EXHIBIT 10.38

September 13, 1995


Dan Tutcher
Midcoast Energy Resources, Inc.
1100 Louisiana St., Suite 3030
Houston, TX 77002

Dear Dan,

     As requested I have remitted to Rainbow Investments Company
the proceeds from my $1,872,450 loan to Midcoast.  Attached is my
letter to Rainbow instructing them to immediately forward to you
this amount and any funds Rainbow is paying Midcoast in a single
cashiers check to your specifications.

     Please let me know if I can be of further help.

                                   Sincerely,



                                   Stevens G. Herbst<PAGE>
          
                                  PROMISSORY NOTE


$1,872,450.00         Corpus Christi, Texas    September 11, 1995

     FOR VALUE RECEIVED, after date, without grace, in the manner,
on the dates, and in the amounts so herein stipulated, MIDCOAST
ENERGY RESOURCES, INC., a Nevada corporation, hereinafter called
"Maker", acting herein by and through its undersigned officers,
promises to pay to the order of STEVENS G. HERBST hereinafter
called "Payee", at his office in the City of Corpus Christi, Nueces
County, Texas the sum of ONE MILLION EIGHT HUNDRED SEVENTY TWO
THOUSAND FOUR HUNDRED FIFTY AND NO/100 DOLLARS ($1,872,450.00),
pursuant to the terms of this Note, in lawful money of the United
States of America which shall be legal tender in payment of all
debts and dues, public and private, at the time of payment, and to
pay interest on the whole of the principal amount hereof from time
to time outstanding prior to the maturity of this Note at a rate
per annum equal to the lesser of:  (a) the rate designated by Frost
Bank, N.A. or its successors, as its base commercial rate
(hereinafter called the "Prime Rate"), as such Prime Rate shall
vary from time to time, plus two percent (2%) (hereinafter called
the "Margin Percentage"), or (b) the "Maximum Rate" (as hereinafter
defined).  The rate of interest payable on this Note shall change
without notice to Maker each time and as of the date that the Prime
Rate changes whether or not such Prime Rate change is published. 
Notwithstanding the foregoing, if at any time the sum of the Margin
Percentage plus such Prime Rate exceeds the Maximum Rate, the rate
of interest to accrue on this Note shall be limited to the Maximum
Rate.

     The sums of principal funded by Payee to Maker on this Note,
together with all accrued interest thereon, shall be due and
payable as follows:

     Interest only, computed on the unpaid principal balance
     of the sums funded by Payee to Maker on this Note, shall
     be due and payable monthly as it accrues, on the 1st day
     of each and every calendar month, beginning April 1,
     1996, and continuing regularly thereafter until and
     including December 31, 1996, after which date both the
     unpaid sums of principal funded by Payee to Maker on this
     Note and the unpaid interest accrued thereon shall be due
     and payable.

     All past-due, unpaid sums of principal funded on this Note,
together with all accrued and past-due, unpaid interest thereon,
shall bear interest from maturity until paid at the "Default Rate"
as hereinafter defined.

     The Maker hereof may at any time and from time to time pay the
full amount or any part of the sums of principal funded by Maker to
Payee on this Note, without the payment of any premium or fee.  All
payments on this Note, whether designated as payments of principal
or interest, shall be applied first to the payment of accrued
interest and balance, if any, to principal.

     It is especially agreed that if default shall be made in any
payment due hereon, either principal or interest, or if there is a
default in any of the terms, covenants, agreements, conditions or
provisions set forth in any instrument or document given to secure
this Note or executed simultaneously with this Note or hereafter,
or if any certificate, affidavit and/or financial statement
furnished to Payee in connection with the loan evidenced by this
Note is false or misleading or omits to state any material fact, or
should any Maker, endorser, surety or guarantor hereof become
insolvent or commit an act of bankruptcy or make an assignment for
the benefit of creditors or authorize the filing of a voluntary
petition in bankruptcy, or should a receiver of any of their
property be appointed, or should involuntary bankruptcy proceedings
be filed or threatened against any Maker, endorser, surety or
guarantor hereof, or should any event occur which results in the
acceleration of the maturity of any indebtedness of any Maker,
endorser, surety or guarantor hereof to Payee or to any other party
under any mortgage, deed of trust, security or loan agreement,
indenture, note or other undertaking, then in any such event, at
the option of Payee or any legal holder hereof at any time
thereafter, without demand or notice, the unpaid balance of the
sums of principal funded by Payee to Maker on this Note, together
with all accrued and unpaid interest thereon, shall at once become
due and payable and shall bear interest from the date of such
default or event (whichever occurs first) until paid at the
"Default Rate" which is defined as the Maximum Rate or, if there is
no Maximum Rate, then a rate per annum equal to the Prime Rate plus
eight percent (8%).

     If any sums becoming owing on this Note are not paid at
maturity, however such maturity may be brought about, and the same
is placed in the hands of an attorney for collection or if
collected by suit or through bankruptcy, probate, receivership or
other legal or judicial proceedings, the Maker hereof agrees to pay
an additional amount of not less than ten percent (10%) of all
unpaid sums of principal funded by Payee to Maker on this Note as
costs of collection and reasonable attorney's fees.

     Each Maker and all sureties, endorsers and guarantors of this
Note, and each party hereafter assuming or otherwise becoming
liable hereon (i) waive demand, presentment for payment, notice of
intention to accelerate the maturity of this Note and to declare
the entire unpaid balance of the sums of principal funded by Payee
to Maker on this Note, together with all accrued and unpaid
interest thereon, due and payable, notice that the entire unpaid
balance of the sums of principal funded by Payee to Maker on this
Note, together with all accrued and unpaid interest thereon, has
been declared due and payable, notice of nonpayment, protest,
notice of protest and all other notices, filings of suit and
diligence in collecting this Note or enforcing any of the security
herefor, (ii) agree to any substitution, exchange or release of any
such security or the release of any party primarily or secondarily
liable hereon, (iii) agree that Payee or other holder hereof shall
not be required first to institute suit or exhaust its remedies
hereon against the Maker or others liable or to become liable
hereon or enforce its rights against any security herefor in order
to enforce payment of this Note by it, and (iv) consent to any
extensions or postponement of time of payment of this Note and to any 
other indulgence with respect hereto without notice thereof to any of them.

     Any check, draft, money order or other instrument given in
payment of all or any portion of any sums becoming owing on this
Note may be accepted by the payee or any other holder hereof and
handled in collection in the customary manner, but the same shall
not constitute payment hereunder or diminish any rights of the
Payee or any other holder hereof, except to the extent that actual
cash proceeds of such instrument are unconditionally received by
the Payee or any other holder hereof and applied to this
indebtedness as herein provided.

     For the purposes of this Note the term "Maximum Rate" shall
mean the maximum rate of interest which the Payee may charge the
Maker on the loan evidenced by this Note without thereby charging
interest which is usurious or unlawful under the state or federal
laws applicable for the purpose of determining the maximum lawful
rate of interest which may be charged on such loan and this Note;
and provided that all fees, "points", and other charges which
constitute interest shall be included and taken into account in
determining such Maximum Rate.  It is expressly provided and
stipulated that, notwithstanding any other provision of this Note,
in no event shall the aggregate of (i) the aggregate interest which
has accrued on this Note from the date hereof through the date of
such calculation, and (ii) the aggregate of any other amounts
accrued or paid which, under applicable laws, are deemed to
constitute interest upon the loan evidenced hereby from the date
hereof through the date of such calculation, ever exceed the
Maximum Rate on the principal balance of the loan evidenced by this
Note from time to time remaining unpaid.  In this connection, it is
expressly stipulated and agreed that it is the intent of the Payee
and the Maker in the execution and delivery of this Note to
contract in strict compliance with the usury laws, if any,
applicable to this Note.  None of the terms of this Note or the
security instruments securing same shall ever be construed to
create a contract to pay interest for the use, forbearance or
detention of money, at a rate in excess of the Maximum Rate.  The
Maker, and any guarantors, endorsers or other parties now or
hereafter becoming liable for the payment of this Note, shall never
be liable for interest in excess of the Maximum Rate and the
provisions of this Note and the security instruments securing same
which may be in apparent conflict herewith.

     Should this Note be signed or endorsed by more than one person
and/or entity, all of the obligations herein contained shall be
considered the joint and several obligations of each maker and
endorser hereof.

     Payment of all unpaid sums of principal funded by Payee to
Maker on this Note, together with all accrued and unpaid interest
thereon, and all fees and other charges, if any, becoming due and
owing on this Note shall be secured by any and all guaranties,
security agreements and other security instruments executed by the
Maker or any other party in favor of Payee as security for this
Note, including those executed simultaneously herewith, those
heretofore executed, and those hereafter executed.

     If any payment on this Note shall become due on a Saturday,
Sunday, or public holiday on which Payee is not open for business,
such payment shall be made on the next succeeding day on which
Payee is open for business and such extension of time shall in such
case be included in computing interest in connection with such
payment.

     IN WITNESS WHEREOF, the undersigned Maker has duly executed
this Note as of the day and year above first written.

                            MIDCOAST ENERGY RESOURCES,INC.



                            By:                       
                                Dan C. Tutcher,
                                President




<PAGE>
                            SECURITY AGREEMENT
                           (Third Party Pledge)


                                 Date:     October 3, 1995 

A.  PARTIES

    1.    Pledgor: MIDCOAST ENERGY RESOURCES, INC.                
                                   
    2.    Address: 1100 Louisiana, Suite 3030, Houston, Texas 77002 
                                           
    3.    Secured Party:  RAINBOW INVESTMENTS COMPANY             
                                          
    4.    Address: P.O. Box 1050, Corpus Christi, Texas 78403     
                                                  

B.  AGREEMENT

    In order to induce Secured Party to loan monies or otherwise
extend credit with or without credit to the hereafter named
Borrower, and at the request of Secured Party, the Pledgor hereby
pledges the hereafter described Collateral unto Secured Party
and grants a security interest in the Collateral unto Secured
Party,in order to secure payment of the Secured Obligations. 
The Borrower to which this Pledge Agreement applies and
references is as follows:

    Borrower:       Midcoast Energy Resources, Inc.               
                                                         

C.  SECURED OBLIGATIONS

    1.    The following are the obligations secured by this
Agreement (herein called the "Secured Obligations").

     Note of even date in the original principal sum of
$1,200,000.00 executed by Borrower payable to Secured Party.


D.  COLLATERAL

    1.    The security interest is granted in the following
Collateral:

     All shares of Magnolia Pipeline Corporation common stock now
owned or hereafter acquired, described further in Exhibit "A".    
          


E.  AGREEMENTS OF PLEDGOR

    1.    Pledgor will:  take adequate care of the Collateral;
insure the Collateral for such hazards and in such amounts as
Secured Party directs, policies to be satisfactory to Secured
Party; pay all costs necessary to obtain, preserve, and enforce
this security interest, collect the obligation, and preserve     
the Collateral, including (but not limited to) taxes, assessments,
insurance premiums, reasonable attorneys' fees and legal expenses,
and expenses of sale; furnish Secured Party with any information on
the Collateral requested by Secured Party; allow Secured Party to
inspect the Collateral and inspect and copy all records relating to
the Collateral and the obligation; sign any papers furnished by
Secured Party which are necessary to obtain and maintain this
security interest; assist Secured Party in complying with the
Federal Assignment of Claims Act, where necessary to enable Secured
Party to become an assignee under such Act; take necessary steps to
preserve the liability of account debtors, obligors, and secondary
parties whose Secured Obligations are part of the Collateral;
transfer possession of all instruments, documents, and chattel
paper which are part of the Collateral to Secured Party
immediately, or as to those hereafter acquired, immediately
following acquisition; perfect a security interest (using a method
satisfactory to Secured Party) in goods covered by chattel  paper
which is part of the Collateral; notify Secured Party of any change
occurring in or to the Collateral, or in any fact or circumstance
warranted or represented by Pledgor in this agreement or
furnished to Secured Party, or if any event of default occurs.

    2.    Pledgor will not (without Secured Party's consent): 
remove the Collateral from the locations specified herein; allow
the Collateral to become an accession to other goods; sell, lease,
otherwise transfer, manufacture, process, assemble, or furnish
under contracts of service, the Collateral; allow the Collateral to
be affixed to real estate, except goods identified herein as
fixtures.

    3.    Pledgor warrants:  no financing statement has been filed
with respect to the Collateral, other than relating to this
security interest; Pledgor is absolute owner of the Collateral, and
it is not encumbered other than by this security interest (and the
same will be true of Collateral acquired hereafter when acquired);
none of the Collateral is affixed to real estate or an accession to
other goods, nor will Collateral acquired hereafter be affixed to
real estate or an accession to other goods when acquired, unless
Pledgor has furnished Secured Party the consents or disclaimers
necessary to make this security interest valid against persons
holding interests in the real estate or other goods; all account
debtors and obligors, whose Secured Obligations are part of the
Collateral, are to the extent permitted by law prevented from
asserting against Secured Party any claims or defenses they have
against sellers, or can be so prevented by Secured Party taking
action provided by law for such purposes.


F.  RIGHTS OF SECURED PARTY

     Secured Party may, in its discretion, after default: 
terminate, on notice to Pledgor, Pledgor's authority to sell,
lease, otherwise transfer, manufacture, process or assemble, or
furnish under contracts of service, inventory Collateral, or any
other Collateral as to which such permission has been given;
require Pledgor to give possession or control of the Collateral to
Secured Party; indorse as Pledgor's agent any instruments or
chattel paper in the Collateral; notify account debtors and
obligors on instruments to make payment direct to Secured Party;
contact account debtors directly to verify information furnished by
Pledgor; take control of proceeds and use cash proceeds to reduce
any part of the obligation; take any action Pledgor is required to
take or otherwise necessary to obtain, preserve, and enforce this
security interest, and maintain and preserve the Collateral,
without notice to Pledgor, and add costs of same to the obligation
(but Secured Party is under no duty to take any such action);
release Collateral in its possession to Pledgor, temporarily or
otherwise; take control of funds generated by the Collateral, such
as dividends, interest, and proceeds or refunds from insurance, and
use same to reduce any part of the Secured Obligations; waive any
of its rights hereunder without such waiver prohibiting the later
exercise of the same or similar rights; revoke any permission or
waiver previously granted to Pledgor.


G.  MISCELLANEOUS

    1.    The rights and privileges of Secured Party shall inure to
its successors and assigns.  All representations, warranties, and
agreements of Pledgor are joint and several if Pledgor is more than
one and shall bind Pledgor's personal representatives, heirs,
successors, and assigns.  Definitions in the Uniform Commercial Code
(also known as the Texas Business and Commerce Code) apply to words and
phrases in this agreement; if Code definitions conflict, Article 9 
definitions apply. Pledgor waives presentment, demand, notice of dishonor,
protest, and extension of time without notice as to any instruments and 
chattel paper in the Collateral.  Notice mailed to Pledgor's address in
Item A2, or to Pledgor's most recent changed address on file with
Secured Party, at least five (5) days prior to the related action
(or, if the Uniform Commercial Code specifies a longer period, such
longer period prior to the related action), shall be deemed
reasonable.

    2.    This pledge is an absolute, completed and continuing one,
and no notice of the Secured Obligations or any extension of credit
already or hereafter contracted by or extended to the Borrower need
be given to the Pledgor.  Secured Party may extend credit to
Borrower in excess of the amount secured hereunder.  Borrower and
Secured Party may rearrange, extend and/or renew from time to time
any or all of the Secured Obligations without notice to the Pledgor
and in such event Pledgor will remain fully bound hereunder to
secure such Secured Obligations regardless of the number of      
rearrangements, renewals and extensions.  The Pledgor hereby
expressly waives marshalling of assets and liabilities, sale in
inverse order of alienation, presentment, demand, protest, notice
of intention to accelerate maturity, notice of acceleration of
maturity, and notice of protest and dishonor on any and all forms
of such Secured Obligations, and also notice of acceptance of this
pledge, acceptance on the part of Secured Party being conclusively
presumed by its request for this pledge and delivery of the same to
it.

    3.    Pledgor authorizes Secured Party, without notice or
demand and without affecting Pledgor's liability hereunder, to take
and hold other security for the payment of the Secured Obligations,
and exchange, enforce, waive and release any such other security;
and to apply such other security and direct the order or manner of
sale thereof as Secured Party in its discretion may determine; and
to obtain a guaranty of the Secured Obligations from any one or
more other persons, corporations or entities whomsoever and at any
time or times to enforce, waive, rearrange, modify, limit or
release such other persons, corporations or entities from their
obligations under such guaranties.  If at any time there be other
debt of Borrower to Secured Party not secured hereby, then Secured
Party may apply all amounts realized by Secured Party from
Borrower, from guarantors or from other collateral to such other
debt.  Provided, if a particular instrument (such as a guaranty or
security agreement) expressly requires application of amounts
received by Secured Party different than permitted under the
preceding sentence, then such amounts shall be applied as provided
in such instrument.

    4.    Pledgor waives any right to require Secured Party to (a)
proceed against the Borrower or (b) proceed against or exhaust any
other security held to secure the Secured Obligations, or (c)
exercise any right of set-off against Borrower, or (d) pursue any
other remedy in Secured Party's power whatsoever.  Pledgor waives
any defense arising by reason of any disability, lack of corporate
authority or power, or other defense of the Borrower or of any
guarantor of the Secured Obligations, and shall remain liable
hereon regardless of whether Borrower or any guarantor be found
not liable thereon for any reason.  Until all the Secured
Obligations shall have been paid in full, Pledgor shall have no
right of subrogation, and waives any right to enforce any remedy
which Secured Party now has or may hereafter have against the
Borrower, and waives any benefit of and any right to participate in
any security now or hereafter held by Secured Party.

    5.Pledgor agrees that if the maturity of any Secured
Obligations hereby secured is accelerated by bankruptcy or
otherwise, such maturity shall also be deemed accelerated for the
purpose of  this pledge without demand or notice to Pledgor.  In
addition to the other obligations of Pledgor imposed by this Pledge
Agreement, if it should become necessary for the Secured Party to
engage the services of an attorney to enforce this Pledge Agreement
against Pledgor, then Pledgor agrees to pay the costs of
collection, including reasonable attorneys' fees, incurred by
Secured Party in enforcing this Pledge Agreement against Pledgor,
and this pledge of the Collateral shall also secure amounts
expended by Secured Party in enforcing this Pledge Agreement
against Pledgor.

    6.Pledgor hereby subordinates all indebtedness owing to the
Pledgor from Borrower to all Secured Obligations of Borrower to
Secured Party, and shall not attempt to set off or reduce any
obligations to Secured Party because of such indebtedness.  The
Pledgor further subordinates any lien or security interest that he
may have on any collateral or security of the Borrower or any other
party to the liens and security interests on said collateral and
security in favor of the Secured Party.  Upon and an event of
default on the Secured Obligations and for so long as such default
exists, Pledgor agrees not to accept any payment on the
subordinated indebtedness nor realize upon any collateral therefor. 
If the Pledgor should receive any such payment, satisfaction or
security for indebtedness of the Borrower to the Pledgor in
violation of the terms hereof, the Pledgor agrees forthwith to 
deliver the same to the Secured Party in the form received,
endorsed or assigned as may be appropriate for application on
account of, or as security for, the Secured Obligations, and until
so delivered, agree to hold the same in trust for the Secured
Party.

    7.The term of this Agreement shall be for so long as any of the
Secured Obligations remains outstanding and unpaid.  It is further
agreed that maturity of the Secured Obligations, as such may be
extended from time to time by agreement between Secured Party and
Borrower as aforesaid, shall be the same with respect to Pledgor as
with respect to Borrower.

    8.Pledgor warrants to Secured Party that Pledgor has
independent means of obtaining financial and other information
about Borrower, and agrees that Pledgor has not been induced to
sign this pledge by reason of information regarding Borrower
furnished by Secured Party, and agrees that Secured Party shall not
in the future be required to furnish Pledgor with any information
regarding Borrower nor notify Pledgor of any adverse changes as to
Borrower's financial condition or otherwise.

    9.If other persons or entities have executed other instruments
guaranteeing any indebtedness of Borrower to Secured Party, or
pledging property to secure any indebtedness of Borrower to Secured
Party, this pledge and instrument is in addition to such other
instruments, and the total indebtedness of Borrower to Secured
Party secured by Pledgor hereunder and by such other persons or
entities, if any, shall be compounded and be the sum of the amount
secured hereunder by Pledgor, plus the amounts guaranteed or
secured by each other person or entity.

H.  DEFAULT

    1.Any of the following is an event of default:  failure of
Borrower to pay any note in the Secured Obligations in accordance
with its terms or any event of default under other loan documents
executed in connection with or evidencing the Secured Obligations;
failure of Pledgor to perform any act or duty required by this
agreement; falsity of any warranty or representation in this
agreement when made; substantial change in any fact warranted or
represented in this agreement; involvement of Pledgor in bankruptcy
or insolvency proceedings, death, dissolution, or other termination
of Pledgor's existence; merger or consolidation of Pledgor with
another; substantial loss, theft, destruction, sale, reduction in
value, encumbrance of, damage to, or change in the Collateral;
modification of any contract, the rights to which are part of the
Collateral; levy on, seizure, or attachment of the Collateral;
judgment against Pledgor; filing any financing statement with
regard to the Collateral, other than relating to this security
interest; Secured Party's belief that the prospect 
of payment of any part of the obligation, or the performance of any
part of this agreement, is impaired.

    2.At any time that the Secured Obligations (or any part
thereof) are matured, Secured Party may proceed to enforce the
security interest herein granted and exercise any and all of the
rights and remedies available to a secured party under the Uniform
Commercial Code as well as all other rights and remedies.  When an
event of default occurs, Pledgor, upon demand by Secured Party,
shall assemble the Collateral and make it available to Secured
Party at a place reasonably convenient to both parties.  Pledgor is
entitled to any surplus.


I.  FIRST AND PRIOR LIEN

    This security interest grants to Secured Party, a first and
prior lien to secure the payment of the Secured Obligations, and
extensions and renewals thereof, with or without notice to Pledgor.



PLEDGOR:
MIDCOAST ENERGY RESOURCES, INC.


By:                                            
      Dan C. Tutcher, President 



<PAGE>
                       GUARANTY AGREEMENT


FOR VALUE RECEIVED and to induce STEVENS G. HERBST, ("Lender"), to
enter into that certain Loan Agreement of even date herewith (the
"Loan Agreement") by and among Lender, MIDCOAST ENERGY RESOURCES,
INC. ("Borrower") and the undersigned, MIDCOAST NATURAL GAS, INC.,
a Texas corporation, DAN C. TUTCHER, and K.B. HOLMES, JR.
("Guarantors"), Guarantors agree as follows:

1.Guarantors jointly and severally, hereby absolutely and
unconditionally guarantee to Lender, its successors and assigns,
the following:  (a) the due and punctual payment of (and not merely
the collectibility of) all sums heretofore, herewith and hereafter
funded by Lender to Borrower, together with all interest accruing
on said sums so funded, under that one certain promissory note
dated of even date herewith in the principal amount of ONE MILLION
EIGHT HUNDRED SEVENTY TWO THOUSAND FOUR HUNDRED FIFTY AND NO/100
DOLLARS ($1,872,450.00), executed by Borrower and payable to the
order of Lender (the "Note"), when due and payable, whether on any
installment payment date or at stated or accelerated maturity, all
according to the terms of the Note; and, (b) the performance of all
other obligations of Borrower under that certain loan agreement
also of even date herewith by and among Lender, Borrower and
Guarantors (the "Loan Agreement").

2.Guarantors are shareholders and/or officers of Borrower. 
Guarantors acknowledge that they shall directly or indirectly
benefit from Lender's extension of credit to Borrower.  Guarantors
understand that Lender would not be entering into the Loan
Agreement or making the loan to Borrower evidenced by the Note but
for the execution by Guarantors of this Guaranty Agreement, the
delivery of same to Lender and the covenants and agreements of
Guarantors herein contained.  The liability of any other persons or
entities, if any, now or hereafter guaranteeing payment of all or
any portion of the Note.

3.   Guarantors shall further secure the Note and this Guaranty
Agreement with a security agreement covering all their interest in
and to all shares of common stock of Midcoast Energy Resources,
Inc. owned by Guarantors, said Security Agreement to be of even
date herewith.

4.Guarantors expressly agree that Lender in its sole and absolute
discretion, without notice to or further assent of Guarantors, and
without in any way releasing, affecting or impairing the
obligations and liabilities of Guarantors hereunder, may:

(a)
waive compliance with, or any default under, or grant any other
indulgences with respect to the Note, the Loan Agreement, and/or
any instrument(s) securing the Note;

(b)
modify, amend or change any provisions of the Note, the Loan
Agreement, and/or any instrument(s) securing the Note;

(c)
grant extensions or renewals of or with respect to the Note;

(d)
assign or otherwise transfer the Note, or this Guaranty Agreement,
or any interest therein or herein;

(e)
deal in all respects with Borrower or its successors or assigns as
if this Guaranty Agreement were not in effect.  The obligations of
Guarantors under this Guaranty Agreement shall be valid and
enforceable according to the terms and conditions hereof,
irrespective of the genuineness, validity, regularity or
enforceability of the Note and/or any security given therefor.

5.Guarantors hereby expressly waive:

(a)
presentment and demand for payment and protest of nonpayment;

(b)
notice of acceptance of this Guaranty Agreement and of presentment,
demand and protest;

(c)
notice of any default hereunder or under the Note, the Loan
Agreement, or any instrument(s) securing the Note;

(d)
demand for observance or performance of provisions of this Guaranty
Agreement or the Note; and

(e)
all other notices and demands otherwise required by law which
Guarantors may lawfully waive.  Guarantors agreed that if this
Guaranty Agreement shall be enforced by suit or otherwise,
Guarantors will reimburse Lender upon demand for its expenses
incurred in connection therewith, including without limitation
reasonable attorney's fees.

6.Every notice, demand, request or other communication given
hereunder or in connection herewith (hereinafter referred to as
"Notice" or "Notices") shall be deemed sufficient if in writing and
sent by registered or certified mail, postage prepaid, return
receipt requested, addressed to the party to receive such Notice,
as follows:

If to Lender:                 If to Guarantors:

Stevens G. Herbst             Mr. Dan C. Tutcher
P.O. Box 1050                 1100 Louisiana, Suite 3030
Corpus Christi, Texas 78403   Houston, Texas 77007

Midcoast Natural Gas, Inc.
1100 Louisiana, Suite 3030
Houston, Texas 77007

K.B. Holmes, Jr.
P.O. Box 1980
Corpus Christi, Texas 78403

7.All rights and remedies afforded to Lender by reason of this
Guaranty Agreement, whether under the terms hereof or by law, are
separate and cumulative, and the exercise of one shall not in any
way limit or prejudice the exercise of any other such rights and
remedies.  No delay or omission by Lender in exercising any such
right or remedy shall operate as a waiver thereof.  No waiver of
any rights or remedies hereunder and no modification or amendment
hereof shall be deemed made by Lender unless in writing and duly
signed by Lender.  Any such written waiver shall apply only to the
particular instance specified therein and shall not impair the
further exercise of such right or remedy or of any other right or
remedy of Lender and no single or partial exercise of any right or
remedy hereunder shall preclude other or further exercise thereof
or any other right or remedy.

8.This Guaranty Agreement shall inure to the benefit of and be
enforceable by Lender, its successors, legal representatives and
assigns, as owners and holders of the Note, and shall be binding
upon and enforceable against Guarantors, and their heirs,
executors, administrators, other legal representatives and assigns.

9.This Guaranty Agreement shall be construed and enforced in
accordance with, and governed by, the laws of the State of Texas.

10.All payments to be made by Guarantors hereunder shall be to
Lender at Lender's offices in Corpus Christi, Nueces County, Texas,
in lawful money of the United States which shall be legal tender
for public and private debts at the time of payment.

11.A determination that any provision of this Guaranty Agreement is
unenforceable or invalid shall not affect the enforceability or
validity of any other provision.

IN WITNESS WHEREOF, Guarantors have duly executed this Guaranty
Agreement in multiple originals as of the day of September, 1995.


GUARANTORS:



DAN C. TUTCHER

MIDCOAST NATURAL GAS, INC.



By: 
    DAN C. TUTCHER, President



    K.B. HOLMES, JR.