.1625% as of December 31, 1997.
      Commitment fees ranging from .1% to .375% per annum were charged to Mobile
      Energy based on the unused portion of these agreements.

      At December 31, 1997, the annual scheduled maturities of long-term debt
      during the next five years are as follows (in thousands):

                                  1998                               $7,885
                                  1999                                8,340
                                  2000                                8,840
                                  2001                                9,335
                                  2002                                9,695


                                     II-24
<PAGE>

  6.  SIGNIFICANT CUSTOMERS, SUPPLIERS, AND CONCENTRATION OF CREDIT RISK

      Mobile Energy derived approximately 74% and 75% of its revenues during the
      years ended December 31, 1997 and 1996, respectively, from Kimberly-Clark
      Tissue. The remainder of Mobile Energy's revenues was derived from S. D.
      Warren. Receivables outstanding from sales to Kimberly-Clark Tissue and S.
      D. Warren were approximately $11.5 million and $4.0 million, respectively,
      at December 31, 1997 and were approximately $10.7 million and $3.7
      million, respectively, at December 31, 1996. In addition, as indicated in
      Note 1, the majority of the Energy Complex's fuel needs are met by the
      Mills. These concentrations expose Mobile Energy's operations to the risk
      of severe impact in the near term should any of the Mills cease operations
      (Note 3).

  7.  SUBSEQUENT EVENTS (Unaudited)

      Substantially all of SERI's employees at the Energy Complex (Note 4) are
      subject to collective bargaining agreements. As of December 31, 1997, a
      number of employees had not completed renogotiations of their collective
      bargaining agreements which expired in 1997. However, in March of 1998,
      the agreements were renegotiated and extend to 2002.



                                     II-25
<PAGE>


                      MOBILE ENERGY SERVICES HOLDINGS, INC.

                                FINANCIAL SECTION

                                     II-26

<PAGE>





                                  Mobile Energy Services Holdings, Inc.
                                              and Subsidiary

                                    Consolidated Financial Statements
                                 as of December 31, 1997, 1996, and 1995
                                              Together With
                                             Auditors' Report

                                     II-27


<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS






To the Board of Directors of
Mobile Energy Services Holdings, Inc.:


We have audited the accompanying consolidated balance sheets of MOBILE ENERGY
SERVICES HOLDINGS, INC. (an Alabama corporation and a wholly owned subsidiary of
Southern Company) AND SUBSIDIARY as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for each of the three years ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mobile Energy Services
Holdings, Inc. and subsidiary as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years ended
December 31, 1997, in conformity with generally accepted accounting principles.




/s/Arthur Andersen LLP
Atlanta, Georgia
February 11, 1998

                                     II-28
<PAGE>


                     MOBILE ENERGY SERVICES HOLDINGS, INC.

                                 AND SUBSIDIARY


                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                 (In Thousands)






                         ASSETS                      1997        1996


CURRENT ASSETS:

    Cash and cash equivalents                     $  28,780   $  26,679

    Restricted deposits                              17,335      17,414

    Trade accounts receivable                        15,510      14,467

    Materials and supplies                            3,185       2,854

    Prepaid expenses and other                        1,483       1,074
                                                  ---------     -------
              Total current assets                   66,293      62,488
                                                  ---------     -------





PROPERTY, PLANT, AND EQUIPMENT                      377,232     374,988

    Less accumulated depreciation                   (35,091)    (23,667)

    Construction work in process                      1,676       3,568
                                                   --------     -------
              Property, plant, and equipment, net   343,817     354,889
                                                   --------     -------



DEFERRED LOAN COSTS, net of accumulated amortization of
    $1,651 and $968 at December 31, 1997 and 1996,
    respectively
                                                     13,504      14,188
                                                   --------     -------
            Total assets                           $423,614    $431,565
                                                   ========    ========




          LIABILITIES AND STOCKHOLDER'S EQUITY        1997        1996



CURRENT LIABILITIES:

    Trade accounts payable                             1,898  $    1,287
    Accounts payable--associated company               1,360         941
    Capital repayments and dividends payable          22,518      16,012
    Note payable                                      16,156      23,564
    Current portion--long-term debt                    7,885       7,350
    Income taxes payable                                 166           0
    Accrued interest                                  13,498      13,846
    Other                                              3,218       1,454
                                                     -------    --------
              Total current liabilities               66,699      64,454
                                                     -------    --------
DEFERRED INCOME TAXES (Note 6)                        51,388      38,647
                                                     -------    --------
LONG-TERM DEBT                                       289,969     296,461
                                                     -------    --------
MINORITY INTEREST                                        670         629
                                                     -------    --------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 7)

STOCKHOLDER'S EQUITY:
    Common stock, $1 par value; 1,000 shares authorized
       and outstanding                                     1            1
    Paid-in capital                                   14,120       30,606
    Retained Earnings                                    767          767
                                                      ------    ---------
         Total stockholder's equity                   14,888       31,374
                                                    --------    ---------
         Total liabilities and stockholder's equity $423,614    $431,565
                                                    ========    ========

The accompanying notes are an integral part of these consolidated balance
sheets.


                                     II-29

<PAGE>


                      MOBILE ENERGY SERVICES HOLDINGS, INC.

                                 AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

                                 (In Thousands)




                                          1997          1996          1995


OPERATING REVENUES:
    Demand charges                        $56,873       $57,399       $58,298
    Processing sales                       27,780        25,317        23,587
    Other                                   1,828         1,342           612
                                          -------        ------       -------
          Total operating revenues         86,481        84,058        82,497
                                          -------        ------       -------
OPERATING EXPENSES:
    Operations and maintenance             26,152        25,864        26,094
    Fuel                                    9,169         7,422         6,303
    Depreciation and amortization          13,005        12,702        11,608
                                          -------        ------       -------
          Total operating expenses         48,326        45,988        44,005
                                          -------        ------       -------

OPERATING INCOME                           38,155        38,070        38,492

INTEREST EXPENSE                          (29,192)      (30,094)      (18,501)

OTHER INCOME                                  978         1,193         1,076



MINORITY INTEREST                             (98)          (89)         (210)
                                          -------        ------       -------

INCOME BEFORE INCOME TAXES                  9,843         9,080        20,857



PROVISION FOR INCOME TAXES                  3,811         3,227         8,058
                                          -------        ------       -------
NET INCOME                               $  6,032      $  5,853       $12,799
                                         ========      ========       =======






The accompanying notes are an integral part of these consolidated statements.


                                       II-30

<PAGE>


                      MOBILE ENERGY SERVICES HOLDINGS, INC.

                                 AND SUBSIDIARY


           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995


                                 (In Thousands)

<TABLE>
<CAPTION>



<S>                                                     <C>           <C>             <C>              <C>

                                                       Common        Paid-In          Retained
                                                        Stock        Capital          Earnings           Total
                                                       -------       --------        ---------           -----



BALANCE, December 31, 1994                                 $1         $74,232          $  2,077           $76,310



    Net income                                              0               0            12,799            12,799
    Dividends                                               0               0           (14,694)          (14,694)
    Capital repayments                                      0         (32,882)                0           (32,882)
                                                          ----        -------           -------           -------
BALANCE, December 31, 1995                                  1          41,350               182            41,533


    Net income                                              0               0             5,853             5,853
    Dividends                                               0               0            (5,268)           (5,268)
    Capital repayments                                      0         (10,744)                0           (10,744)
                                                          ----        -------           -------          --------
BALANCE, December 31, 1996                                  1          30,606               767            31,374



    Net income                                              0               0             6,032             6,032

    Dividend                                                0               0            (6,032)           (6,032)

    Capital repayments                                      0         (16,486)                0           (16,486)
                                                         ----         -------           -------           -------
    BALANCE, December 31, 1997                             $1         $14,120           $   767           $14,888
                                                         ====        =======            =======          ========



</TABLE>


The accompanying notes are an integral part of these consolidated statements.

                                     II-31
<PAGE>




                      MOBILE ENERGY SERVICES HOLDINGS, INC.

                                 AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

                                 (In Thousands)

<TABLE>
<CAPTION>



<S>                                                                             <C>          <C>        <C>

                                                                                  1997        1996        1995

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                   $  6,032    $  5,853    $  12,799
                                                                                --------    --------    ---------
   Adjustments to reconcile net income to net cash provided by operating
      activities:
         Depreciation and amortization                                            13,005      12,702       11,608
         Increase in deferred income taxes                                        12,711      17,320       18,880
         Changes in certain operating assets and liabilities:
            Increase in trade accounts receivable                                 (1,043)       (669)      (8,165)
            Increase in materials and supplies                                      (331)       (336)        (402)
            (Increase) decrease in prepaids and other                               (410)        559         (765)
            Increase (decrease) in accounts payable                                1,949      (4,562)      (6,709)
            Increase (decrease) in income taxes payable                              166      (3,335)       3,335
            (Decrease) increase in accrued interest                                 (348)      3,957        9,570
            Other, net                                                               756        (779)       1,798
                                                                                --------    --------    ---------
               Total adjustments                                                  26,455      24,857       29,150
                                                                                --------    --------    ---------
               Net cash provided by operating activities                          32,487      30,710       41,949
                                                                                --------    --------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property, plant, and equipment                                    (1,009)     (9,670)     (11,097)
                                                                                --------    --------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   (Repayments) borrowings of notes payable, net                                  (7,408)      9,489     (175,925)
   (Repayments) issuance of long-term debt                                        (5,957)     (9,612)     197,238
   Payment of dividends and return of capital                                    (16,012)    (23,004)     (24,572)
                                                                                --------    --------    ---------
               Net cash used in financing activities                             (29,377)    (23,127)      (3,259)
                                                                                --------    --------    ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   2,101      (2,087)      27,593

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                    26,679      28,766        1,173
                                                                                --------    --------    ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                         $28,780     $26,679    $  28,766
                                                                                ========    ========    =========
SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid (received) during the period for:
      Interest                                                                   $27,358     $24,585   $    8,412
                                                                                ========    ========    =========
      Income tax benefits (Note 6)                                              $ (9,764)   $(10,229)   $ (13,005)
                                                                                ========    ========    =========



</TABLE>


                                     II-32


The accompanying notes are an integral part of these consolidated statements.


<PAGE>


                      MOBILE ENERGY SERVICES HOLDINGS, INC.

                                 AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1997, 1996, AND 1995



  1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      General

      Mobile Energy Services Holdings, Inc. ("Holdings"), a wholly owned
      subsidiary of The Southern Company ("Southern"), was incorporated on
      August 25, 1994 as Mobile Energy Services Company, Inc. and subsequently
      changed its name to Mobile Energy Services Holdings, Inc. Holdings was
      created to purchase an energy and chemical recovery complex located in
      Mobile, Alabama (the "Energy Complex"), from Scott Paper Company ("Scott
      Paper"). This transaction occurred on December 16, 1994 (the
      "Acquisition"). Most of the Energy Complex's fuel needs are met from waste
      and by-products generated by a pulp mill (the "Pulp Mill"), located in
      Mobile, Alabama that is part of an integrated pulp, paper, and tissue
      manufacturing facility that also includes a paper mill (the "Paper Mill")
      and a tissue mill (the "Tissue Mill," and together with the Pulp Mill and
      the Paper Mill, the "Mills").

      Concurrent with the Acquisition, Holdings entered into various long-term
      contracts with Scott Paper in its capacity as the owner of the Pulp Mill
      and the Tissue Mill and with S. D. Warren Company ("S. D. Warren"), a
      wholly owned subsidiary of Scott Paper, in its capacity as the owner of
      the Paper Mill (Note 3). Ownership of S. D. Warren was subsequently
      transferred to an entity unaffiliated with Scott Paper. During 1995, Scott
      Paper merged with Kimberly-Clark Tissue Company ("Kimberly-Clark Tissue"),
      a subsidiary of Kimberly-Clark Corporation. Pursuant to the contracts, the
      Energy Complex provides substantially all of the power, steam, and liquor
      processing services required by the Mills.

      Effective July 14, 1995, Holdings contributed all of its assets (other
      than an agreement for the provision of administrative and other services
      with Southern Company Services, Inc., a wholly owned subsidiary of
      Southern), liabilities, and operations (the "Transfer"), including the
      Energy Complex, to Mobile Energy Services Company, L.L.C. ("Mobile
      Energy") in the form of a tax-free exchange. The Transfer has been
      accounted for in a manner similar to a pooling of interests, and
      accordingly, the financial statements of Mobile Energy for prior periods
      include the accounts of Holdings prior to the Transfer. Of the equity
      interest in Mobile Energy, 99% was acquired by Holdings and 1% was
      acquired by Southern Energy Resources, Inc. ("SERI"), an indirect, wholly
      owned subsidiary of Southern and formerly known as Southern Electric
      International, Inc. and Southern Energy, Inc.


                                       II-33

<PAGE>


      Accounting Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.

      Presentation

      The consolidated financial statements include the accounts of Holdings and
      its majority-owned subsidiary, Mobile Energy. All significant intercompany
      accounts and transactions have been eliminated. Certain prior period
      amounts presented in the financial statements have been reclassified to
      conform to the current period presentation.

      Property, Plant, and Equipment

      Property, plant, and equipment are recorded at cost. Depreciation is
      provided using the straight-line method over the estimated economic lives
      of the related assets (ranging from 5 to 35 years). Upon the retirement or
      sale of assets, the costs of such assets and the related accumulated
      depreciation are removed from the balance sheet and the gain or loss, if
      any, is included in income.

      At December 31, 1997 and 1996, property, plant, and equipment consisted of
      the following (in thousands):

                                                   1997            1996


                Buildings                        $  18,591       $  18,591
                Machinery and equipment            358,641         356,397
                                                  --------        ---------
                                                  $377,232        $374,988
                                                  ========        ========

      Long-Lived Assets

      The Financial Accounting Standards Board has issued Statements of
      Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
      Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
      This statement requires that long-lived assets be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying
      amount of an asset may not be recoverable. This statement also imposes
      stricter criteria for regulatory assets by requiring that such assets be
      probable of future recovery at each balance sheet date. The Company
      adopted this standard on January 1, 1996 without a material impact on the
      financial statements.

                                     II-34

<PAGE>

      Cash and Cash Equivalents

      Cash and cash equivalents consist primarily of highly liquid investments
      with original maturities of three months or less and are carried at cost,
      which approximates fair value.

      Restricted Deposits

      Restricted deposits consist of amounts required by debt agreements (Note
      5) to be set aside for upcoming serial principal repayments.

      Fair Value of Financial Instruments

      The carrying values of financial assets and liabilities, as defined in
      Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
      About Fair Value of Financial Instruments," in the accompanying balance
      sheets approximate their fair values, except for the 8.665% and 6.95%
      bonds (Note 5), the fair values of which are based on quoted market
      prices, as follows (in millions):

                                                         Carrying       Fair
                                                       -------------  ---------
                                                          Amount        Value


                8.665% first mortgage bonds                 $221          $275
                6.95% industrial revenue bonds                77            95


      Deferred Loan Costs

      Loan costs represent amounts incurred for professional services and other
      related costs for the offering of bonds discussed in Note 5. These costs
      are being amortized using the straight-line method over the life of the
      related bonds.

      Income Taxes

      Holdings provides deferred income taxes for all significant income tax
      temporary differences in accordance with SFAS No. 109, "Accounting for
      Income Taxes." SFAS No. 109 requires, among other things, the use of an
      asset and liability method for the recognition of deferred tax liabilities
      and assets.

      Derivatives

      In anticipation of potential interest rate risks associated with the
      acquisition (Note 2) and its related long-term financing, Mobile Energy
      entered into two interest rate swap options ("Swap Options") and two
      interest rate swaps ("Swaps") to manage such exposure by trading variable
      rate obligations for fixed rate obligations. In all cases, the Swap
      Options and Swaps related to specific portions of Mobile Energy's
      anticipated debt commitments and were of notional amounts and maturities
      that are consistent with such commitments.

      The Swap Options and Swaps were treated as hedges for the anticipated
      debt. Accordingly, the gains and losses which resulted upon the
      termination of the Swap Options and Swaps were deferred and are being

                                       II-35
<PAGE>

      amortized to interest expense over the period of the related debt, as are
      the premiums paid for the Swap Options and Swaps.


  2.  PURCHASE OF PROPERTY, PLANT, AND EQUIPMENT

      On December 16, 1994, Mobile Energy purchased certain property, plant, and
      equipment located near Mobile, Alabama, from Scott Paper for approximately
      $264,000,000 cash and assumed various liabilities of Scott Paper totaling
      approximately $92,000,000. The excess of the fair value of assets acquired
      over the purchase price paid was allocated among the assets purchased in
      accordance with Accounting Principles Board Opinion No. 16. The total cash
      purchase price of approximately $263,597,000 was allocated as follows (in
      thousands):

                Utility plant                                  $356,152
                Long-term obligations (Note 5)                  (85,000)
                Current liabilities                              (7,555)
                                                               --------
                                                               $263,597
                                                               ========

  3.  COMMITMENTS AND CONTINGENCIES

      Cluster and Combustion Rule

      Mobile Energy is contractually obligated under three energy service
      agreements (the "Agreements") to provide power processing services and
      steam processing services to the Mills and liquor processing services to
      the Pulp Mill for a period of 25 years beginning December 16, 1994. Under
      the terms of the Agreements, the mill owners are obligated to pay monthly
      fixed demand charges for dedicated capacity of the Energy Complex and also
      variable charges for actual amounts purchased.

      Mobile Energy is subject to dynamic federal, state, and local
      environmental laws and regulations. For example, the Environmental
      Protection Agency ("EPA") has issued (1) certain standards for the control
      of wastewater pollutants facilities and (2) a national emission standard
      for hazardous air pollutants from facilities which would include the Mills
      (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 operation and maintenance expenses incurred by Mobile
      Energy as a result of the Cluster Rule or the Combustion Rule.


                                     II-36

<PAGE>

      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 nonenvironmental law or regulation) or
      would have the ability to comply with its obligations under the master
      operating agreement associated with the Combustion Rule. 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 the proposed Combustion Rule were not
      released until November 1997, Mobile Energy is unable to reasonably
      estimate the potential costs, if any, that may result from compliance with
      these additional programs.

      Lease Commitments

      In connection with the Acquisition, Mobile Energy entered into
      noncancelable 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 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 ensured
      and therefore is not considered a bargain purchase option under SFAS No.
      13, "Accounting for Leases."

  4.  RELATED-PARTY TRANSACTIONS

      Under the terms of an agreement between SERI and Mobile Energy, SERI
      provides all operations and maintenance services for the Energy Complex.
      Such services are billed to Mobile Energy at SERI's direct cost plus an
      overhead cost allocation and totaled approximately $26,152,000 and
      $24,505,000 for the years ended December 31, 1997 and 1996,
      951591475respectively.

  5.  LONG-TERM DEBT

      Details of long-term debt at December 31, 1997 and 1996 are as follows (in
      thousands):
<TABLE>
<CAPTION>
<S>                                                                 <C>            <C>


                                                                       1997          1996


  8.665% first mortgage bonds, due serially on a semiannual basis
  through 2017; secured by the Energy Complex, net of unamortized
  discount of $20.755 million and $22.012 million at December 31,
  1997 and 1996,
  respectively                                                       $221,210      $227,303

  Obligations incurred in connection with the sale by public
  authorities of tax-exempt industrial revenue bonds (Series
  1995), 6.95%, due serially on an annual basis beginning January
  1, 2017 and ending January 1, 2020; secured by the Energy
  Complex, net of unamortized discount of $8.356 million and
  $8.492 million at December 31, 1997 and 1996, respectively
                                                                     $ 76,644      $ 76,508

  Less current portion                                                  7,885         7,350
                                                                     --------      --------
  Long-term debt                                                     $289,969      $296,461
                                                                     ========      ========

</TABLE>

                                     II-37

<PAGE>

      On August 15, 1995, Mobile Energy issued $255,210,000 of first mortgage
      bonds, the proceeds from which were used primarily to repay Southern a
      $190,000,000 bridge loan and to terminate the Swaps (Note 1). The loss on
      termination of the related swap of $23.6 million has been treated as a
      discount on the related debt. This discount and the rate of interest
      represent an effective interest rate, compounded monthly, of 10.037%. Also
      on August 15, 1995, Mobile Energy joined with public authorities and
      issued $85,000,000 of tax-exempt bonds, the proceeds of which were used to
      refund Series 1984 bonds of $85,000,000 which were assumed in the
      Acquisition (Note 2). The loss on termination of the related swap of $8.7
      million has been treated as a discount on the related debt. This discount
      and the rate of interest represent an effective interest rate, compounded
      monthly, of 7.893%.

      On August 24, 1995, Mobile Energy entered into a revolving credit
      agreement expiring December 31, 2001 with Banque Paribas which allows
      Mobile Energy to draw up to $15,000,000 at an interest rate of LIBOR plus
      1% ($606,897 at 7.0%, $2,005,677 at 7.0%, $1,821,029 at 7.0%, $3,810,031
      at 7.0%, and $6,000,000 at 7.0% on December 31, 1997). Mobile Energy is
      required to have no borrowings for a period of five consecutive business
      days during each year; therefore, the borrowings under this agreement are
      classified as current in the accompanying balance sheets.

      In addition, Southern entered into a separate working capital facility
      aggregating to $16,908,000 with Banque Paribas expiring December 31, 2001
      at an interest rate of LIBOR plus .35%, under which Mobile Energy may draw
      funds but for which it has no liability to Banque Paribas. There were
      borrowings which totaled $1,912,132 at 6.1625% as of December 31, 1997.
      Commitment fees ranging from .1% to .375% per annum were charged to Mobile
      Energy based on the unused portion of these agreements.

                                     II-38

<PAGE>


      At December 31, 1997, the annual scheduled maturities of long-term debt
during the next five years are as follows (in thousands):

                                  1998                $7,885
                                  1999                 8,340
                                  2000                 8,840
                                  2001                 9,335
                                  2002                 9,695


  6.  INCOME TAXES

      Details of the income tax provision for the years ended December 31, 1997
and 1996 are set forth below (in thousands):

                                                        1997          1996


            Current benefit:
               Federal                               $(8,900)     $(14,093)

            Deferred provision (benefit):
               Federal                                12,209        17,453
               State                                     502          (133)

                                                      12,711        17,320

                     Total income tax provision     $  3,811     $   3,227


      The effective income tax rate of 38.25% differs from the statutory federal
      tax rate due to the impact of state taxes, net of the related federal
      benefit.

      The tax effects of temporary differences between the amounts of assets and
      liabilities in the financial statements and their respective tax bases,
      which give rise to deferred tax assets and liabilities (all of which are
      noncurrent), are as follows (in thousands):

<TABLE>
<CAPTION>


<S>                                                      <C>                           <C>
                                                         1997                          1996
                                               Deferred        Deferred       Deferred       Deferred
                                                  Tax             Tax            Tax            Tax
                                              Liabilities        Assets       Liabilities    Assets
                                              -----------      --------       ----------     -------




       Accelerated depreciation                  $52,125         $   0          $39,210        $   0
       Other                                           0           737                0          563
                                                 -------          ----          -------         ----

                  Total                          $52,125          $737          $39,210         $563
                                                 =======          ====          =======         ====
</TABLE>




                                     II-39

<PAGE>


      Holdings and the other corporate subsidiaries of Southern file a
      consolidated federal tax return. Under a joint consolidated income tax
      agreement, each company's current and deferred income taxes due are
      computed on a stand-alone basis. Payments are made between the
      subsidiaries of Southern when tax benefits generated by one subsidiary are
      utilized by another subsidiary. Under this agreement, Holdings received
      tax refunds of approximately $9,764,000 and $10,229,000 during the years
      ended December 31, 1997 and 1996, respectively.


  7.  SIGNIFICANT CUSTOMERS, SUPPLIERS, AND CONCENTRATION OF CREDIT RISK

      Mobile Energy derived approximately 74% and 75% of its revenues during the
      years ended December 31, 1997 and 1996, respectively, from Kimberly-Clark
      Tissue. The remainder of Mobile Energy's revenues were derived from S. D.
      Warren. Receivables outstanding from sales to Kimberly-Clark Tissue and S.
      D. Warren were approximately $11.5 million and $4.0 million, respectively,
      at December 31, 1997 and were approximately $10.7 million and $3.7
      million, respectively, at December 31, 1996. In addition, as indicated in
      Note 1, the majority of the Energy Complex's fuel needs are met by the
      Mills. These concentrations expose Mobile Energy's operations to the risk
      of severe impact in the near term should any of the Mills cease operations
      (Note 3).

8.    SUBSEQUENT EVENTS (Unaudited)

      Substantially all of SERI's employees at the Energy Complex (Note 4) are
      subject to collective bargaining agreements. As of December 31, 1997, a
      number of employees had not completed renogotiations of their collective
      bargaining agreements which expired in 1997. However, in March of 1998,
      the agreements were renegotiated and extend to 2002.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     None.

                                     II-40

<PAGE>



                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

Omitted pursuant to General Instruction I.

Item 11.  EXECUTIVE COMPENSATION

Omitted pursuant to General Instruction I.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Omitted pursuant to General Instruction I.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Omitted pursuant to General Instruction I.

                                      III-1

<PAGE>



                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

    (a) The following documents are filed as a part of this report on Form 10-K:

        (1)    Financial Statements:
               Reports of Independent Public Accountants on the financial
               statements for Holdings and Mobile Energy are listed under Item
               8 herein.

               The financial statements filed as a part of this report for
               Holdings and Mobile Energy are listed under Item 8 herein.

         (2)    Financial Statement Schedules:
                None

         (3)    Exhibits:
                Exhibits for Holdings and Mobile Energy are listed in the
                Exhibit Index beginning on page IV-3.

     (b) Reports on Form 8-K:
         Neither of the registrants has filed any reports on Form 8-K during the
         last quarter of the fiscal year ended December 31, 1997.

                                      IV-1

<PAGE>

Pursuant to the requirements of Section 13 or 15(d) 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

     Date: March 31, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. The signature of each of the
undersigned shall be deemed to relate only to matters having reference to the
above-named company and any subsidiaries thereof.

     /s/Thomas G. Boren
     Thomas G. Boren
     President and Chief Executive Officer
     (Principal Executive Officer)

     /s/Raymond D. Hill
     Raymond D. Hill
     Vice President and Chief Financial Officer
     (Principal Financial Officer)

     /s/James A. Ward
     James A. Ward
     Vice President and Controller
     (Controller)

     Members:
     Mobile Energy Services Holdings, Inc.
     By: /s/S. Marce Fuller
     S. Marce Fuller
     President and Chief Executive Officer
     Southern Energy Resources, Inc.

     By  /s/Thomas G. Boren
     :   Thomas G. Boren
         President and Chief Executive Officer

         Date:    March 31, 1998

Pursuant to the requirements of Section 13 or 15(d) 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

     Date: March 31, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. The signature of each of the
undersigned shall be deemed to relate only to matters having reference to the
above-named company and any subsidiaries thereof.

     /s/S. Marce Fuller
     S. Marce Fuller
     President and Chief Executive Officer and Director
     (Principal Executive Officer)


     /s/James A. Ward
     James A. Ward
     Vice President and Controller and Director
     (Controller and Principal Financial Officer)

     Directors:

     /s/K. E. Adams
     K.E.  Adams

     /s/T. G. Boren
     T.G. Boren

     /s/ A. W. Harrelson
     A.W. Harrelson


     Date: March 31, 1998

                                  IV-2

<PAGE>

                            Exhibit Index


         The following exhibits indicated by an asterisk preceding the exhibit
number are filed herewith. The balance of the exhibits have heretofore been
filed with the SEC, respectively, as the exhibits and in the file numbers
indicated and are incorporated herein by reference.

(3)  Articles of Incorporation and By-Laws

          3.1  -- Articles of Organization of Mobile  Energy. (Designated in
                  Registration No. 33-92776 as Exhibit 3.1.)

          3.2  -- Operating Agreement of Mobile Energy.  (Designated in
                  Registration No. 33-92776 as Exhibit 3.2.)

          3.3  -- Amended and Restated Articles of Incorporation of Holdings.
                  (Designated in Registration No. 33-92776 as Exhibit 3.3.1)

          3.4  -- By-Laws of Holdings. (Designated in Registration No. 33-92776
                  as Exhibit 3.4.)

(4)  Instruments Describing Rights of Security Holders, Including Indentures

          4.1  -- Trust Indenture dated as of August 1, 1995 among First Union
                  National Bank of Georgia, Mobile Energy and Holdings.
                 (Designated as Exhibit 4.1 to the registrant's  Form 10-K for
                  the fiscal year ended December 31,1995 (the "1995 Form
                  10-K")).

          4.2  -- First Supplemental Indenture dated as of August 1, 1995 among
                  First Union National Bank of Georgia, Mobile Energy and
                  Holdings. (Designated as Exhibit 4.2 to the 1995 Form 10-K).

          4.3  -- Intercreditor and Collateral Agency Agreement dated as of
                  August 1, 1995 among Bankers Trust (Delaware), First Union
                  National Bank of Georgia, Banque Paribas, The Industrial
                  Development Board of the City of Mobile, Alabama, Mobile
                  Energy and Holdings. (Designated as Exhibit 4.3 to the 1995
                  Form 10-K).

          4.4  -- Amended and Restated Trust Indenture dated as of August 1,
                  1995 between First Union National Bank of Georgia and The
                  Industrial Development Board of the City of Mobile, Alabama.
                  (Designated as Exhibit 4.4 to the 1995 Form 10-K).

          4.5  -- Amended and Restated Lease and Agreement dated as of August 1,
                  1995 among the Industrial Development Board of the City of
                  Mobile, Alabama, Mobile Energy and Holdings. (Designated as
                  Exhibit 4.5 to the 1995 Form 10-K).

          4.6  -- Revolving Credit Agreement dated as of August 1, 1995 among
                  Mobile Energy, Holdings, and Banque Paribas. (Designated as
                  Exhibit 4.6 to the 1995 Form 10-K).

          4.7  -- Leasehold Mortgage, Assignment of Leases, Rents, Issues and
                  Profits and Security Agreement and Fixture Filing dated as of
                  August 1, 1995 by Mobile Energy and the Industrial Development
                  Board of the City of Mobile, Alabama in favor of Bankers Trust
                  (Delaware). (Designated as Exhibit 4.7 to the 1995 Form 10-K).

                                  IV-3

<PAGE>

          4.8  -- First Amendment to Leasehold Mortgage, Assignment of Leases,
                  Rents, Issues and Profits and Security Agreement and Fixture
                  Filing dated as of December 9, 1995 among Mobile Energy, the
                  Industrial  Development Board of the City of Mobile,  Alabama
                  and Bankers Trust (Delaware).  (Designated as Exhibit 4.8 to
                  the 1995 Form 10-K).

          4.9  -- Assignment and Security  Agreement  dated as of August 1, 1995
                  among Mobile Energy, the Industrial Development Board of the
                  City of Mobile, Alabama and Bankers Trust (Delaware).
                  (Designated as Exhibit 4.9 to the 1995 Form 10-K).

(10)  Material Contracts

          10.1 -- Pulp Mill Energy Services Agreement dated as of December 12,
               1994 and first amendment thereto, between Scott Paper and Mobile
               Energy (as assignee of Holdings). (Designated in Registration No.
               33-92776 as Exhibits 10.1 and 10.2.)

          10.2 -- Paper Mill Energy Services  Agreement dated as of December 12,
               1994 and first amendment thereto, between S.D. Warren and Mobile
               Energy (as assignee of Holdings). (Designated in Registration No.
               33-92776 as Exhibits 10.3 and 10.4.)

          10.3 -- Tissue Mill Energy Services Agreement dated as of December 12,
               1994 and first amendment thereto,  Scott Paper and Mobile Energy
               (as assignee  f Holdings). (Designated in Registration  No.
               33-92776 as Exhibit 10.5 and 10.6.)

          10.4 -- Amended and Restated Master Operating Agreement dated as of
               July 13, 1994 among Scott Paper, S.D. Warren and Mobile Energy
               (as  assignee of Holdings). (Designated in Registration  No.
               33-92776 as Exhibit 10.7.)

         10.5 -- Asset Purchase Agreement between Scott Paper and Mobile Energy
               (as  assignee of Holdings). (Designated in Registration No.
               33-92776 as Exhibit 10.8.)

        10.6 -- Common Services Agreement dated as of December 12, 1994 and
               first amendment thereto, among Scott Paper,  S.D. Warren and
               Mobile Energy  (as  assignee  of  Holdings). (Designated in
               Registration No. 33-92776 as Exhibits 10.9 and 10.10.)

        10.7 -- Transition  Agreement  dated as of December 12, 1994 and first
               and second amendment  thereto,  between  Scott  Paper and Mobile
               Energy (as assignee of Holdings). (Designated in Registration No.
               33-92776 as Exhibits 10.11, 10.11.1 and 10.11.2.)

       10.8 -- Lease  Agreement  dated as of  December  12,  1994 and  first
               amendment thereto, between  Scott Paper and Mobile  Energy (as
               assignee of Holdings). (Designated in Registration  No. 33-92776
               as Exhibits 10.12 and 10.13.)

       10.9 -- Supplementary Lease Agreement dated as of December 12, 1994
               and first amendment thereto,  between  Scott  Paper and  Mobile
               Energy (as assignee of Holdings). (Designated in Registration No.
               33-92776 as Exhibit 10.14 and 10.15)

                                      IV-4

<PAGE>

       10.10-- Second Amendment to Supplementary Lease Agreement dated as of
               August 1, 1995 between Scott Paper and Mobile Energy.(Designated
               as Exhibit 10.10 to the 1995 Form 10-K).

      10.11-- Third Amendment to Supplementary Lease Agreement dated as of
               December 8, 1995 between Scott Paper and Mobile Energy.
               (Designated as Exhibit 10.11 to the 1995 Form 10-K).

      10.12-- Easement Deeds dated as of December  12, 1994  between  Scott
              Paper and Mobile Energy (as assignee of Holdings). (Designated in
              Registration No. 33-92776 as Exhibits 10.16 and 10.18.)

     10.13--  Easement Deeds dated as of December 12, 1994  between  Mobile
               Energy (as assignee of Holdings) and Scott Paper. (Designated in
               Registration No. 33-92776 as Exhibits 10.17 and 10.19.)

     10.14-- Easement  Deed dated as of December  12, 1994  between  Mobile
             Energy (as assignee of Holdings) and S.D. Warren . (Designated in
             Registration No. 33-92776 as Exhibit 10.20.)

     10.15-- Easement Deed dated as of December 12, 1994 between S.D. Warren and
          Mobile Energy (as assignee of Holdings). (Designated in  Registration
          No. 33-92776 as Exhibit 10.21.)

     10.16-- Easement Deed dated as of December 8, 1995 between Scott Paper and
          Mobile Energy. (Designated as Exhibit 10.16 to the 1995 Form 10-K).

     10.17-- Employee Transition  Agreement  dated as of December  12, 1994 and
          first amendment thereto, among Scott Paper, Mobile Energy (as assignee
          of Holdings) and SEI.  (Designated  in  Registration  No.  33-92776 as
          Exhibits 10.22 and 10.22.1.)

     10.18--  Water Procurement  and  Effluent  Service  Agreement  dated as of
          December 12, 1994 and first amendment thereto, among Scott Paper, S.D.
          Warren and Mobile  Energy (as assignee of  Holdings). (Designated  in
          Registration No. 33-92776 as Exhibits 10.23 and 10.24.)

     10.19-- Boiler Ash  Disposal  Agreement  dated as of December  12, 1994 and
          first amendment  thereto  between  Scott Paper and Mobile  Energy (as
          assignee of Holdings). (Designated in  Registration  No.  33-92776 as
          Exhibits 10.25 and 10.26.)

     10.20-- Paper Mill Environmental  Indemnity  Agreement dated as of December
          12, 1994 and first amendment  thereto,  between S.D. Warren and Mobile
          Energy (as assignee of  Holdings).  (Designated  in  Registration  No.
          33-92776 as Exhibits 10.27 and 10.28.)

     10.21-- Pulp Mill Environmental  Indemnity  Agreement dated as of December
          12, 1994 and first amendment  thereto, between Scott Paper and Mobile
          Energy (as assignee of  Holdings). (Designated  in  Registration  No.
          33-92776 as Exhibits 10.29 and 10.30.)


                                  IV-5

<PAGE>


     10.22-- Tissue Mill Environmental Indemnity Agreement dated as of December
          12, 1994 and first amendment thereto, between Scott Paper and Mobile
          Energy (as assignee of  Holdings).  (Designated  in  Registration  No.
          33-92776 as Exhibits 10.31 and 10.32.)

     10.23-- Scott  Environmental Indemnity  Agreement dated as of December 12,
          1994 and first  amendment thereto, between Scott Paper and  Mobile
          Energy (as assignee of  Holdings).  (Designated  in  Registration  No.
          33-92776 as Exhibits 10.33 and 10.34.)

     10.24-- Facility Operations and Maintenance Agreement dated as of December
          12, 1994  between  SEI and Mobile  Energy (as  assignee of  Holdings).
          (Designated in Registration No. 33-92776 as Exhibit 10.35.)

     10.25-- Independent Engineer Agreement between Stone & Webster and Mobile
          Energy. (Designated in Registration No. 33-92776 as Exhibit 10.38.)

     10.26-- 1984 Tax-Exempt  Lease  and  Agreement  and  amendments  thereto.
          (Designated in Registration No. 33-92776 as Exhibit 10.39.)

     10.27--  1984  Tax-Exempt Lease Assignment and  Assumption   Agreement.
          (Designated in Registration No. 33-92776 as Exhibit 10.40.)

     10.28--  1973  Installment   Sale   Agreement  and   amendments   thereto.
          (Designated in Registration No. 33-92776 as Exhibit 10.41.)

     10.29-- 1973  Tax-Exempt  Lease and  Assignment  Agreement.  (Designated in
          Registration No. 33-92776 as Exhibit 10.42.)

     10.30--  1984-1985  Taxable  Sublease  Agreement  and  amendments  thereto.
          (Designated in Registration No. 33-92776 as Exhibit 10.43.)

     10.31-- 1984-1985  Taxable Sublease and Assignment  Agreement.  (Designated
          in Registration No. 33-92776 as Exhibit 10.44.)

     10.32--  1976   Installment   Sale   Agreement  and   amendments   thereto.
          (Designated in Registration No. 33-92776 as Exhibit 10.45.)

     10.33-- 1976  Tax-Exempt  Lease and  Assignment  Agreement.  (Designated in
          Registration No. 33-92776 as Exhibit 10.46.)

     10.34--  1994  Recovery  Boiler  Bonds  Lease  Agreement.   (Designated  in
          Registration No. 33-92776 as Exhibit 10.47.)

     10.35--  1994  Recovery  Boiler  Bonds  Lease   Assignment  and  Assumption
          Agreement. (Designated in Registration No. 33-92776 as Exhibit 10.48.)

     10.36-- Estoppel  and  Nondisturbance  Agreement,  dated as of December 12,
          1994,  delivered  by  Three  Rivers  Timber  Company.  (Designated  in
          Registration No. 33-92776 as Exhibit 10.49.)



                                      IV-6

<PAGE>

     10.37-- Omnibus  Deed,  Bill of Sale,  General  Assignment and  onveyance
          Agreement   between   Holdings  and  Mobile  Energy. (Designated  in
          Registration No. 33-92776 as Exhibit 10.50.)

     10.38--   Recognition,   Cooperation   and  Consent   Agreement among  The
          Industrial  Development Board of the City of Mobile,  Alabama,  Mobile
          Energy,  Bankers Trust  (Delaware),  AmSouth Bank of Alabama and Three
          Rivers Timber  Company.  (Designated in  Registration  No. 33-92776 as
          Exhibit 10.51.)

     10.39--  Recognition,  Cooperation  Consent Agreement among The Industrial
          Development  Board  of the City of  Mobile,  Alabama,  Mobile  Energy,
          Bankers  Trust  (Delaware)  and First Union  National Bank of Georgia.
          (Designated in Registration No. 33-92776 as Exhibit 10.52.)

     10.40-- Mill  Owner  Maintenance  Reserve  Account Agreement among  Scott
          Paper,  S.D.  Warren ,  Southern  and Mobile  Energy.  (Designated in
          Registration No. 33-92776 as Exhibit 10.53.)

     10.41-- SCS  Agreement  dated as of July 14,  1995  between SCS and Mobile
          Energy. (Designated in Registration No. 33-92776 as Exhibit 10.54.)

     10.42--  Consent  and  Agreement  dated as of August 1,  1995  among  Scott
          Paper, Mobile Energy and Bankers Trust (Delaware) (re: the Amended and
          Restated  Master  Operating  Agreement  dated as of July 13,  1995 and
          certain other  agreements).  (Designated  as Exhibit 10.42 to the 1995
          Form 10-K).

     10.43--  Consent  and  Agreement  dated as of August 1,  1995  among  Scott
          Paper,  Mobile  Energy and Bankers  Trust  (Delaware)  (re:  the Asset
          Purchase  Agreement  dated as of December  12, 1994 and certain  other
          agreements). (Designated as Exhibit 10.43 to the 1995 Form 10-K).

     10.44--  Consent  and  Agreement  dated as of  August 1,  1995  among  S.D.
          Warren,  Mobile Energy and Bankers Trust  (Delaware).  (Designated  as
          Exhibit 10.44 to the 1995 Form 10-K).

     10.45--  Consent  and  Agreement  dated as of August 1, 1995 among the Pulp
          Mill Owner, Mobile Energy and Bankers Trust (Delaware). (Designated as
          Exhibit 10.45 to the 1995 Form 10-K).

     10.46-- Consent and  Agreement  dated as of August 1, 1995 among the Tissue
          Mill Owner, Mobile Energy and Bankers Trust (Delaware). (Designated as
          Exhibit 10.46 to the 1995 Form 10-K).

     10.47-- Consent and Agreement  dated as of August 1, 1995 among E.J. Hodder
          &  Associates,  Inc.,  Mobile  Energy and  Bankers  Trust  (Delaware).
          (Designated as Exhibit 10.47 to the 1995 Form 10-K).

     10.48-- Consent  and  Agreement  dated as of August 1, 1995 among Ahlstrom
          Recovery,   Inc.,   Mobile  Energy  and  Bankers   Trust  (Delaware).
          (Designated as Exhibit 10.48 to the 1995 Form 10-K).

                                      IV-7
<PAGE>

     10.49-- Consent  to  Assignment  dated as of August 1, 1995 among Southern
          Energy,  Mobile Energy and Bankers Trust  (Delaware).  (Designated  as
          Exhibit 10.49 to the 1995 Form 10-K).

     10.50-- Consent  to  Assignment  dated as of August 1, 1995 among  Southern
          Company  Services,  Inc.,  Mobile Energy and Bankers Trust (Delaware).
          (Designated as Exhibit 10.50 to the 1995 Form 10-K).

     10.51--  Estoppel,  Consent and  Recognition  Agreement  among Scott Paper,
          Mobile Energy and Bankers Trust  (Delaware) (re: Lease Agreement dated
          as of December 12,  1994).  (Designated  as Exhibit  10.51 to the 1995
          Form 10-K).

     10.52-- Estoppel,  Consent and  Recognition  Agreement,  among Scott Paper,
          Mobile Energy and Bankers Trust  (Delaware) (re:  Supplementary  Lease
          Agreement dated as of December 12, 1994). (Designated as Exhibit 10.52
          to the 1995 Form 10-K).

     10.53--  Underwriting  Agreement dated as of August 15, 1995 between Mobile
          Energy and Goldman,  Sachs & Co., Bear, Stearns & Co., Inc. and Lehman
          Brothers Inc. (Designated as Exhibit 10.53 to the 1995 Form 10-K).


 .

(27)  Financial Data Schedules

*        27.       --    Financial Data Schedules.

                                      IV-8