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<SEC-DOCUMENT>0000899243-98-000507.txt : 19980331
<SEC-HEADER>0000899243-98-000507.hdr.sgml : 19980331
ACCESSION NUMBER: 0000899243-98-000507
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 15
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980330
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: NGC CORP
CENTRAL INDEX KEY: 0000879215
STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311]
IRS NUMBER: 943248415
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 033-68842
FILM NUMBER: 98578059
BUSINESS ADDRESS:
STREET 1: 1000 LOUISIANA
STREET 2: STE 5800
CITY: HOUSTON
STATE: TX
ZIP: 77002
BUSINESS PHONE: 7133677600
MAIL ADDRESS:
STREET 1: 13430 NORTHWEST FREEWAY
STREET 2: SUITE 1200
CITY: HOUSTON
STATE: TX
ZIP: 77040-6095
FORMER COMPANY:
FORMER CONFORMED NAME: TRIDENT NGL HOLDING INC
DATE OF NAME CHANGE: 19930916
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission file number: 1-11156
NGC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3248415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Louisiana, Suite 5800
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 507-6400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
Common Stock, par value $.01 per share New York Stock Exchange
Series A Participating Preferred Stock ----
6.75% Debt Securities due 2005 ----
7.625% Senior Notes due 2026 ----
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has 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 registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No
------ -----
The aggregate value of Common Stock held by non-affiliates of the registrant was
approximately $364,438,085 on March 25, 1998, (based on $14.8125 per share, the
last sale price of the Common Stock as reported on the New York Stock Exchange
Composite Tape on such date). 151,524,970 shares of the registrant's Common
Stock were outstanding as of March 25, 1998.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the
Annual Report to Shareholders for the fiscal year ended December 31, 1997. As
to Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the 1998
Annual Meeting of Stockholders to be filed not later than 120 days after
December 31, 1997.
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 registrant's 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.
================================================================================
<PAGE>
NGC CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Business.................................................................. 1
Item 1A Executive Officers........................................................ 12
Item 2. Properties................................................................ 14
Item 3. Legal Proceedings......................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders....................... 20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 20
Item 6. Selected Financial Data................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 23
Item 8. Financial Statements and Supplementary Data............................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 35
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 36
Item 11. Executive Compensation.................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 36
Item 13. Certain Relationships and Related Transactions............................ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 36
Signatures........................................................................... 42
</TABLE>
For definitions of certain terms used herein, see "Item 1. BUSINESS --
DEFINITIONS."
<PAGE>
PART I
Item 1. BUSINESS
THE COMPANY
GENERAL
NGC Corporation, ("NGC" or the "Company") is a leading North American
marketer of natural gas, natural gas liquids, electricity and crude oil and is
engaged in natural gas gathering, processing and transportation through direct
and indirect ownership and operation of natural gas processing plants,
fractionators, storage facilities and pipelines and engages in electric power
generation through direct and indirect ownership of cogeneration and other
electric power producing facilities. Acting in the role of a large-scale
aggregator, processor, marketer and reliable supplier of multiple energy
products and services, NGC has evolved into a reliable energy commodity and
service provider.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities
primarily to natural gas marketing. Starting in 1990, Clearinghouse began
expanding its core business operations through acquisitions and strategic
alliances with certain of its shareholders resulting in the formation of a
midstream energy asset business and establishing energy marketing operations in
both Canada and the United Kingdom. Effective March 1, 1995, Clearinghouse and
Trident NGL Holding, Inc. ("Holding"), a fully integrated natural gas liquids
company, merged and the combined entity was renamed NGC Corporation ("Trident
Combination"). On August 31, 1996, NGC completed a strategic combination with
Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron")
whereby substantially all of Chevron's midstream assets were merged with NGC
("Chevron Combination"). In June 1997, NGC acquired Destec Energy, Inc.
("Destec"), a leading independent power producer. By virtue of the growth of
NGC's core businesses combined with the synergies derived from these
transactions, NGC has established itself as an industry leader providing
quality, competitively priced energy products and services to customers
primarily throughout North America and in the United Kingdom.
BG plc, Chevron and NOVA Corporation ("NOVA") each own approximately 26
percent of the outstanding common stock of NGC.
The principal executive office of the Company is located at 1000 Louisiana,
Suite 5800, Houston, Texas 77002, and the telephone number of that office is
(713) 507-6400. NGC and its affiliates maintain marketing and/or regional
offices in Atlanta, Georgia; Bogata, Columbia; Boston, Massachusetts; Calgary,
Alberta; Chicago, Illinois; Dallas, Texas; Englewood, Colorado; London, England;
Mexico City, Mexico; Midland, Texas; Oklahoma City, Oklahoma; Pleasanton,
California; Tampa, Florida; Tulsa, Oklahoma; and Washington D.C.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Form 10-K contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. When used in this document, words
such as "anticipate", "estimate", "project", and "expect" are intended to
identify forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, projected or expected. Among the key risk factors that
may have a direct bearing on NGC's results of operations and financial condition
are: (i) competitive practices in the industries in which NGC competes, (ii)
fluctuations in energy commodity prices which have not been properly hedged or
which are inconsistent with NGC's open position in its energy marketing
activities, (iii) operational and systems risks, (iv) environmental liabilities
which are not covered by indemnity or insurance, and (v) the impact of current
and future laws and governmental regulations (particularly environmental
regulations) affecting the energy industry in general, and NGC's operations in
particular.
1
<PAGE>
DEFINITIONS
As used in this Form 10-K, the abbreviations listed below are defined as
follows:
Bbl 42 U.S. gallons, the basic unit for measuring crude oil and
natural gas condensate.
MBbls/d Volume of one thousand barrels per day.
MMBbls Volume of one million barrels.
MMcf/d Volume of one million cubic feet per day.
Bcf Volume of one billion cubic feet
Bcf/d Volume of one billion cubic feet per day.
Bpd Barrels per day.
LPG Liquid petroleum gas.
MW s Megawatts.
Spot The Henry Hub cash price posting for natural gas per the "Inside
FERC" publication.
NYMEX New York Mercantile Exchange.
BUSINESS
The Company reports operations under three primary business segments: the
natural gas and power marketing segment, the power generation segment and the
natural gas liquids, crude oil and gas transmission segment.
Natural Gas and Power Marketing
NGC's Natural Gas and Power Marketing business uses its knowledge of the
marketplace, considerable physical transmission, storage, processing and
distribution assets and a multi-commodity mindset to provide customers with
flexible, tailored solutions to meet their energy supply, asset management and
financial risk management needs. NGC's business strategy in this segment
includes expanding its relationships with existing local distribution companies
("LDCs") and industrial customers to broaden its customer base and role as a
wholesale energy supplier.
The Company's wholesale natural gas marketing activities consist of
contracting to purchase specific volumes of natural gas from suppliers at
various points of receipt to be supplied over a specific period of time;
aggregating natural gas supplies and arranging for the transportation of these
gas supplies through proprietary and third-party transmission systems;
negotiating the sale of specific volumes of natural gas over a specific period
of time to LDCs, utilities, power plants and other end-users; and matching
natural gas receipts and deliveries based on volumes required by customers.
During 1997, the Company announced the formation of three retail energy
alliances that will each provide energy services to industrial, commercial and
residential customers. NGC's goal is to build a network of regionally focused
alliance relationships that leverage the different strengths of each alliance
partner by combining NGC's buying power and large-scale wholesale energy supply
infrastructure with the ability of regional partners to assess and address local
conditions quickly and effectively. In determining alliance partner candidates,
NGC seeks partners having significant existing customer bases, strong regional
name recognition and similar infrastructures. Management believes the formation
of a series of alliances throughout North America will provide NGC with
accelerated market penetration and a potential platform for selling products and
services to a retail customer base at modest capital investment during a period
of evolving regulation and restructuring.
The Company is also a marketer of electricity and power products and
services in the United States through its wholly owned subsidiary Electric
Clearinghouse, Inc. ("ECI"). ECI provides its customers with a 24-hour-a-day
resource for the sale and purchase of power through access to wholesale markets
throughout North America. ECI helps customers remarket their fuel, optimize
generation assets and capacity utilization and maximize energy conversion and
tolling opportunities. In addition, ECI provides market aggregation and sales
assistance and offers risk-management services and strategies, which complement
its marketing activities.
Natural Gas Purchases. The Company purchases natural gas from a variety of
suppliers under contracts with varying terms and conditions intended to ensure a
stable supply of natural gas. When purchasing natural gas, the Company considers
price, location, liquids content, if applicable, and quantities available. In
1997, the Company
2
<PAGE>
purchased natural gas in every major producing basin in the United States and
Canada from over 900 suppliers, ranging from major producers to small
independent companies. Pursuant to ancillary agreements entered into as part of
the Chevron Combination, NGC has the obligation to purchase and the right to
market substantially all of the natural gas produced or controlled by Chevron in
the United States (except Alaska). The Chevron relationship provides the Company
with a significant stable supply of natural gas which, when combined with gas
supplies available from its network of other supply sources, allows it to
effectively manage gas supplies and reduces the risk of short-term supply
shortages during periods of peak demand.
Transportation. The Company arranges for transportation of the natural gas
it markets from the supplier receipt point to the delivery point requested by
the purchaser. The Company generally retains title to the natural gas from the
receipt point to the delivery point and obtains transportation on unaffiliated
pipelines. The Company believes that its understanding of the United States'
pipeline network, along with the scale and geographic reach of its gas marketing
efforts, are important to the Company's success as a gas marketer. These
factors, as well as its efficiency in utilizing the gas transportation network,
allow the Company to provide its suppliers with multiple outlets for their
natural gas and, in times of significant changes in demand or supply due to
weather or other factors, to route gas to areas of the United States where it is
most needed. The Company attempts to reduce transportation charges by taking
advantage of its broad array of transportation agreements and by negotiating
competitive discounts. The Company uses a variety of transportation arrangements
to move its customers' volumes, including short-term and long-term firm and
interruptible agreements with pipelines and brokered firm contracts with its
customers.
Natural Gas Sales. The Company sells natural gas under sales agreements
that have varying terms and conditions intended to match seasonal and other
changes in demand. The Company's wholesale customer base consists primarily of
gas and electric utilities and industrial and commercial end-users and marketers
of natural gas. In 1997, sales were made to approximately 1,100 customers
located throughout the contiguous United States and parts of Canada. For the
year ended December 31, 1997, the Company's North American operations sold an
aggregate average of 8.0 Bcf per day of natural gas.
Natural Gas Storage and Marketing Hubs. Natural gas storage capacity plays
an important role in the Company's ability to act as a full-service natural gas
marketer by allowing it to manage relatively constant gas supply volumes with
uneven demand levels. Through the use of its storage capabilities, the Company
offers peak delivery services to satisfy winter heating and summer electric-
generating demands. Storage inventories also provide performance security or
"backup" service to the Company's customers. The Company at various times leases
short-term and long-term firm and interruptible storage.
The Company also utilizes gas market area hubs to allow customers to
manage short-term prices and help solve imbalance and transportation problems.
These strategic market hubs, located where regional interstate pipelines
converge, are designed to bring buyers and sellers together over a broad
geographic area. Services offered by the hubs include wheeling, loaning, parking
and title transfer, which complement existing natural gas supply, transportation
and storage services, and contribute to a more efficient, reliable, cost-
effective marketplace. Wheeling refers to the simultaneous transfer of natural
gas from one pipeline to another, while loaning occurs when one party allows
another party to borrow natural gas. Parking services allow a customer to store
natural gas in a hub for future redelivery, while title transfer services allow
a customer to assign title to natural gas that is in storage.
Foreign Markets. During 1997, the Company restructured the ownership of
its joint ventures with NOVA to market natural gas in Canada and with British
Gas plc to market natural gas in the United Kingdom. As a result of these
restructurings, NGC is now pursuing energy marketing and midstream asset
businesses through wholly owned subsidiaries in Canada and in the United
Kingdom. Additionally, as part of the restructuring of operations in the United
Kingdom, NGC retained a twenty-five percent participating preferred stock
interest in Accord Energy Limited ("Accord"), a U.K.-based energy marketing
company.
Power Marketing. The Company formed ECI in February 1994 to pursue
electric power marketing opportunities created by the deregulation of the
domestic electric power industry. The U.S. electric industry is estimated to
produce approximately $200 billion in industry revenues annually, and is at
least double the U.S. natural gas business. As power becomes deregulated and
thus commoditized, its value relative to natural gas will continue to converge.
Complexity in the marketplace could be ever-increasing and management of
customer energy requirements will require a multi-commodity focus. NGC believes
that its ownership of strategically located generating assets will enable the
Company to expand its electric power marketing business. In 1997, NGC made sales
to approximately 180
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<PAGE>
customers and sold 94.7 million megawatt hours of electricity as compared with
14.9 million megawatt hours sold during 1996.
POWER GENERATION
NGC's Destec subsidiary is in the business of developing, operating and
managing projects which produce electricity, thermal energy and synthetic gas.
NGC's business strategy in power generation focuses on being a low-cost producer
of electric power. Destec has interests in 16 partnerships, each formed to
build, own and operate electric power generating facilities, and owns/leases and
operates one cogeneration plant, one heat recovery plant and one coal
gasification facility. The combined gross capacity of these facilities is
approximately 2,839 megawatts of electricity and over 3.4 million pounds per
hour of steam. Destec continues to pursue expansion of its asset base by
acquiring, developing, constructing, managing and operating power generation
facilities.
The majority of the power generating facilities owned directly or
indirectly by Destec are cogeneration plants. A cogeneration plant utilizes
power production technology that results in the sequential generation of two or
more useful forms of energy (e.g., electricity and steam) from a single fuel
source (e.g., natural gas). Destec also owns an interest in a coal gasification
plant that produces synthetic gas, which serves as an alternative fuel in power
generation facilities.
Destec provides services to the partnerships in which it owns an interest
in the areas of project development, engineering, environmental affairs,
operating services and management and fuel supply services. Such management
services include: (i) engineering oversight of all conceptual planning,
feasibility studies, environmental studies and plant, engineering and
construction design; (ii) specialized and comprehensive operating, maintenance,
testing and start-up services; and (iii) asset management services that
coordinate project activities with, and maintain relationships among, all
project stakeholders, which include owners, customers, lenders, suppliers, and
operators. Various activities are performed with a goal of obtaining ongoing
profitability, including negotiating new contracts and/or amending existing
contracts, developing annual and long-term business plans and forecasts,
developing and implementing profit improvement opportunities, monitoring
regulatory, legislative, and environmental affairs, and providing various
accounting and financial services.
NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION
The Company's natural gas liquids, crude oil and gas transmission segment
includes natural gas gathering and processing, fractionation, natural gas
liquids marketing, natural gas transmission and crude oil marketing and
transportation operations.
Natural Gas Gathering and Processing. The natural gas processing industry
is a major segment of the oil and gas industry, providing the necessary service
of refining raw natural gas into marketable pipeline quality natural gas and
natural gas liquids. The Company owns interests in 48 gas processing plants,
including 36 plants which it operates. The Company also operates natural gas
gathering pipeline systems, including certain assets held pending sale. These
assets are primarily located in the key producing areas of New Mexico, Texas,
Louisiana, Arkansas, Oklahoma and Kansas.
During the year ended December 31, 1997, the Company processed an average
of 2.8 Bcf per day of natural gas and produced an average of 136.2 thousand
barrels per day of natural gas liquids. As part of the Chevron Combination's
ancillary agreements, NGC acquired the right to process substantially all of
Chevron's processable natural gas in those geographic areas where it is
economically feasible for NGC to provide such service.
Fractionation. The natural gas liquids removed from the natural gas stream
at gas processing plants are generally in the form of a commingled stream of
liquid hydrocarbons (raw product). The commingled natural gas liquids are
separated at fractionation facilities into the component products of ethane,
propane, normal butane, isobutane and natural gasoline. At December 31, 1997,
the Company had ownership interests in two fractionation facilities, each
located in Mont Belvieu, Texas, plus significant fractionation capacity at the
VESCO facility located in Plaquemines Parish, Louisiana. During 1997, these
facilities fractionated an average of 252 gross barrels per day. The Company is
in the process of constructing a fourth facility in Lake Charles, Louisiana,
that is expected to be operational in the fourth quarter of 1998. Upon
completion of this construction project, NGC will have gross fractionation
capacity at these facilities of approximately 405 thousand barrels per day. In
addition, the Company maintains fractionation capability at several of its gas
processing facilities.
4
<PAGE>
NGL Marketing. The Company markets its own natural gas liquids production
and also purchases natural gas liquids from third parties for resale. Through
the Company's strategic network of pipeline connections, terminals, rail cars,
trucks, barges and storage facilities, the Company moves natural gas liquids
from producing regions in the Gulf Coast, West and Midwest to most major
domestic and international markets. The Company operates large-scale marine
terminals in Texas, Florida and Louisiana, which offer importers a variety of
methods for transporting products to the marketplace. In addition, NGC has
access to over 60 million barrels of underground liquids storage providing
customers with the ability to store, trade, buy and sell specification products.
In 1997, the Company significantly expanded utilization of such storage,
terminalling and shipping assets and services to support the growth of its
international deepwater LPG business. During 1997, the Company sold
approximately 414 thousand barrels per day of natural gas liquids to over 900
customers.
Transmission Operations. The Company's transportation assets are inter-
connected with the nation's gas liquids and natural gas pipeline systems. NGC
owns a 49 percent interest in a partnership which operates the West Texas LPG
Pipeline, a pipeline capable of delivering 160,000 barrels per day of liquids to
fractionation facilities at Mont Belvieu, Texas. In addition, the Company owns
and operates a 12-inch bi-directional pipeline, which can transport 50,000
barrels per day of liquids and finished products between major LPG Hubs, Lake
Charles, Louisiana and Mont Belvieu. The Company operates an extensive Houston-
area distribution system which provides market access to refiners and chemical
plants on the Houston Ship Channel. The Company operates an intrastate natural
gas pipeline system in south-central Kansas, which serves markets in the Wichita
area and provides access to markets in the Midwest and Mid-Continent areas
through interconnected intrastate and interstate pipelines. The Company also
operates the Ozark Gas Transmission Pipeline ("Ozark"), an interstate pipeline
system located in eastern Oklahoma and central Arkansas.
Crude Oil Marketing. The Company provides a full range of crude oil
marketing services to producers, and serves the North American refining
community as a regionally diversified supplier of crude oil. Through its
participation in major trading centers in the Mid-Continent, Rocky Mountain and
Gulf Coast areas, the Company has established itself as a dependable source of
competitively priced crude oil. During 1997, the Company sold approximately 168
thousand barrels per day of crude oil to over 150 customers.
INTERNATIONAL OPPORTUNITIES
NGC's strategic investors, BG plc, NOVA and Chevron, provide the Company
with international business opportunities through joint ventures or other means.
By combining NGC's multi-commodity energy trading expertise with these business
partners' international asset positions and understanding of local governments,
markets and customer needs, NGC intends to bring multi-commodity products and
services to new markets. As countries privatize or deregulate their energy
industries, NGC will work closely with its business partners to explore
opportunities that optimize value in selected overseas markets.
RISK MANAGEMENT ACTIVITIES
NGC utilizes certain types of fixed-price forward purchase and sales
contracts, futures and option contracts traded on the NYMEX and swaps and
options traded in the over-the-counter financial markets to manage and hedge its
fixed-price purchase and sales commitments, to provide fixed-price commitments
as a service to its customers and suppliers, to reduce its exposure to the
volatility of cash market prices and to protect its investment in storage
inventories. The Company may, at times, have a bias in the market, within
established guidelines, resulting from the management of its portfolio.
Additionally, NGC monitors its exposure to fluctuations in interest rates and
foreign currency exchange rates and may execute swaps, forward-exchange
contracts or other financial instruments to hedge and manage these exposures.
In addition to the risk associated with price or interest rate movements,
credit risk is also inherent in the Company's risk management activities. Credit
risk relates to the risk of loss resulting from the nonperformance of
contractual obligations by a counterparty. NGC maintains credit policies with
regard to its counterparties, which management believes minimize its overall
credit risk.
The commercial groups of NGC manage, on a portfolio basis, the resulting
market risks inherent in the transactions, subject to parameters established by
the NGC Board of Directors. Market risks are monitored by a risk control group
that operates separately from the commercial units that create or actively
manage these risk exposures
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to ensure compliance with NGC's risk management policies. Risk measurement is
also practiced against the NGC portfolios with stress testing and scenario
analysis.
STRATEGIC BUSINESS COMBINATIONS
The Destec Acquisition. NGC acquired Destec, an independent power
producer, for $1.26 billion in June 1997. Following the acquisition, NGC sold
certain international and non-strategic Destec assets for aggregate proceeds of
$735 million. NGC believes the acquisition of Destec's power generating assets
will result in significant benefits through the integration of Destec's
electricity and thermal energy marketing activities with NGC's existing power
marketing business, conducted through ECI, and the introduction of Destec's
customers to the variety of energy products and services provided by other NGC
businesses. NGC expects Destec's expertise in power technology and engineering
and experience in development, construction, management and operation of power
facilities to provide a platform for expansion of its power generating business
worldwide.
Chevron Combination. On August 31, 1996, NGC completed the Chevron
Combination pursuant to which substantially all of Chevron's midstream assets,
including substantially all of the assets comprising Warren Petroleum Company
and Chevron's Natural Gas Business Unit and an undivided interest in those
assets that constitute the West Texas LPG Pipeline, were combined into NGC. As a
result of the Chevron Combination, Chevron received approximately 38.6 million
shares of NGC common stock, approximately 7.8 million shares of NGC's Series A
Participating Preferred Stock and $128 million in cash, and NGC assumed
approximately $155 million of indebtedness.
In connection with the Chevron Combination, NGC and Chevron entered into
certain ancillary supply, sales and service agreements with respect to natural
gas, natural gas liquids and electricity. Pursuant to these ancillary
agreements, NGC has the obligation to purchase and the right to market
substantially all of the natural gas and natural gas liquids produced or
controlled by Chevron in the United States (except Alaska), to process
substantially all of Chevron's processable natural gas in those geographic areas
where it is economically feasible for NGC to provide such service, to supply
natural gas feedstocks to Chevron refineries and chemical plants in the United
States and to participate in existing and future opportunities to provide
electricity to Chevron's United States facilities as well as to purchase or
market excess electricity generated by those facilities.
Trident Combination. On March 14, 1995, NGC and Holding, a registrant on
the New York Stock Exchange, consummated the Trident Combination. Pursuant to
the terms of the Trident Combination, Holding, the legally surviving corporation
in the Combination, was renamed NGC Corporation. The Trident Combination
provided NGC with significant gas gathering, gas processing, fractionation and
other midstream assets.
RECENT DEVELOPMENTS
Restructuring of Liquids Business. During the fourth quarter of 1997, the
Company recognized a $275 million charge largely related to its plan to
restructure the Company's natural gas liquids business, including
rationalization and consolidation of assets acquired in both the Trident and
Chevron Combinations, the reorganization of personnel to improve operational
management of this segment and a reduction of employees involved in non-
strategic operations. Execution of this comprehensive plan began in 1997 and
will continue into 1998. Pursuant to this restructuring, the Company anticipates
recording an additional severance charge of approximately $10 million during the
first quarter of 1998.
Sale of Ozark. In January 1998, the Company announced an agreement to sell
the Ozark Gas Transmission System for $55 million, and expects to recognize an
estimated pre-tax gain of approximately $27 million related to the sale. Closing
of the transaction is expected in the third quarter of 1998, subject to certain
conditions, including FERC and other governmental approvals.
El Paso Capacity Commitment. For a two-year period beginning January 1,
1998, the Company contracted for 1.3 billion cubic feet per day of firm
transportation capacity to California on the El Paso Natural Gas pipeline
system. The arrangement has been implemented but is subject to regulatory
approval in a pending proceeding in which challenges have been filed. The firm
capacity provides NGC with the ability to serve an expanded California customer
base arising from the recent Chevron Combination and Destec acquisition, as well
as to take advantage of opportunities associated with the deregulation of the
electric power industry in California. Pursuant to this arrangement, NGC is
obligated to pay a minimum of $70 million of reservation charges over the two-
year term.
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New Power Project Commitments. In November 1997, the Company together with
NRG Energy, Inc. ("NRG"), was awarded the contract to acquire the El Segundo
Station, a 1,020 megawatt gas-fired power generating facility located in Los
Angeles, California. The El Segundo facility will be acquired by an entity owned
fifty percent by the Company and fifty percent by NRG. Additionally, in February
1998, NGC together with NRG, was awarded the contract to acquire a 560
megawatt gas-fired power facility located in Long Beach, California. The Long
Beach facility will also be acquired by an entity owned fifty percent by NGC and
fifty percent by NRG. The El Segundo facility is partially a merchant plant
while the Long Beach facility is solely a merchant plant. Both acquisitions are
expected to close in the second quarter of 1998. With respect to both these
acquisitions, NGC will be the lead party on fuel procurement, power marketing
and asset management, while NRG will be operator of the facilities.
Additionally, Destec and a partner were selected to build a 766 megawatt
independent power station near Townsville, in Queensland, Australia. The
Townsville project is expected to be partially operational in July 2001, and
fully operational by July 2003. Destec will own fifty percent of this project.
Venice Energy Services Company, L.L.C. ("VESCO"). The VESCO members have
entered into a definitive agreement with Koch Energy Services Company ("Koch")
pursuant to which Koch will contribute a cryogenic gas processing unit to VESCO
on behalf of NGC in exchange for approximately 10 percent of NGC's interest in
the limited liability company. The transaction, which is expected to close in
the second quarter of 1998, will reduce NGC's interest in VESCO to approximately
23 percent.
COMPETITION
All phases of the businesses in which NGC is engaged are highly
competitive. In connection with both domestic and foreign operations, the
Company encounters strong competition from companies of all sizes, having
varying levels of financial and personnel resources.
NGC competes in its gas marketing business with other natural gas
merchants, producers and pipelines for sales based on its ability to aggregate
competitively priced supplies from a variety of sources and locations and to
utilize transportation efficiently through third-party pipelines. With respect
to its marketing operations, NGC believes that customers will increasingly
scrutinize the financial condition of their suppliers to assure that contract
obligations will be met; suppliers and transporters will demand more stringent
credit terms to secure the performance of natural gas merchants; the increased
role of storage and other risk management tools will add to the financial costs
of doing business; the increasing availability of pricing information to
participants in the natural gas industry will continue to exert downward
pressure on per-unit profit margins in the industry; suppliers will have to be
multi-fuel marketers; and large competitors will create competition from
entities having significant liquidity and other resources. As a result, NGC
believes its financial condition and its access to capital markets will play an
increasing role in distinguishing the Company from many of its competitors.
Operationally, NGC believes its ability to remain a low-cost merchant and to
effectively combine value-added services, competitively priced supplies and
price risk management services will determine the level of success in its
natural gas marketing operations.
NGC's power marketing business is similar to its gas marketing business in
that it provides contract services to electric utilities, markets and supplies
electricity, and invests in power-related assets and joint ventures. As a
result, the competition issues incumbent upon the Company's gas marketing
operations similarly impact the Company's power marketing business. As with its
gas marketing operations, the Company believes it has the ability to establish
itself as a low cost and dependable merchant providing competitively priced
supplies and a variety of services which will differentiate NGC from the
competition.
The independent power generation industry has grown rapidly over the past
twenty years. The demand for power may be met by generation capacity based on
several competing technologies, such as gas-fired or coal-fired cogeneration and
power generating facilities fueled by alternative energy sources including hydro
power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste
and nuclear sources. The Company's Power Generation segment competes with other
non-utility generators, regulated utilities, unregulated subsidiaries of
regulated utilities and other energy service companies in the development and
operation of energy-producing projects. The trend towards deregulation in the
U.S. electric power industry has resulted in a highly competitive market for
acquisition or development of domestic power generating facilities. As the
nation's regulated utilities seek non-regulated investments and states move
toward retail electric competition, these trends can be expected to continue for
the foreseeable future.
7
<PAGE>
The Company's natural gas liquids, crude oil marketing and gas transmission
businesses face significant competition from a variety of competitors including
major integrated oil companies, major pipeline companies and their marketing
affiliates and national and local gas gatherers, processors, brokers, marketers
and distributors of varying sizes and experience. The principal areas of
competition include obtaining gas supplies for gathering and processing
operations, obtaining supplies of raw product for fractionation, the marketing
of natural gas liquids, crude oil, residue gas, helium, condensate and sulfur,
and the transportation of natural gas, natural gas liquids and crude oil.
Competition typically arises as a result of the location and operating
efficiency of facilities, the reliability of services and price and delivery
capabilities. The Company believes it has the infrastructure, long-term
marketing abilities, financial resources and management experience to enable it
to effectively compete.
REGULATION
General. The Company is subject to the laws, rules and regulations of the
countries in which it conducts its operations. The regulatory burden on the
energy industry increases its cost of doing business and, consequently, affects
its profitability. Inasmuch as these rules and regulations are frequently
amended or reinterpreted, the Company is unable to predict the future cost or
impact of complying with such regulations. These rules and regulations affect
the industry as a whole; therefore, the Company does not believe that it is
affected in a significantly different manner from its competitors.
The transportation and sale for resale of natural gas is subject to
regulation by the Federal Energy Regulatory Commission ("FERC") under the
Natural Gas Act of 1938, as amended ("NGA") and, to a lesser extent, the Natural
Gas Policy Act of 1978, as amended ("NGPA"). Interstate transportation and
storage services by natural gas companies, including interstate pipeline
companies, and the rates charged for such services, are regulated by the FERC.
Certain of the Company's pipeline activities and facilities are involved in
interstate transportation of natural gas, crude oil and natural gas liquids, and
are subject to these or other federal regulations.
Natural Gas Marketing. Commencing in 1985, the FERC promulgated a series
of orders and regulations adopting changes that significantly altered the
business of transporting and marketing natural gas by fostering competition. The
thrust of these regulations was to induce interstate pipeline companies to
provide nondiscriminatory transportation services to producers, distributors and
other shippers. The effect of the foregoing regulations has been the creation of
a more open access market for natural gas purchases and sales and the creation
of a business environment which has fostered the evolution of various
unregulated, privately negotiated natural gas sales, purchase and transportation
arrangements.
Regulation determined by the FERC relating to the sale for resale of
natural gas continues to evolve. While the ultimate impact of such
determinations on the Company's operations cannot be predicted with certainty,
the Company does not believe that the outcome of these matters will have a
material adverse effect on the Company's operations or competitiveness.
Gas Processing. The primary function of NGC's gas processing plants is the
extraction of natural gas liquids and the conditioning of natural gas for
marketing, and not natural gas transportation. The FERC has traditionally
maintained that a processing plant is not a facility for transportation or sale
for resale of natural gas in interstate commerce and therefore is not subject to
jurisdiction under the NGA. Even though the FERC has made no specific
declaration as to the jurisdictional status of the Company's gas processing
operations or facilities, NGC believes its gas processing plants are primarily
involved in removing natural gas liquids and therefore exempt from FERC
jurisdiction. Nonetheless, certain facilities downstream of processing plants
are being considered for use in transporting gas between pipelines, which may
invoke FERC's jurisdiction. Such jurisdiction should apply to the downstream
facility as a pipeline, however, and not to the plants themselves.
Gathering. The NGA exempts gas gathering facilities from the jurisdiction
of the FERC. Interstate transmission facilities, on the other hand, remain
subject to FERC jurisdiction. The FERC has historically distinguished between
these two types of facilities on a fact-specific basis. NGC believes its
gathering facilities and operations meet the current tests used by the FERC to
determine a nonjurisdictional gathering facility status. Some of the recent
cases applying these tests in a manner favorable to the determination of NGC's
nonjurisdictional status are still subject to rehearing and appeal. In addition,
the FERC's articulation and application of the tests used to distinguish between
jurisdictional pipelines and nonjurisdictional gathering facilities have varied
over time. While the Company believes current definitions create
nonjurisdictional status for NGC's gathering facilities, no assurance can be
given that such facilities will remain classified as gas gathering facilities
and the possibility exists that the rates,
8
<PAGE>
terms, and conditions of the services rendered by those facilities, and the
construction and operation of the facilities will be subject to regulation by
the FERC or by the various states in the absence of FERC regulation.
Market Hubs. The market hub for which Hub Services, Inc., a wholly owned
subsidiary of NGC, serves as hub administrator is a combined gas storage,
transportation and interchange facility. To the extent the market hub provides
services in intrastate commerce, the rates, terms and conditions of service are
regulated by the applicable state public utility commissions. To the extent the
market hub provides service in interstate commerce subject to the NGA or NGPA,
the FERC has overlapping regulatory authority with respect to rates, terms and
conditions of service.
Other Regulatory Issues. The Company's gas purchases and sales are
generally not regulated by the FERC; however, as a gas merchant, the Company
depends on the gas transportation and storage services offered by various
interstate and intrastate pipeline companies to enable the sale and delivery of
its gas supplies. Additionally, certain other pipeline activities and facilities
of the Company are involved in interstate and intrastate transportation and
storage services and are subject to various federal and state regulations which
generally regulate rates, terms and conditions of service.
Electricity Marketing Regulation. The Federal Power Act ("FPA") and rules
promulgated by the FERC regulate the transmission of electric power in
interstate commerce and sales for resale of that power. As a result, portions of
ECI's operations are under the jurisdiction of the FPA and FERC. In April 1996,
the FERC adopted rules (Order 888) to expand transmission service and access and
provide alternative methods of pricing for transmission services. Upon
promulgation of the final rule by the FERC (and the Public Utility Commission of
Texas for ERCOT), the interstate transmission grid in the continental United
States was opened to all qualified persons that seek transmission services to
wheel wholesale power. Utilities are required to provide transmission customers
non-discriminatory open access to their transmission grids with rates, terms,
and conditions comparable to that which the utility imposes on itself. Order
888 was upheld by the FERC in March 1997 and is subject to appeal. Second
generation implementation issues arising out of Order 888 abound. These include
issues relating to power pool structures and transmission pricing. These too
will likely find their way to the courts, and their outcome cannot be predicted.
Power Generation Regulation. Historically in the United States, regulated
and government-owned utilities have been the only significant producers of
electric power for sale to third parties. Pursuant to the enactment of the
federal Public Utility Regulatory Policies Act of 1978 ("PURPA"), companies
other than utilities were encouraged to enter the electric power business by
reducing regulatory constraints. In addition, PURPA and its implementing
regulations created unique opportunities for the development of cogeneration
facilities by requiring utilities to purchase electric power generated in
cogeneration plants meeting certain requirements (referred to as "Qualifying
Facilities"). As a result of PURPA, a significant market for electric power
produced by independent power producers developed in the United States. The
exemptions from extensive federal and state regulation afforded by PURPA to
Qualifying Facilities are important to NGC and its competitors. Many of the
projects that NGC currently owns meet the requirements under PURPA to be
Qualifying Facilities and are maintained on that basis.
In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"),
which amended the FPA and the Public Utility Holding Company Act of 1935
("PUHCA") to create new exemptions from PUHCA for independent power producers
selling electric energy at wholesale, to increase electricity transmission
access for independent power producers and to reduce the burdens of complying
with PUHCA's restrictions on corporate structures for owning or operating
generating or transmission facilities in the United States or abroad. The Energy
Act has enhanced the development of independent power projects and has further
accelerated the changes in the electric utility industry that were initiated by
PURPA.
Changes in PURPA, PUHCA and other related federal statutes may occur in the
next several years. The nature and impact of such changes on the Company's
projects, operations and contracts is unknown at this time. NGC actively
monitors these developments to determine such impacts as well as to evaluate new
business opportunities created by restructuring of the electric power industry.
Depending on the outcome of these legislative matters, changes in legislation
could have an adverse effect on current contract terms.
The enactment in 1978 of PURPA and the adoption of regulations thereunder
by the FERC and individual states provide incentives for the development of
small power production facilities and cogeneration facilities meeting certain
criteria. In order to be a Qualifying Facility, a cogeneration facility must (i)
produce not only electricity but also a certain quantity of thermal energy (such
as steam) which is used for a qualified purpose other than power generation,
(ii) meet
9
<PAGE>
certain energy operating and efficiency standards when oil or natural gas is
used as a fuel source and (iii) not be controlled or more than 50 percent owned
by an electric utility or electric utility holding company, or any combination
thereof. PURPA provides two primary benefits to Qualifying Facilities owned and
operated by non-utility generators. First, Qualifying Facilities under PURPA are
exempt from certain provisions of PUHCA, the FPA and, except under certain
limited circumstances, state laws respecting rate and financial regulation.
Second, PURPA requires that electric utilities purchase electricity generated by
Qualifying Facilities at a price equal to the purchasing utility's full "avoided
cost" and that the utility sell back-up power to the Qualifying Facility on a
non-discriminatory basis. The FERC regulations also permit Qualifying Facilities
and utilities to negotiate agreements for utility purchases of power at rates
other than the purchasing utility's avoided cost. If Congress amends PURPA, the
statutory requirement that an electric utility purchase electricity from a
Qualifying Facility at full avoided costs could be eliminated. Although current
legislative proposals specify the honoring of existing contracts, repeal of the
statutory purchase requirements of PURPA going forward could increase pressure
to renegotiate existing contracts. Any changes which result in lower contract
prices could have an adverse effect on the Company's operations and financial
position.
The Congress passed the Energy Act to promote further competition in the
development of new wholesale power generation sources. Through amendments to
PUHCA, the Energy Act encourages the development of independent power projects
which are certified by the FERC as exempt wholesale generators ("EWGs"). The
owners or operators of qualifying EWGs are exempt from the provisions of PUHCA.
The Energy Act also provides the FERC with extensive new authority to order
electric utilities to provide other electric utilities, Qualifying Facilities
and independent power projects with access to their transmission systems.
However, the Energy Act does preclude the FERC from ordering transmission
services to retail customers and prohibits "sham" wholesale energy transactions
which appear to provide wholesale service, but actually are providing service to
retail customers.
The FPA grants the FERC exclusive rate-making jurisdiction over wholesale
sales of electricity in interstate commerce. The FPA provides the FERC with
ongoing as well as initial jurisdiction, enabling the FERC to revoke or modify
previously approved rates. Such rates may be based on a cost-of-service approach
or on rates that are determined through competitive bidding or negotiation on a
market basis. Although Qualifying Facilities under PURPA are exempt from rate-
making and certain other provisions of the FPA, independent power projects and
certain power marketing activities are subject to the FPA and to the FERC's
rate-making jurisdiction. Utilities are not obligated to purchase power from
projects subject to regulation by the FERC under the FPA because they do not
meet the requirements of PURPA. However, because such projects would not be
bound by PURPA's thermal energy use requirement, they may have greater latitude
in site selection and facility size. All of the projects currently owned or
operated by NGC as Qualifying Facilities under PURPA are exempt from the FPA.
NGC's EWGs, Commonwealth Atlantic and Hartwell, are subject to the FPA and the
jurisdiction of the FERC. With approval from FERC, such entities, with certain
exceptions, are exempted from being required to sell cost-based rates and can
make all sales at market-based rates set through negotiations. Independent power
projects in which the Company has an interest have been granted market based
rate authority and comply with the FPA requirements governing approval of
wholesale rates and subsequent transfers of ownership interests in such
projects.
Development of projects in international markets creates exposure and
obligations to the national, provincial and local laws of each host country,
worldwide environmental standards and requirements imposed by multi-lateral
lending institutions. The principal regulatory consideration for international
projects is PUHCA, since it is broadly applicable to the ownership and operation
of power facilities (including generation and transmission facilities) both
inside and outside of the United States. For international projects, the
principal basis for exemption from PUHCA is by obtaining EWG status from the
FERC. EWG status is very beneficial for international projects because EWGs are
generally allowed to make retail sales in international markets. Another way to
obtain an exemption from PUHCA for foreign ownership and operation activities is
by filing a foreign utility company determination ("FUCO") with the Securities
and Exchange Commission. However, FUCO filings are less frequently used,
because unlike EWGs, no formal regulatory order is issued confirming the status
of a FUCO. The development of international power generation and transmission
projects also may entail other multi-national regulatory considerations arising
under United States law, including export/import controls, trade laws and other
similar legislation. NGC attempts to identify and manage those issues early in
the development process to ensure compliance with such laws and regulations.
State Regulatory Reforms. Legislation currently under review in various
states impacting gas and electricity marketing and power generation businesses
is most likely to impact NGC in the near term. However, other state regulatory
reforms impacting the Company's processing and gathering operations and other
businesses are proceeding. While the ultimate impact of such legislation on the
Company's businesses cannot be predicted with certainty, the Company does not
believe that the outcome of these matters will have a material adverse effect on
the Company's operations or competitiveness.
10
<PAGE>
ENVIRONMENTAL AND OTHER MATTERS
NGC's operations are subject to extensive federal, state and local
statutes, rules and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Development of
projects in international markets creates exposure and obligations to the
national, provincial and local laws of each host country, including
environmental standards and requirements imposed by these governments.
Compliance with these statutes, rules and regulations requires capital and
operating expenditures including those related to monitoring, pollution control
equipment, emission fees and permitting at various operating facilities and
remediation obligations. Failure to comply with these statutes, rules and
regulations may result in the assessment of civil and even criminal penalties.
The Company's environmental expenditures have not been prohibitive in the past,
but are anticipated to increase in the future with the trend toward stricter
standards, greater regulation, more extensive permitting requirements and an
increase in the number and types of assets operated by the Company subject to
environmental regulation. No assurance can be given that future compliance with
these environmental statutes, rules and regulations will not have a material
adverse effect on the Company's operations or its financial condition.
The vast majority of federal environmental remediation provisions are
contained in the Superfund laws -- the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and the Superfund Amendments and
Reauthorization Act ("SARA") and in the corrective action provisions of the
Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the U.S.
Environmental Protection Agency ("EPA") acts pursuant to Superfund legislation
to remediate facilities that are abandoned or inactive or whose owners are
insolvent; however, the legislation may be applied to sites still in operation.
Superfund law imposes liability, regardless of fault or the legality of the
original conduct, on certain classes of persons that contributed to the release
of a "hazardous substance" into the environment. These persons include the
current or previous owner and operator of a facility and companies that
disposed, or arranged for the disposal, of the hazardous substance found at a
facility. CERCLA also authorizes the EPA and, in certain instances, private
parties to take actions in response to threats to public health or the
environment and to seek recovery for the costs of cleaning up the hazardous
substances that have been released and for damages to natural resources from
such responsible party. Further, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. RCRA
provisions apply to facilities that have been used to manage or are currently
managing hazardous waste and which are either still in operation or have
recently been closed. As amended, RCRA requires facilities to remedy any
releases of hazardous wastes or hazardous waste constituents at waste treatment,
storage or disposal facilities.
In connection with discrete asset acquisitions and sales, NGC may obtain or
be required to provide indemnification against certain environmental
liabilities. These indemnities are typically limited in scope and time period.
To minimize its exposure for such liabilities, environmental audits of the
assets NGC wishes to acquire are made, either by NGC personnel, outside
environmental consultants, or a combination of the two. The Company has not
heretofore incurred any material environmental liabilities arising from its
acquisition or divestiture activities. The incurrence of a material
environmental liability, and/or the failure of an indemnitor to meet its
indemnification obligations with respect thereto, could have a material adverse
effect on NGC's operations and financial condition.
To the Company's knowledge, it is in substantial compliance with, and is
expected to continue to comply in all material respects with, applicable
environmental statutes, regulations, orders and rules. Further, to the best of
the Company's knowledge, there are no existing, pending or threatened actions,
suits, investigations, inquiries, proceedings or clean-up obligations by any
governmental authority or third party relating to any violations of any
environmental laws with respect to the Company's assets or pertaining to any
indemnification obligations with respect to properties previously owned or
operated by the Company which would have a material adverse effect on the
Company's operations and financial condition. NGC's aggregate expenditures for
compliance with laws and regulations related to the discharge of materials into
the environment or otherwise related to the protection of the environment
approximated $9.4 million in 1997. Total environmental expenditures for both
capital and operating maintenance and administrative costs are not expected to
exceed $15 million in 1998.
In addition to environmental regulatory issues, the design, construction,
operation and maintenance of the Company's pipeline facilities are subject to
the safety regulations established by the Secretary of the Department of
Transportation pursuant to the Natural Gas Pipeline Safety Act ("NGPSA"), or by
state regulations meeting the requirements of the NGPSA. The Company believes it
is currently in substantial compliance, and expects to continue to comply in all
material respects, with these rules and regulations.
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<PAGE>
The Company's operations are subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and other comparable state statutes.
The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of SARA and similar state statutes require that
information be organized and maintained about hazardous materials used or
produced in its operations. Certain of this information must be provided to
employees, state and local government authorities and citizens. The Company
believes it is currently in substantial compliance, and expects to continue to
comply in all material respects, with these rules and regulations.
OPERATIONAL RISKS AND INSURANCE
NGC is subject to all risks inherent in the various businesses in which it
operates. These risks include, but are not limited to, explosions, fires and
product spillage, which could result in damage to or destruction of operating
assets and other property, or could result in personal injury, loss of life or
pollution of the environment, as well as curtailment or suspension of operations
at the affected facility. NGC maintains general public liability, property and
business interruption insurance in amounts that it considers to be adequate for
such risks. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. The occurrence of a significant event not fully
insured or indemnified against, and/or the failure of a party to meet its
indemnification obligations, could materially and adversely affect NGC's
operations and financial condition. Moreover, no assurance can be given that NGC
will be able to maintain insurance in the future at rates it considers
reasonable.
During both 1997 and 1996, the Company designated two of its subsidiaries
to assist in the management of certain liabilities principally relating to
environmental, litigation and credit reserves. Together with the involvement of
third parties whose primary consideration will be based on the realization of
savings by the Company, the subsidiaries will attempt to find new ways to handle
these costs in a more efficient manner.
EMPLOYEES
The Company employs approximately 1,100 employees at its administrative
offices and approximately 1,472 employees at its operating facilities.
Approximately 120 employees at Company-operated facilities are subject to
collective bargaining agreements with the Oil, Chemical and Atomic Workers
International Union or the Metal Trades Council. Management considers relations
with both union and non-union employees to be satisfactory.
ITEM 1a. EXECUTIVE OFFICERS
Set forth below are the names and positions of the current executive
officers of the Company, together with their ages, position(s) and years of
service with the Company.
<TABLE>
<CAPTION>
Served with the
Name Age * Position(s) Company Since
- ---- ------ ----------- ---------------
<S> <C> <C> <C>
C. L. Watson 48 Chairman of the Board, Chief Executive Officer, 1985
and a Director of the Company
Thomas M. Matthews 54 President and Director of the Company 1996
Stephen W. Bergstrom 40 Senior Vice President and Advisory Director 1986
of the Company and President of Clearinghouse
John U. Clarke 45 Senior Vice President, Chief Financial Officer 1997
Stephen A. Furbacher 50 Senior Vice President of the Company and 1996
President of Warren Petroleum Limited
Partnership
Kenneth E. Randolph 41 Senior Vice President, General Counsel and 1984
Secretary of the Company
Dan W. Ryser 48 Senior Vice President of the Company and 1993
President of Destec Energy, Inc.
</TABLE>
- ----------
* As of April 1, 1998.
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<PAGE>
The executive officers named above will serve in such capacities until the
next annual meeting of the Company's Board of Directors, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office.
C. L. Watson serves as Chairman of the Board, Chief Executive Officer and a
Director of the Company. He also served as President of NGC from March 1995 to
December 1996. Mr. Watson served as Chairman and as a member of the
Clearinghouse Management Committee from May 1989 and through March 1995, and as
Chief Executive Officer and President of Clearinghouse from September 1985
through March 1995. Prior to his employment with Clearinghouse, Mr. Watson
served as Director of Gas Sales for the Western United States for Conoco Inc.
Mr. Watson also serves as a member of the Board of Directors of Baker Hughes
Incorporated.
Thomas M. Matthews joined the Company in December 1996 as President of NGC.
Prior to joining the Company, Mr. Matthews served as President and Chief
Executive Officer of Texaco Natural Gas from January 1996 through November 1996
and Vice President of Texaco, Inc. from November 1993 through November 1996.
Mr. Matthews also served as President of Texaco Refining and Marketing, Inc.
from December 1993 through December 1995. He joined Texaco U.S.A. as Vice
President-Gas in 1989. Prior to joining Texaco, Mr. Matthews spent eight years
with Tenneco as President of Tennessee Gas Pipeline Company and Executive Vice
President of Tenneco Gas and sixteen years with Exxon in various domestic and
international engineering, management and executive positions, having last
served as Vice President-Exxon Gas.
Stephen W. Bergstrom serves as Senior Vice President and as an advisory
director of the Company and as President of Clearinghouse. He served as
Executive Vice President of Clearinghouse and as a member of the Clearinghouse
Management Committee from May 1989 through March 1995. In addition, Mr.
Bergstrom served as Senior Vice President Gas Marketing and Supply of
Clearinghouse from May 1987 through May 1990 and as Vice President Gas Supply of
Clearinghouse from July 1986 through May 1987. Prior to his employment with the
Clearinghouse, Mr. Bergstrom served as Vice President Gas Supply of Enron Gas
Marketing, a subsidiary of Enron Corporation.
John U. Clarke joined the Company in April 1997 as Senior Vice President
and Chief Financial Officer and serves as the Company's principal financial
officer. Prior to joining NGC, Mr. Clarke was a managing director and co-head
of a specialty energy practice group with Simmons & Company International, an
investment banking firm for approximately one year. He previously had served as
President of Concept Capital Group, Inc., a financial advisory firm formed by
Mr. Clarke in May, 1995. Mr. Clarke was Executive Vice President and Chief
Financial and Administrative Officer with Cabot Oil & Gas Corporation from
August 1993 to February 1995, and worked for Transco Energy Company, from April
1981 to May 1993, last serving as Senior Vice President and Chief Financial
Officer. Mr. Clarke began his career with Tenneco Inc. in January 1978.
Stephen A. Furbacher serves as President of Warren Petroleum Limited
Partnership and Senior Vice President of NGC Corporation. Mr. Furbacher manages
the operations of NGC's natural gas gathering and processing, natural gas
liquids fractionation, storage, transportation and terminalling services. Prior
to joining the Company in September 1996, Mr. Furbacher served as President of
Warren Petroleum Company, a division of Chevron U.S.A. Inc.
Kenneth E. Randolph serves as Senior Vice President, General Counsel and
Secretary of the Company. He has served as Senior Vice President and General
Counsel of NGC (or its predecessor, Clearinghouse) since July 1987. In addition,
he served as a member of the Clearinghouse Management Committee from May 1989
through February 1994 and managed Clearinghouse's marketing operations in the
Western and Northwestern United States from July 1984 through July 1987. Prior
to his employment with the Company, Mr. Randolph was associated with the
Washington, D.C. office of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Dan W. Ryser serves as President of Destec Energy, Inc. and Senior Vice
President of NGC Corporation. Mr. Ryser manages the Company's power generation
business. Since joining NGC in 1993, Mr. Ryser has served the Company in
several capacities, including managing ECI's electricity marketing operations.
Prior to joining the Company in 1993, Mr. Ryser held various positions at Enron
Corp. including President of Enron Gas Processing Company, President of
Transwestern Pipeline Company, Executive Vice President of Enron Gas Marketing
and President of Houston Pipe Line Company.
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<PAGE>
Item 2. PROPERTIES
All of the Company's operating assets are held through wholly owned
subsidiaries. The Company's operations are located throughout the contiguous
United States, western Canada and the United Kingdom. Current year activity
conducted in these areas is discussed under "Item 1. BUSINESS -- General."
Following is a description of such properties owned by the Company at December
31, 1997.
GATHERING SYSTEMS AND PROCESSING FACILITIES
NGC's natural gas processing services are provided at two types of gas
processing plants, referred to as field and straddle plants. Field plants
aggregate volumes from multiple producing wells into quantities that can be
economically processed to extract natural gas liquids and to remove water vapor,
solids and other contaminants. Straddle plants are situated on mainline natural
gas pipelines and allow operators to extract natural gas liquids from a natural
gas stream when the market value of natural gas liquids separated from the
natural gas stream is higher than the market value of the same unprocessed
natural gas. The following table provides certain information, including
operational data for the year ended December 31, 1997, concerning the gas
processing plants and gathering systems in which NGC owns an interest.
<TABLE>
<CAPTION>
Location Total Plant
-------------------- -------------------------
Practical 1997 Inlet NGL
Gas Processing Facilities % Owned County/Parish State Capacity (3) Throughput Production
------------------------------ ------- ------------- ----- ------------ ---------- -----------
(MMcf/d) (1) (Bpd) (2)
<S> <C> <C> <C> <C> <C> <C>
Operated Field Plants:
Arbuckle (14) 100.00 Murray OK 2 1.8 39.1
Binger (4) 100.00 Caddo OK 10 7.7 820.5
Breckenridge/Shackleford (4)(11) 100.00 Stephens & TX 30 17.2 2,708.2
Shackleford
Bridger Lake (9) 100.00 Summit UT 25 14.8 461.8
Canadian (4)(12) 100.00 Hemphill TX 25 23.6 2,253.4
Chico (4)(11) 100.00 Wise TX 100 63.2 9,624.5
East Texas (4)(11) 100.00 Gregg TX 34 28.0 4,251.9
Eunice (4)(11) 100.00 Lea NM 67 57.3 6,657.6
Eustace (4)(11) 100.00 Henderson TX 54 33.9 2,098.5
Fashing (12) 44.74 Atascosa TX 29 20.6 269.7
Haynesville I & II 100.00 Claiborne LA 85 66.7 3,317.5
Kellerville (4)(10)(11) 100.00 Wheeler TX 10 5.9 1,375.4
Leedey (4)(11) 100.00 Roger Mills OK 50 35.1 3,283.0
Lefors (4)(11) 100.00 Gray TX 12 7.3 1,966.2
Madill (4)(11) 100.00 Marshall OK 25 15.6 858.9
Moores Orchard (4)(12) 100.00 Fort Bend TX 7 4.0 123.4
Monahans/Worsham (4)(12) 100.00 Ward TX 31 25.6 2,665.6
Monument (4)(12) 100.00 Lea NM 80 65.5 7,187.2
New Hope 100.00 Franklin TX 30 15.4 902.0
Ringwood (4)(10)(15) 100.00 Major OK 62 52.3 3,698.4
Roberts Ranch (4)(11) 56.25 Midland TX 46 24.5 2,536.5
Rodman (4)(11) 100.00 Garfield OK 50 43.3 3,528.6
Sand Hills (4)(12) 100.00 Crane TX 200 176.3 13,577.3
Saunders/Vada/Bluitt (4)(10)(12) 100.00 Lea NM 44 34.0 5,129.4
Sherman (4)(12) 100.00 Grayson TX 33 16.4 733.1
Sligo 100.00 Bossier LA 40 36.0 658.5
Spivey (5)(6)(11) 3.87 Harper KS 3 0.2 29.5
Texarkana (4) 100.00 Miller AR 22 14.8 492.0
West Seminole (4)(11) 40.14 Gaines TX 5 9.3 592.4
Operated Straddle Plants:
Barracuda (8) 100.00 Cameron LA 190 149.8 3,872.5
Cheney (11) 100.00 Kingman KS 85 65.0 3,696.3
===============================================================================================================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Location Total Plant
-------------------- -------------------------
Practical 1997 Inlet NGL
Gas Processing Facilities % Owned County/Parish State Capacity (3) Throughput Production
------------------------------ ------- ------------- ----- ------------ ---------- -----------
(MMcf/d) (1) (Bpd) (2)
<S> <C> <C> <C> <C> <C> <C>
Lowry (4)(11) 100.00 Cameron LA 265 173.6 4,495.5
Stingray (8) 100.00 Cameron LA 300 231.0 2,719.6
Yscloskey (6)(11)(13) 32.36 St. Bernard LA 566 430.3 7,610.4
Non-Operated Field Plants:
Diamond M (4) 3.98 Scurry TX 1 0.7 161.4
Dover Hennessey (4) 7.36 Kingfisher OK 6 2.7 275.7
Indian Basin (4)(12) 14.29 Eddy NM 30 29.9 1,358.8
Maysville (4)(11)(13) 44.00 Garvin OK 59 45.9 5,951.6
Snyder (7)(11) 3.25 Scurry TX 2 1.6 97.9
Non-Operated Straddle Plants:
Bluewater (12) 16.72 Acadia LA 122 66.5 1,316.2
Calumet (6)(11)(13) 21.91 St. Mary's LA 300 81.9 3,545.5
Iowa (12) 9.92 Jefferson LA 50 20.1 427.7
Davis
North Terrebone Robin (12) 0.83 Terrebone LA 10 13.2 249.8
Patterson (12) 1.09 St. Mary's LA 3 0.2 4.9
Sea Robin (12) 18.70 Vermillion LA 187 61.0 1,536.5
Toca (12) 8.86 St. Bernard LA 93 117.4 3,711.2
===================================================================================================================
</TABLE>
(1) Gross to the facility.
(2) Gross production, net to the Company's ownership interest.
(3) Capacity data is at practical recovery rates, net to NGC's interest.
(4) NGC owns the indicated percentage of an associated gas gathering system.
(5) NGC owns 2.19 percent of the associated gas gathering system.
(6) NGC ownership is adjustable and subject to periodic (usually annual)
redetermination.
(7) NGC owns the indicated percentage of the Snyder gas gathering system and
3.98 percent of the Diamond M gas gathering system which also supplies the
Snyder plant.
(8) This facility has no gathering lines.
(9) This facility consists of a 100 percent interest in a processing plant and
an NGL pipeline, a 100 percent interest in a crude oil pipeline and a 33.33
percent interest in reserves connected and dedicated to the plant. The
gathering system behind the processing plant gathers production from Utah
and Wyoming.
(10) The Enid, Kellerville, Vada and Bluitt facilities were closed during 1997
as part of NGC's program of asset rationalization and reorganization.
(11) These assets, or a portion thereof, were acquired in the Trident
Combination.
(12) These assets were acquired in the Chevron Combination.
(13) Additional interest in this facility was acquired as part of the Chevron
Combination.
(14) The Company's interest in this facility was disposed of in 1997.
(15) Includes the Enid, Oklahoma plant.
FRACTIONATION FACILITIES
The following table provides certain information concerning stand alone
fractionation facilities in which NGC owns an interest.
<TABLE>
<CAPTION>
Location Total Plant
---------------------- ------------------------
1997 Inlet
Fractionation Facilities (1) % Owned County/Parish State Capacity (2) Throughput
---------------------------- ------- ------------- ----- ------------ ----------
(MBbls/d)
<S> <C> <C> <C> <C> <C>
Mont Belvieu (3) 100.00 Chambers TX 205 158
Gulf Coast Fractionators (4) 38.75 Chambers TX 42 32
========================================================================================
</TABLE>
(1) Table does not include fractionation operations at VESCO or at other gas
processing facilities.
(2) Capacity data is at practical recovery rates.
(3) Interest in this facility was acquired as part of the Chevron Combination.
(4) Interest was acquired as part of the Trident Combination.
15
<PAGE>
A subsidiary of the Company is constructing a fractionation facility in
Lake Charles, Louisiana. The facility, which is expected to be operational in
the fourth quarter of 1998, will fractionate up to 55,000 barrels per day of
natural gas liquids principally from Gulf of Mexico natural gas production. The
new fractionator will extract ethane and propane for delivery to the Louisiana
market with the remaining commingled product shipped through the Company's 12"
bi-directional pipe line to Mont Belvieu, Texas, for further fractionation. The
facility will receive and ship product by pipeline, truck and barge and will
serve the petrochemical and refining industry in the Gulf Coast area.
STORAGE AND TERMINAL FACILITIES
The following table provides information concerning terminal and storage
facilities owned by the Company:
<TABLE>
<CAPTION>
Location
Storage and --------------------
Terminal Facilities % Owned County/Parish State Description
- -------------------- ------- ------------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Hackberry Storage 100.00 Cameron LA NGL storage facility
Mont Belvieu Storage 100.00 Chambers TX NGL storage facility
Hattiesburg Storage 100.00 Washington MS NGL storage facility
Hackberry Terminal 100.00 Cameron LA Marine import/export
terminal
Mont Belvieu Terminal 100.00 Chambers TX Product terminal
facility
Galena Park Terminal 100.00 Harris TX LPG import/export
terminal
Calvert City Terminal 100.00 Marshall KY Product transport
terminal
Greenville Terminal 100.00 Washington MS Propane terminal
Hattiesburg Terminal 50.00 Forrest MS Propane terminal
Lampton-Love Terminal 100.00 Forrest MS Product transport
terminal
Pt. Everglades Terminal 100.00 Broward FL Marine propane
terminal
Tampa Terminal 100.00 Hillsborough FL Marine propane
terminal
Tyler Terminal 100.00 Smith TX Product terminal
Mont Belvieu 100.00 Chambers TX Offices and repair
Transport shop
Abilene Transport 100.00 Taylor TX Raw LPG transport
terminal
Bridgeport 100.00 Jack TX Raw LPG transport
Transport terminal
Gladewater 65.00 Gregg TX Raw LPG transport
Transport terminal
Grand Lakes Tank Farm 100.00 Cameron LA Condensate storage
</TABLE>
MARKETING HUBS
Through its wholly owned subsidiary Hub Services, Inc. ("HSI"), NGC
participated in the formation of Enerchange L.L.C. ("Enerchange") which, among
other things, owns and operates a natural gas market area hub. Marketing hubs
are transportation and interchange facilities located in the vicinity of an
interconnection of two or more interstate pipelines. Each hub takes deliveries
from a large number of suppliers and provides these suppliers with a wide
variety of markets in which to sell their gas. By providing access to a large
number of gas buyers and sellers, a hub improves the gas market by reducing
transaction costs of matching buyers and sellers of gas, enhances the
reliability of gas supply and provides buyers and sellers a wide range of gas
marketing services. Each marketing hub provides customers with "wheeling",
"loaning", "parking" and "title transfer" services. The following table provides
information with respect to the marketing hub in which NGC indirectly owns an
interest.
<TABLE>
<CAPTION>
Service
Facility Name HSI's Partner % Owned area Names of Connecting Pipelines
--------------- ------------- ------- ------- ----------------------------------
<S> <C> <C> <C> <C>
Chicago Hub NICOR Hub Services 76.61 Midwest ANR Pipeline Company, Midwestern
Gas Transmission Company, Northern
Natural Gas Company and Natural Gas
Pipeline Company of America
============================================================================================
</TABLE>
16
<PAGE>
NATURAL GAS, LIQUIDS AND CRUDE OIL PIPELINES
NGC owns interests in various interstate and intrastate pipelines and
gathering systems, the more significant of which include: (i) the Ozark Gas
Transmission System, a 266-mile interstate natural gas pipeline with design
capacity of 170 MMcf/d that transports gas from eastern Oklahoma to central
Arkansas, where the system interconnects with interstate pipelines that serve
Midwest and Northeast markets; (ii) an interstate liquids pipeline capable of
transporting 160,000 Bpd from its origin in eastern New Mexico to fractionation
facilities in Mont Belvieu, Texas; (iii) a 1,300-mile crude oil system which
gathers crude oil in 25 central and southern Oklahoma counties, accessing more
than half of the state's production, and serves the U.S. crude oil trading hub
in Cushing, Oklahoma and the Wynnewood, Oklahoma refinery; (iv) the Kansas Gas
Supply Corporation that owns and operates an approximate 1,200 mile regulated
intrastate gas pipeline system in south-central Kansas with capacity to
transport approximately 100 MMcf/d of natural gas; and (v) an extensive liquids
gathering system at the Lake Charles fractionation facility and a 12-inch
liquids pipeline that connects the Lake Charles area facilities with the Mont
Belvieu fractionation facilities. The following table identifies these and
other pipeline and gathering system assets in which NGC owns an interest:
<TABLE>
<CAPTION>
%
Pipeline Systems Owned 1997 Throughput (1) States Description
------------------------------ ------- -------------------- -------- -------------
<S> <C> <C> <C> <C>
Ozark Gas Transmission 100.00 131.4 OK/AR Interstate natural gas pipeline
System
West Texas LPG Pipeline 49.00 87.5 NM/TX Interstate LPG pipeline
Crude Oil Pipeline System 100.00 81.2 TX/OK Crude oil pipelines
Kansas Gas Supply 100.00 60.9 KS/OK Intrastate natural gas pipeline
Warren NGL Pipeline 100.00 20.9 TX/LA Liquids pipeline
Bridger Lake/Phantex Pipeline 100.00 0.4 UT/WY Interstate liquids pipeline
Pelican Pipeline 100.00 73.9 LA Gas gathering pipeline
Vermillion Pipeline 100.00 23.0 Gulf of Mexico Gas gathering pipeline
Western Gas Gathering 100.00 3.5 KS Gas gathering pipeline
Pawnee Rock 100.00 5.6 KS Gas gathering pipeline
Searcy 100.00 8.8 OK/AR Interstate natural gas pipeline
Seahawk 100.00 49.2 LA Intrastate natural gas pipeline
Warren Intrastate Gas Pipeline 100.00 4.0 TX Intrastate natural gas pipeline
Bradshaw Gathering 50.00 32.3 KS Gas gathering pipeline
Lake Boudreaux 100.00 1.3 LA Gas gathering pipeline
Grand Lake Liquids System 100.00 1.3 LA Intrastate liquids pipeline
==================================================================================================================
</TABLE>
(1) 1997 throughput is based on thousands of barrels per day for the liquids and
crude lines and million cubic feet per day for the gas gathering and
transportation lines.
In January 1998, the Company announced an agreement to sell the Ozark Gas
Transmission System for $55 million, resulting in an estimated pre-tax gain of
approximately $27 million. Closing of the transaction is expected in the third
quarter of 1998, subject to certain conditions, including FERC and other
governmental approvals.
POWER GENERATION FACILITIES
NGC has significant interests in nineteen power projects, the majority of
which are cogeneration facilities operated by NGC. Sixteen of these projects are
represented by varying interests owned in partnerships, each formed to build,
own and operate electric power generating facilities. The remaining projects
consist of one cogeneration plant, one heat recovery plant and one coal
gasification facility. The combined gross capacity of these facilities is
approximately 2,839 megawatts of electricity and over 3.4 million pounds per
hour of steam. The following table provides information concerning power
projects owned by the Company:
17
<PAGE>
<TABLE>
<CAPTION>
Gross
% Capacity
Power Generation Project Owned In MWs Location Primary Power Purchaser
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CoGen Power (1) 100.00 5 Port Arthur, TX Great Lakes Carbon Corporation
CoGen Lyondell (1) Lessee 590 Channelview, TX ARCO Chemical Company
Oyster Creek 50.00 424 Freeport, TX The Dow Chemical Company
Corona (1) 40.00 47 Corona, CA SOCAL Edison Company
Kern Front (1) 50.00 48 Kern County, CA Pacific Gas & Electric Company
High Sierra (1) 50.00 48 Kern County, CA Pacific Gas & Electric Company
Double "C" (1) 50.00 48 Kern County, CA Pacific Gas & Electric Company
San Joaquin (1) 25.00 48 Stockton, CA Pacific Gas & Electric Company
Chalk Cliff (1) 25.00 46 Kern County, CA Pacific Gas & Electric Company
Badger Creek (1) 50.00 46 Kern County, CA Pacific Gas & Electric Company
McKittrick (1) 50.00 46 McKittrick, CA Pacific Gas & Electric Company
Live Oak (1) 50.00 47 Kern County, CA Pacific Gas & Electric Company
Crockett 8-12.00 240 Crockett, CA Pacific Gas & Electric Company
Bear Mountain (1) 50.00 46 Bakersfield, CA Pacific Gas & Electric Company
Commonwealth Atlantic 50.00 340 Chesapeake, VI Virginia Electric & Power
Company
Black Mountain 50.00 85 Las Vegas, NV Nevada Power Company
Hartwell Energy 50.00 300 Hart County, GE Ogelthorpe Power Corporation
Michigan Power (1) 50.00 123 Ludington, MI Consumers Energy Company
Wabash (1)(2) Lessee 262 W. Terre Haute, IN PSI Energy, Inc.
=========================================================================================================
</TABLE>
(1) Facility operated by NGC.
(2) Steam and synthetic gas capacity is translated into equivalent megawatts.
The Company and NRG have been awarded contracts to acquire the El Segundo
Station, a 1,020 megawatt gas-fired power generating facility located in Los
Angeles, CA, and a 560 megawatt gas-fired power facility located in Long Beach,
CA. Both acquisitions are expected to close in the second quarter of 1998.
OTHER PROPERTY INVESTMENTS
Effective November 1, 1996, the Company and Chevron formed Venice Gas
Processing Company, a Texas limited partnership ("Partnership"). The Partnership
was formed for the purpose of owning and operating the Venice Complex, located
in Plaquemines Parish, Louisiana. The complex includes an extensive 810 Mmcf/d
gathering system that extends into the Gulf of Mexico, a one Bcf/d lean oil gas
processing plant, a 35,000 barrel per day fractionator, NGL storage facilities,
a marine terminal and acreage. In 1997, Venice reorganized as a limited
liability company changing its name to VESCO. In September 1997, the VESCO
members announced they had agreed to expand ownership in VESCO to include an
affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company
("Shell"), effective September 1, 1997, in exchange for Shell's commitment of
certain offshore reserves to VESCO. The transaction reduced NGC's interest in
VESCO from 37 percent to approximately 32 percent as of the effective date. The
VESCO members have entered into a definitive agreement with Koch pursuant to
which Koch will contribute a 300 Mmcf/d cryogenic gas processing unit to VESCO
on NGC's behalf in exchange for approximately 10 percent of NGC's interest in
the limited liability company. The transaction, which is expected to close in
the second quarter of 1998, will reduce NGC's interest in VESCO to approximately
23 percent. NGC operates the facility and has commercial responsibility for
product distribution and sales.
During 1997, the Company contributed the Waskom gas processing facility to
the Waskom Gas Processing Company ("Waskom"), a Texas limited partnership. NGC
owns a 33 percent interest in Waskom, operates the facility and has commercial
responsibility for product distribution and sales.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to its properties in
accordance with standards generally accepted in the energy industry, subject to
such exceptions which, in the opinion of the Company, would not have a material
adverse effect on the use or value of said properties.
18
<PAGE>
The operating agreements for certain of the Company's natural gas
processing plants and fractionation facilities grant a preferential purchase
right to the plant owners in the event any owner desires to sell its interest.
Such agreements may also require the consent of a certain percentage of owners
before rights under such agreements can be transferred. The Company is subject,
as a plant owner under such agreements, to all such restrictions on transfer of
its interest. In addition, the Company has granted certain entities certain
rights of first refusal with respect to any future sale of certain assets.
Certain of the Company's power generation assets are subject to rights of first
refusal or consent requirements with the Company's partners or power purchasers
which restrict the transfer of interests in the facilities.
Substantially all of NGC's gathering and transmission lines are constructed
on rights-of-way granted by the apparent record owners of such property. In some
instances, land over which rights-of-way have been obtained may be subject to
prior liens that have not been subordinated to the right-of-way grants. Permits
have been obtained from public authorities to cross over or under, or to lay
facilities in or along, water courses, county roads, municipal streets and state
highways, and in some instances, such permits are revocable at the election of
the grantor. Permits have also been obtained from railroad companies to cross
over or under lands or rights-of-way, many of which are also revocable at the
grantor's election. Some such permits require annual or other periodic payments.
In a few minor cases, property was purchased in fee.
INDUSTRY SEGMENTS
Segment financial information is included in Note 15 of NGC's consolidated
financial statements contained elsewhere herein.
ITEM 3. LEGAL PROCEEDINGS
On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a
lawsuit in the Superior Court of the State of California, City and County of San
Francisco, against Destec, Destec Holdings, Inc. ("Holdings"), Destec Operating
Company and San Joaquin CoGen, Inc., wholly owned direct and indirect
subsidiaries of the Company as well as against San Joaquin CoGen Limited ("San
Joaquin" or the "Partnership"), a limited partnership in which the Company has
an indirect twenty-five percent general partner ownership interest. In the
lawsuit, PG&E asserts claims and alleges unspecified damages for fraud,
negligent misrepresentation, unfair business practices, breach of contract and
breach of the implied covenant of good faith and fair dealing. PG&E alleges that
due to the insufficient use of steam by San Joaquin's steam host, the
Partnership did not qualify as a cogenerator pursuant to the California Public
Utilities Code ("CPUC") Section 218.5, and thus was not entitled under CPUC
Section 454.4 to the discount the Partnership received under gas transportation
agreements entered into between PG&E and San Joaquin in 1989, 1991, 1993 and
1995. All of PG&E's claims in this suit arise out of the Partnership's alleged
failure to comply with CPUC Section 218.5. The defendants filed a response to
the suit on May 15, 1997. The parties are actively engaged in discovery, and a
trial has been set by the Court for September 28, 1998. On October 20, 1997,
PG&E named Libbey-Owens-Ford, the Partnership's steam host, as an additional
defendant in the action. On February 23, 1998, PG&E served by mail its Second
Amended Complaint on all defendants. On March 30, 1998, the defendants filed
their response to PG&E's Second Amended Complaint, denying PG&E's allegations
and alleging certain counterclaims against PG&E. The Company's subsidiaries
intend to vigorously defend this action. In the opinion of management, the
ultimate resolution of this lawsuit will not have a material adverse effect on
the Company's financial position or results of operations.
On March 24, 1995, Southern California Gas Company ("SOCAL") filed a
lawsuit in the Superior Court of the State of California for the County of Los
Angeles, against Destec, Destec Holdings and Destec Gas Services, Inc., wholly-
owned direct and indirect subsidiaries of the Company (collectively, the "Destec
Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited
(collectively, the "Partnerships"), limited partnerships in which the Company
has an indirect twenty-five percent general partner interest together with an
indirect 20 percent limited partner interest and an indirect fifty percent
limited partner interest, respectively. All general partners of the Partnerships
are also named defendants. The lawsuit alleges breach of contract against the
Partnerships and their respective general partners, and interference and
conspiracy to interfere with contracts against the Destec Defendants. The breach
of contract claims arise out of the "transport-or-pay" provisions of the gas
transportation service agreements between the Partnerships and SOCAL. SOCAL has
sought damages from the Partnerships for past damages and anticipatory breach
damages in an amount equal to approximately $31,000,000. On October 24, 1997,
the Court granted SOCAL's Motion for Summary Judgment relating to the breach of
contract causes of action against
19
<PAGE>
the Partnerships and their respective general partners, and requested that SOCAL
submit a proposed order consistent with that ruling for the Court's signature.
On November 21, 1997, the Partnerships filed for voluntary Chapter 11 bankruptcy
protection in the Eastern District of California. Normal business operations by
the Partnerships will continue throughout the course of these reorganization
proceedings. On January 12, 1998, the Court entered a Final Order that (a)
severs out the Partnerships due to their Chapter 11 bankruptcy filings, (b)
includes a finding of contract liability against the Destec Defendants, (c)
dismisses the tortious interference claims against the Destec Defendants, and
(d) assesses damages in an aggregate amount of approximately $31,000,000. The
liability of the Destec Defendants under the judgment will be limited to that
portion of the damage award not paid to SOCAL by the partnerships through the
Chapter 11 bankruptcy proceedings. On January 12, 1998, the Destec Defendants
filed their Notice of Appeal, and posted a security bond, with the Second
Appellate District in Los Angeles based on the lack of allegations made or
proven by SOCAL which support holding those entities liable in contract. On
March 11, 1998, the Partnerships and their respective general partners filed
Notices of Appeal with respect to those findings in the Court's January 12,
1998, Final Order that were adverse to those defendants. The appeal process is
anticipated to take approximately eighteen months.
The PG&E and SOCAL litigations represent pre-acquisition contingencies
acquired by NGC in the Destec acquisition. Resolution of these lawsuits could
impact the purchase price allocation contained in the accompanying balance sheet
as described in Note 2. In a related matter, Chalk Cliff and San Joaquin have
each guaranteed the obligations of the other partnership, represented by the
project financing loans used to construct the power generation facilities owned
by the respective partnerships. Chalk Cliff and San Joaquin believe there is
little incentive for their lenders to call on this cross-guarantee at this time.
In the opinion of management, the Company's financial position or results of
operations would not be materially adversely affected if the lenders chose to
exercise their option under the terms of such arrangements.
On March 6, 1998, NGC settled all outstanding issues arising under a gas
marketing contract between Apache Corporation and Clearinghouse. A previously
recognized contingency reserve was sufficient to offset the confidential cash
settlement.
The Company assumed liability for various claims and litigation in
connection with the Chevron Combination, the Trident Combination, the Destec
acquisition and in connection with the acquisition of certain gas processing and
gathering facilities from Mesa Operating Limited Partnership. NGC believes,
based on its review of these matters and consultation with outside legal
counsel, that the ultimate resolution of such items will not have a material
adverse effect on the Company's financial position or results of operations.
Further, the Company is subject to various legal proceedings and claims, which
arise in the normal course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's $0.01 par value common stock ("Common Stock") is listed and
traded on the New York Stock Exchange under the ticker symbol "NGL". The number
of stockholders of record of the Common Stock as of March 25, 1998, was 291.
The following table sets forth the high and low closing prices for
transactions involving the Company's Common Stock for each calendar quarter, as
reported on the New York Stock Exchange Composite Tape and related dividends
paid per common share during such periods.
20
<PAGE>
<TABLE>
<CAPTION>
High Low Dividend
---------- -------- --------
<S> <C> <C> <C>
1997:
Fourth Quarter $19.875 $16.000 $0.0125
Third Quarter 17.750 14.875 0.0125
Second Quarter 19.625 15.500 0.0125
First Quarter 24.000 15.375 0.0125
1996:
Fourth Quarter $24.750 $15.625 $0.0125
Third Quarter 17.000 14.250 0.0125
Second Quarter 16.125 12.250 0.0125
First Quarter 12.750 8.625 0.0125
===========================================================
</TABLE>
The holders of the Common Stock are entitled to receive dividends if, when
and as declared by the Board of Directors of the Company out of funds legally
available therefor. Consistent with the Board of Directors' intent to establish
a policy of declaring quarterly cash dividends, a cash dividend of $0.0125 per
share was declared and paid in each quarter since the effective date of the
Trident Combination. Beginning in the third quarter of 1996, the Company has
paid quarterly cash dividends on its Series A Participating Preferred Stock of
$0.0125 per share, or $0.05 per share on an annual basis.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below was derived from, and is
qualified by reference to, the Consolidated Financial Statements of the Company,
including the Notes thereto, contained elsewhere herein. Please refer to the
Notes to Consolidated Financial Statements for information on transactions and
accounting classifications which have affected the comparability of the periods
presented below. The selected financial information should be read in
conjunction with the Consolidated Financial Statements and related Notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
($ in thousands, except per share data)
Statement of Operations Data (1)(3):
Revenues $13,378,380 $7,260,202 $3,665,946 $3,237,843 $2,790,977
Operating margin 385,294 369,500 194,660 99,126 91,850
General and administrative expenses 149,344 100,032 68,057 47,817 36,585
Depreciation and amortization expense 104,391 71,676 44,913 8,378 7,594
Asset impairment, abandonment and
other charges 275,000 --- --- --- ---
Net income (loss) (4) $ (102,485) $ 113,322 $ 92,705 $ 42,101 $ 45,997
Earnings (loss) per share (5) $(0.68) $0.83 $0.82 n/a n/a
Pro forma earnings per share (5) n/a n/a $0.40 $0.28 $0.30
Shares outstanding 150,653 136,099 113,176 97,804 97,804
Cash Flow Data:
Cash flows from operating activities $ 278,589 $ (30,954) $ 90,648 $ 17,170 $ 20,292
Cash flows from investment activities (510,735) (111,140) (310,623) (38,376) (7,911)
Cash flows from financing activities 204,984 176,037 221,022 18,959 (46,418)
Other Financial Data:
EBITDA (6) $ 291,899 $ 289,023 $ 142,538 $ 57,716 $ 57,553
Dividends or distributions to partners, net 7,925 6,740 9,253 14,041 14,118
Capital expenditures, acquisitions
and investments (7) 1,034,026 859,047 979,603 47,014 16,464
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ----------- ----------- ---------- ----------
($ in thousands)
Balance Sheet Data (2):
Current assets $ 2,018,780 $1,936,721 $ 762,939 $ 445,782 $ 402,602
Current liabilities 1,753,094 1,548,987 705,674 404,144 375,662
Property and equipment, net 1,521,576 1,691,379 948,511 114,062 84,539
Total assets 4,516,903 4,186,810 1,875,252 645,471 512,534
Long-term debt 1,002,054 988,597 522,764 33,000 ---
Total equity 1,019,125 1,116,733 552,380 152,213 120,689
</TABLE>
(1) The Destec acquisition was accounted for as an acquisition of a business
in accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The Chevron Combination was accounted for as an acquisition of
assets under the purchase method of accounting and the results of
operations attributed to the acquired assets are included in the Company's
financial statements and operating statistics effective September 1, 1996.
The Trident Combination was accounted for as an acquisition of a business
in accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective March 1,
1995.
22
<PAGE>
(2) The Destec acquisition and the Chevron and Trident Combinations were each
accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the effective dates of
each transaction. The effective dates of the Destec acquisition, the
Chevron Combination and the Trident Combination were June 30, 1997,
September 1, 1996 and March 1, 1995, respectively.
(3) Results for the year ended December 31, 1994, include the effects of a
change to mark-to-market accounting for fixed-price natural gas
transactions.
(4) Net income (loss) does not include a provision for federal income taxes,
other than minimal amounts on the taxable income of Clearinghouse's
corporate subsidiaries, for the years ended December 31, 1994 and 1993,
respectively.
(5) Earnings (loss) per share are computed in accordance with provisions of
Statement of Financial Account Standard No. 128, "Earnings Per Share", for
each of the years ended December 31, 1997, 1996 and 1995, respectively.
Pro forma earnings per share for each of the years ended December 31,
1995, 1994 and 1993, respectively, are based on reported net income for
the period adjusted for the incremental statutory federal and state income
taxes that would have been provided had Clearinghouse been a taxpaying
entity prior to the Trident Combination. The pro forma earnings per share
computation for the year ended December 31, 1995, eliminates the effect of
a one-time $45.7 million income tax benefit associated with the Trident
Combination. The weighted average shares outstanding for the year ended
December 31, 1995, is based on the weighted average number of common
shares outstanding plus the common stock equivalents that would arise from
the exercise of outstanding options or warrants, when dilutive. Pro forma
weighted average shares outstanding of 97.8 million shares for the years
ended December 31, 1994 and 1993, respectively, give effect to the terms
of the Trident Combination and the common stock equivalent shares
outstanding as of the effective date of the Trident Combination assuming a
common stock market price of $12 in all periods.
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented as a measure of the Company's ability to service its debt and
to make capital expenditures. It is not a measure of operating results and
is not presented in the Consolidated Financial Statements. The 1997 amount
includes the non-cash portion of items associated with the $275 million
impairment and abandonment charge.
(7) Includes value assigned the assets acquired in the Destec acquisition and
the Chevron and Trident Combinations, respectively. The 1997 amount is
before reduction for value received upon sale of Destec's foreign and non-
strategic assets of approximately $735 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Company Profile
NGC is a leading North American marketer of natural gas, natural gas
liquids, electricity and crude oil and is engaged in natural gas gathering,
processing and transportation through direct and indirect ownership and
operation of natural gas processing plants, fractionators, storage facilities
and pipelines and engages in electric power generation through direct and
indirect ownership of cogeneration and other electric power producing
facilities. Acting in the role of a large-scale aggregator, processor, marketer
and reliable supplier of multiple energy products and services, NGC has evolved
into a reliable energy commodity and service provider.
From inception of operations in 1984 until 1990, Clearinghouse limited its
activities primarily to natural gas marketing. Starting in 1990, Clearinghouse
began expanding its core business operations through acquisitions and strategic
alliances with certain of its shareholders resulting in the formation of a
midstream energy asset business and establishing energy marketing operations in
both Canada and the United Kingdom. Effective March 1, 1995, Clearinghouse and
Holding, a fully integrated natural gas liquids company, merged and the combined
entity was renamed NGC Corporation. On August 31, 1996, NGC completed a
strategic combination with Chevron whereby substantially all of Chevron's
midstream assets were merged with NGC. In June 1997, NGC acquired Destec, a
leading independent power producer. By virtue of the growth of NGC's core
businesses combined with the synergies derived from the aforementioned
transactions, NGC has established itself as an industry leader providing
quality, competitively priced energy products and services to customers
throughout North America and in the United Kingdom.
Recent Developments
During the fourth quarter of 1997, the Company recognized a $275 million
charge largely related to its plan to restructure the Company's natural gas
liquids business, including rationalization and consolidation of assets acquired
in both the Trident and Chevron Combinations, the reorganization of personnel to
improve operational management of this segment and a reduction of employees
involved in non-strategic operations. Execution of this comprehensive plan began
in 1997 and will continue into 1998. Pursuant to this restructuring, the Company
anticipates recording an additional severance charge of approximately $10
million during the first quarter of 1998. Management believes the planned
restructuring and reorganization steps will position the Company for improved
operating results and an enhanced competitive position for the future.
23
<PAGE>
For a two-year period beginning January 1, 1998, the Company contracted
for 1.3 billion cubic feet per day of firm transportation capacity to California
on the El Paso Natural Gas pipeline system. The arrangement has been implemented
but is subject to regulatory approval in a pending proceeding in which
challenges have been filed. The firm capacity provides NGC with the ability to
serve an expanded California customer base arising from the recent Chevron
Combination and Destec acquisition, as well as to take advantage of
opportunities associated with the deregulation of the electric power industry in
California. Pursuant to this arrangement, NGC is obligated to pay a minimum of
$70 million of reservation charges over the two-year term.
In January 1998, the Company announced an agreement to sell the Ozark Gas
Transmission System for $55 million, resulting in an estimated pre-tax gain of
approximately $27 million. Closing of the transaction is expected in the third
quarter of 1998, subject to certain conditions, including FERC and other
governmental approvals.
In November 1997, the Company together with NRG Energy, Inc. ("NRG"), was
awarded the contract to acquire the El Segundo Station, a 1,020 megawatt gas-
fired power generating facility located in Los Angeles, CA. The El Segundo
facility will be acquired by an entity owned fifty percent by the Company and
fifty percent by NRG. Additionally, in February 1998, NGC together with NRG,
was awarded the contract to acquire a 560 megawatt gas-fired power facility
located in Long Beach, CA. The Long Beach facility will also be acquired by an
entity owned fifty percent by NGC and fifty percent by NRG. The El Segundo
facility is partially a merchant plant while the Long Beach facility is a
merchant plant. NGC's estimated share of the acquisition cost for these two
facilities is $58.8 million. Both acquisitions are expected to close in the
second quarter of 1998. With respect to both these acquisitions, NGC will be
the lead party on fuel procurement, power marketing and asset management, while
NRG will be operator of the facilities. Additionally, Destec and a partner were
selected to build a 766 megawatt independent power station near Townsville, in
Queensland, Australia. The Townsville project is expected to be partially
operational in July 2001, and fully operational by July 2003. Destec will own
fifty percent of this project.
The VESCO members have entered into a definitive agreement with Koch
pursuant to which Koch will contribute a cryogenic gas processing unit to VESCO
on behalf of NGC in exchange for approximately 10 percent of NGC's interest in
the limited liability company. The transaction, which is expected to close in
the second quarter of 1998, will reduce NGC's interest in VESCO to approximately
23 percent.
Business Segments
NGC's operations are divided into three segments: the Natural Gas and
Electric Power Marketing Segment ("Marketing"), the Power Generation Segment
("Power Generation") and the Natural Gas Liquids, Crude Oil and Gas Transmission
Segment ("Liquids"). Marketing consists of subsidiaries engaged in the business
of: contracting to purchase specific volumes of natural gas from suppliers at
various points of receipt to be supplied over a specific period of time;
aggregating natural gas supplies and arranging for the transportation of these
gas supplies through proprietary and third-party transmission systems;
negotiating the sale of specific volumes of natural gas over a specific period
of time to local distribution companies, utilities, power plants and other end-
users; and matching natural gas receipts and deliveries based on volumes
required by customers throughout North America. Marketing also includes the
operations of ECI, a provider of electric power products and services in the
United States. Power Generation includes the operations of Destec, which
primarily consist of the development, operation and management of projects which
produce electricity, thermal energy and synthetic gas. Destec's operations also
include engineering, project development, operating, management and fuel supply
services provided to certain partnerships, which own power generation
facilities. Liquids consists of subsidiaries engaged in natural gas gathering
and processing, fractionation, natural gas liquids marketing, natural gas
transmission and crude oil marketing. Liquids also includes the operations of
NGC Global Energy, which includes marine transportation of natural gas liquids
and energy marketing in the United Kingdom.
IMPACT OF PRICE FLUCTUATIONS
Marketing's operating margin, exclusive of risk-management activities, is
relatively insensitive to commodity price fluctuations since most of this
segment's purchase and sales contracts do not contain fixed-price provisions.
Generally, the prices contained in these contracts are tied to a current spot or
index price and, therefore, adjust directionally with changes in overall market
conditions. Commodity price fluctuations can, however, have a significant impact
on the operating margin derived from the segment's risk-management activities.
NGC generally attempts to balance its fixed-price physical and financial
purchase and sales commitments in terms of contract
24
<PAGE>
volumes, and the timing of performance and delivery obligations. However, to the
extent a net open position exists, fluctuating market prices can impact NGC's
financial position or results of operations. The net open position is actively
managed, and the impact of a change in price on the Company's financial
condition at a point in time is not necessarily indicative of the impact of
price movements throughout the year. At December 31, 1997, a $0.25 increase in
the price of natural gas would have increased operating margin by approximately
$3.5 million, and a $0.25 decrease in the price of natural gas would have
decreased operating margin by approximately $2.2 million. The impact of the
$0.25 price movements referred to above are before application of market
reserves, which would likely reduce the after-tax earnings impact of these price
movements.
Fuel costs, principally natural gas, represent the primary variable cost
impacting margins at the Company's power generating facilities. Historically,
operating margins have been relatively insensitive to commodity price
fluctuations since most of this business's purchase and sales contracts contain
variable power sales contract features tied to a current spot or index natural
gas price allowing revenues to adjust directionally with changes in natural gas
prices.
Operating margins associated with Liquids' natural gas gathering,
processing and fractionation activities are very sensitive to changes in natural
gas liquids prices principally as a result of contractual terms under which
products are sold by these businesses. Based upon current operations, a one cent
movement in the annual average price of natural gas liquids would impact annual
operating margin by approximately $10 million. The operating margin in these
businesses is relatively insensitive to fluctuations in natural gas prices as a
result of the mitigating impact of fuel costs in the Company's fractionation
operations and residue gas sales in its gathering and processing activities.
Commodity price fluctuations also impact the operating margins derived from the
Liquids segment's natural gas liquids and crude oil marketing businesses. In
order to manage its exposure to price risks in these businesses, the Company,
from time to time, will enter into financial instrument contracts to hedge
purchase and sale commitments and inventories.
SEASONALITY
NGC's revenue and operating margin are subject to fluctuations during the
year primarily due to the impact certain seasonal factors have on sales volumes
and the prices of natural gas, electricity, natural gas liquids and crude oil.
Marketing's sales volumes and operating margin are typically higher in the
winter months than in the summer months, reflecting increased demand due to
greater heating requirements and, typically, higher natural gas prices. Liquids
is also subject to seasonal factors; however, such factors typically have a
greater impact on sales prices than on sales volumes. Natural gas liquids prices
typically increase during the winter season due to greater heating requirements.
The Company's wholesale propane business is seasonally weighted in terms of
volume and price consistent with the trend in Marketing's operations as a result
of greater demand for crop-drying and space-heating requirements in the fall and
winter months. The Company's electricity generating facilities generally
experience peak demand during the summer cooling season.
EFFECT OF INFLATION
Although NGC's operations are affected by general economic trends,
management does not believe inflation has had a material effect on the Company's
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business strategy has been to grow horizontally across all
sectors of the midstream energy business segment through strategic acquisitions
or construction of core operating facilities in order to capture the significant
synergies which management believes exist among these types of assets and NGC's
natural gas, electricity, and natural gas liquids marketing businesses. In
addition, the Company is extensively involved in risk management activities,
which complement its firm purchase and sales commitments, capacity,
transportation and other similar obligations.
NGC has historically relied upon operating cash flow and borrowings from a
combination of money market lines of credit, sales of commercial paper and
various long-term credit arrangements for its liquidity and capital resource
requirements. The following briefly describes the terms of these arrangements.
25
<PAGE>
Commercial Paper and Money Market Lines of Credit
NGC initiated a commercial paper program in the fourth quarter of 1997 for
amounts up to $600 million, supported by its existing bank Credit Agreement.
Also in the fourth quarter, the Company established several uncommitted money
market bank lines. The Company utilizes commercial paper proceeds and borrowings
under uncommitted money market bank lines for general corporate purposes,
including short-term working capital requirements. At December 31, 1997,
commercial paper outstanding totaled $229.5 million at a weighted average
interest rate of 6.8 percent. There were no amounts outstanding under the
uncommitted money market bank lines at year end.
Credit Agreement
NGC has a $550 million revolving Credit Agreement, which matures on March
14, 2000, providing for letters of credit and borrowings for working capital,
capital expenditures and general corporate purposes. The $550 million
commitment under the Credit Agreement reduces by $22.5 million each quarter
beginning in June 1998 and continuing through maturity. During 1997, the Credit
Agreement was amended to provide, among other things, for the establishment of a
new two-year $400 million term loan facility. Proceeds from the term loan
facility were used to consummate the Destec acquisition. At December 31, 1997,
letters of credit and borrowings under the Credit Agreement aggregated
approximately $130.9 million (which included $50 million under the term loan
facility). After consideration of the outstanding commercial paper, unused
borrowing capacity under the revolving credit facility approximated $240
million.
Senior Notes and Shelf Registration
In October 1996, NGC sold $175 million of 7.625% 30-year Senior Notes due
2026 ("Senior Debentures"). Interest on the Senior Debentures is payable
semiannually on April 15 and October 15 of each year. The Senior Debentures are
redeemable, at the option of the Company, in whole or in part from time to time,
at a formula based redemption price. On December 15, 1995, the Company sold $150
million of 6.75% Senior Notes due 2005 ("Senior Notes"). Interest on the Senior
Notes is payable semiannually on June 15 and December 15 of each year.
In February 1998, the Company completed an amendment to the Credit
Agreement and the filing of supplemental indentures to each of the Senior
Debentures and Senior Notes, the effect of which was to eliminate all clauses,
provisions and terms in such documents requiring certain wholly owned
subsidiaries of the Company to fully and unconditionally guarantee, on a joint
and several basis, the obligations of the Company under such credit agreement,
debentures and notes, respectively.
Letter of Credit Agreement
The Letter of Credit Agreement was a $300 million credit facility, which
provided for the issuance of letters of credit in support of the Company's
obligation to purchase substantially all of the natural gas produced or
controlled by Chevron in the United States (except Alaska). In January 1998, the
Company replaced the majority of its obligation under the Letter of Credit
Agreement with a surety bond, applied the remaining obligation under the Letter
of Credit Agreement to the letter of credit capacity under its Credit Agreement
and canceled this arrangement.
Chevron Note
As part of the Chevron Combination, NGC assumed approximately $155.4
million payable to Chevron upon demand on or after August 31, 1998 (the "Chevron
Note"). The Chevron Note bears interest at an effective rate of 6.4 percent per
annum payable semiannually in arrears each February and August. Should Chevron
choose not to demand payment of the Chevron Note then principal plus accrued
interest is payable in full on August 14, 2004. NGC has the right, at any time
on or after August 31, 1998, to prepay in whole or in part the principal and
accrued interest outstanding under the Chevron Note.
Warren NGL, Inc. ( Formerly Trident NGL, Inc.) Notes
At December 31, 1997, Warren had outstanding $105 million principal amount
of 10.25% Subordinated Notes due 2003 (interest payable semi-annually in arrears
each April and October) and $65 million principal amount of 14% Senior
Subordinated Notes due 2001 (interest payable semi-annually in arrears each
February and August).
26
<PAGE>
Unamortized premium balances associated with each of these notes are being
amortized using the interest method, resulting in effective interest rates of
8.4 percent and 8.3 percent per annum, respectively.
In February 1998, the Company delivered Notices of Redemption to the
holders of the Warren NGL, Inc. Notes. The Company's intent is to retire the
14% Senior Subordinated Notes on March 31, 1998, and the 10.25% Subordinated
Notes on April 15, 1998, pursuant to the redemption provisions contained in the
respective indentures. NGC will fund these redemptions through a combination of
cash on hand, borrowings under existing credit agreements and/or the issuance of
new debt securities. NGC will not incur a financial statement charge related to
these redemptions since the carrying values of the notes were adjusted at the
time of the Trident Combination so that they would equal the redemption prices
on the redemption dates.
Company Obligated Preferred Securities of a Subsidiary Trust
During May 1997, NGC Corporation Capital Trust I ("Trust") issued in a
private transaction $200 million aggregate liquidation amount of 8.316%
Subordinated Capital Income Securities ("Trust Securities") representing
preferred undivided beneficial interests in the assets of the Trust. The Trust
invested the proceeds from the issuance of the Trust Securities in an equivalent
amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the
Company. The sole assets of the Trust are the Subordinated Debentures. Proceeds
from issuance of the Securities were used to reduce amounts outstanding under
the Credit Agreement. During October 1997, the Trust completed an exchange offer
through which all of the outstanding Securities were exchanged by the holders
thereof for registered securities having substantially the same rights and
obligations.
Other Matters
Acquisition and Construction Projects. Included in the 1998 budget is
approximately $300 million committed to construction projects in progress,
identified asset acquisitions, maintenance capital projects, environmental
projects, technology infrastructure and software enhancements, contributions to
equity investments and certain discretionary capital investment funds. The
capital budget is subject to revision as unforeseen opportunities or
circumstances arise. Funds committed in 1998 to announced acquisitions and
significant construction projects and other capital investments are as follows:
<TABLE>
<CAPTION>
Estimated
Projected In Funding
Project In-Service Date Commitment
------- --------------- ----------
($ in thousands)
<S> <C> <C>
Lake Charles Fractionator Fourth Quarter 1998 $36,710
Venice Energy Services Company, L.L.C. Various during 1998 15,169
El Segundo Power Generating Facility Second Quarter 1998 43,875
Long Beach Power Generating Facility Second Quarter 1998 14,900
Maintenance Capital Various 23,103
Environmental Capital Projects Various 8,872
Information Technology Infrastructure and Software Various 58,440
</TABLE>
Dividend Requirements. Holders of the Company's Common Stock are entitled
to receive dividends if, when and as declared by the Board of Directors of the
Company out of funds legally available therefor. Currently, aggregate cash
dividends of $0.05 per share on the outstanding Common Stock are expected to be
declared by the Board of Directors and paid by the Company during 1998. The
Company also anticipates payment of dividends during 1998 on the outstanding
shares of its Series A Participating Preferred Stock of $0.05 per share on an
annual basis.
Stock Repurchase Plan. The Company has a stock repurchase program, approved
by the Board of Directors, that allows it to repurchase, from time to time, up
to 1.6 million shares of common stock in open market transactions. The timing
and number of shares ultimately repurchased will depend upon market conditions
and consideration of alternative investments. Pursuant to this program, the
Company has acquired 654,900 shares at a total cost of $10.5 million, or $16.04
per share on a weighted average cost basis, through December 31, 1997.
27
<PAGE>
Advance Payment For Future Deliveries. In October 1997, NGC received
$103.5 million from a gas purchaser as an advance payment for future natural gas
deliveries of 16,650 MMBtu per day over a ten-year period commencing November 1,
1997 ("Advance Agreement"). As a condition of the Advance Agreement, NGC entered
into a natural gas swap with a third party under which NGC became a fixed price
payor on identical volumes to those to be delivered under the Advance Agreement
at prices based on then current market rates. The payment will be classified as
an advance on the balance sheet and will be reduced ratably as gas is delivered
to the purchaser under the terms of the Advance Agreement. In addition, the
purchaser will pay a monthly fee to NGC associated with delivered volumes. The
Advance Agreement contains certain non-performance penalties that impact both
parties and as a condition precedent, NGC purchased a surety bond in support of
its obligations under the Advance Agreement.
Quantitative and Qualitative Market Risk Disclosures. The Company is
exposed to certain market risks inherent in the Company's financial instruments
which arise from transactions entered into in the normal course of business. The
Company routinely enters into financial instrument contracts to hedge purchase
and sale commitments and inventories in its natural gas, natural gas liquids,
crude oil, electricity and coal businesses in order to minimize the risk of
market fluctuations. NGC also monitors its exposure to fluctuations in interest
rates and foreign currency exchange rates and may execute swaps, forward-
exchange contracts or other financial instruments to hedge and manage these
exposures. The absolute notional contract amounts associated with commodity
risk-management, interest rate and forward exchange contracts, respectively,
were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996 1995
---------------------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 2.558 1.535 0.881
Electricity (Megawatt Hours) 2.244 --- ---
Natural Gas Liquids (Million Barrels) 4.355 3.270 2.523
Crude Oil (Million Barrels) 14.920 2.034 0.232
Interest Rate Swaps (in thousands of US Dollars) $180,000 $ --- $ ---
Fixed Interest Rate Paid on Swaps 6.603 --- ---
U.K. Pound Sterling (in thousands of US Dollars) $ 74,638 $ --- $ ---
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.5948 $ --- $ ---
Canadian Dollar (in thousands of US Dollars) $ 37,041 $ --- $ ---
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.7240 $ --- $ ---
====================================================================================
</TABLE>
Cash-flow requirements for these commodity risk-management, interest rate
and foreign exchange contracts were estimated based upon market prices in effect
at December 31, 1997. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Beyond
---------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows
based on year end
market prices/rates $9,155 $5,902 $4,085 $1,185 $ 806 $559
===================================================================================
</TABLE>
Further discussion of quantitative and qualitative aspects of these
exposures and the management thereof is contained in the accompanying notes to
the consolidated financial statements.
Year 2000 Issues. The Company is continuing its analysis of the "Year
2000" issue. The potential costs and uncertainties associated with this review
are dependent upon a number of factors, including legacy software and hardware
configurations and planned information technology infrastructure enhancements.
Results of the review conducted to date indicate that the Company will not be
burdened by a material event resulting from the Company's untimely resolution of
Year 2000 issues. Further, management does not currently believe the cost of
resolving such issues will be material to the Company's consolidated results of
operations or financial position.
Environmental Matters. NGC's operations are subject to extensive federal,
state and local statutes, rules and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
28
<PAGE>
protection. Compliance with these statutes, rules and regulations requires
capital and operating expenditures including those related to monitoring and
permitting at various operating facilities and the cost of remediation
obligations. The Company's environmental expenditures have not been prohibitive
in the past, but are anticipated to increase in the future with the trend toward
stricter standards, greater regulation, more extensive permitting requirements
and an increase in the number of assets operated by the Company subject to
environmental regulation.
NGC's aggregate expenditures for compliance with laws and regulations
related to the discharge of materials into the environment or otherwise related
to the protection of the environment approximated $9.4 million in 1997. Total
environmental expenditures for both capital and operating maintenance and
administrative costs are not expected to exceed $15 million in 1998.
Conclusion
The Company continues to believe that it will be able to meet all foreseeable
cash requirements, including working capital, capital expenditures and debt
service, from operating cash flow supplemented by borrowings under its various
credit facilities, if required.
29
<PAGE>
RESULTS OF OPERATIONS
The following discussion of NGC's financial position, results of operations
and cash flows as of and for each of the years ended December 31, 1997, 1996 and
1995, respectively, is impacted by the strategic combinations previously
discussed. Both the continuity of operations and the resulting comparability of
results between periods is materially impacted as a result of the Destec
acquisition and both the Chevron and Trident Combinations (collectively
"Strategic Combinations"). The Strategic Combinations were each accounted for
under the purchase method of accounting and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values as of the effective dates of each transaction. The results
of operations and cash flows presented in the consolidated financial statements
contained elsewhere herein include the results of the acquired operations as of
the effective dates of each transaction. The following table reflects certain
operating and financial data for the Company's business segments and subsegments
for the years ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
($ in thousands)
<S> <C> <C> <C>
Operating Margin (1)(2):
Natural Gas and Power Marketing Segment -
Natural Gas Marketing $ 99,375 $100,243 $ 64,685
Electric Power Marketing 4,526 3,379 (939)
-------- -------- --------
103,901 103,622 63,746
-------- -------- --------
Power Generation 18,987 --- ---
-------- -------- --------
Natural Gas Liquids, Crude Oil and Gas Transmission Segment -
Natural Gas Processing - Field Plants 159,609 122,754 48,856
Natural Gas Processing - Straddle Plants 30,098 42,198 26,934
Fractionation (8) 25,813 20,223 15,172
Natural Gas Liquids Marketing 22,639 48,355 21,706
Crude Oil Marketing 500 11,583 3,490
Natural Gas Gathering and Transmission 16,755 18,140 11,882
Other 102 1,300 2,874
-------- -------- --------
255,516 264,553 130,914
-------- -------- --------
Global:
LPG Sales 2,973 1,325 ---
Other 3,917 --- ---
-------- -------- --------
6,890 1,325 ---
-------- -------- --------
$385,294 $369,500 $194,660
======== ======== ========
Operating Statistics (1)(3):
Natural Gas Marketing (Bcf/d) -
U.S. Sales Volumes (4) 6.1 4.3 3.5
Canadian Sales Volumes (5) 1.9 n/a n/a
Electric Power Marketing - Million Megawatt Hours Sold 94.7 14.9 3.5
Power Generation (Million Megawatt Hours Generated) -
Gross 7.2 --- ---
Net 4.3 --- ---
Natural Gas Liquids Processed (MBbls/d - Gross) -
Field Plants 89.8 57.4 38.7
Straddle Plants 46.4 36.9 34.1
Fractionation - Barrels Received for Fractionation (MBbls/d)(8) 158.4 169.1 95.0
NGL Marketing - Sales Volumes (MBbls/d) 413.9 245.0 120.6
Natural Gas Gathering and Transmission (MMcf/d) 0.4 0.3 0.3
Crude Oil Marketing - Sales Volumes (MBbls/d) 168.3 106.0 60.9
Global Sales -
LPG Sales Volumes (MMBbls) (6) 33.5 1.7 ---
Gas Sales Volumes (Bcf/d) (7) 0.2 n/a n/a
=========================================================================================================
</TABLE>
30
<PAGE>
(1) The Destec acquisition was accounted for as an acquisition of a business
in accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The Chevron Combination was accounted for as an acquisition of
assets under the purchase method of accounting and the results of
operations attributed to the acquired assets are included in the Company's
financial statements and operating statistics effective September 1, 1996.
The Trident Combination was accounted for as an acquisition of a business
in accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective March 1,
1995.
(2) Information excludes the Company's proportionate share of margin
associated with ventures accounted for under the equity method. In 1997,
the most significant operations included equity investments in Accord,
VESCO, Gulf Coast Fractionators ("GCF") and certain partnerships owning
power generating assets. In 1996 and 1995, significant equity investments
included the operations of Accord, Novagas Clearinghouse, Ltd. ("NCL") and
GCF, respectively.
(3) Information excludes the Company's proportionate share of operating
statistics associated with ventures accounted for under the equity method.
In 1997, the most significant operations included equity investments in
Accord, VESCO and GCF. In 1996 and 1995, significant equity investments
included the operations of Accord, NCL and GCF, respectively.
(4) Includes immaterial amounts of inter-company gas sales for all periods.
(5) Represents volumes sold by NGC Canada, Inc. for the period from April 1,
1997 through December 31, 1997. Volumes sold by NCL prior to the
reorganization are not comparable.
(6) Includes 5.8 MMBbls of inter-company sales for the year ended December 31,
1997. A material amount of volumes sold in 1996 are inter-company sales
volumes.
(7) Represents volumes sold by NGC UK Ltd. for the year ended December 31,
1997. Volumes sold by Accord prior to the reorganization are not
comparable.
(8) Effective January 1, 1997, the Company sold its interest in the Mont
Belvieu I fractionator. The Company had acquired this facility as part of
the Trident Combination.
THREE YEARS ENDED DECEMBER 31, 1997
For the year ended December 31, 1997, the Company realized a net loss of
$102.5 million, or $0.68 per share. This compares with net income of $113.3
million, or $0.83 per share, and $92.7 million, or $0.82 per share, in 1996 and
1995, respectively. The current period loss includes one-time charges totaling
$218.5 million, on an after-tax basis, which were principally associated with
the abandonment and impairment of certain operating and non-operating assets,
inventory obsolescence and lower-of-cost-or-market writedowns, reserves for
contingencies and other obligations, a charge for a hedging related loss and a
charge associated with a change in the method of accounting for certain business
process re-engineering and information technology transformation costs. The
comparability of results period to period was also impaired by one-time gains
totaling $7.3 million recognized during 1997, other charges of $2.5 million and
$1.1 million recognized in 1996 and 1995, respectively, and a $45.7 million
income tax benefit recognized in 1995 related to the Trident Combination.
Revenues in each of the three years in the period ended December 31, 1997,
totaled $13.4 billion, $7.3 billion and $3.7 billion, respectively.
A significant portion of the 1997 charges was taken during the fourth
quarter of 1997, reflecting the culmination of a year-long project intended to
restructure the Company's natural gas liquids business, including
rationalization and consolidation of assets acquired in the Strategic
Combinations and the pursuit of a joint venture partner in order to achieve
critical mass in the Company's crude oil marketing business. In addition, a
company-wide reorganization of reporting responsibilities and improvements in
business processes and computer information systems resulted in the
identification of other obsolete assets and a reduction of employees involved in
non-strategic operations. Pursuant to these restructuring efforts and in order
to comply with required accounting methodology, the Company anticipates
recording an additional severance charge of approximately $10 million during the
first quarter of 1998. Management believes the restructuring and reorganization
steps taken in 1997 and early 1998 have positioned the Company for improved
operating results and an enhanced competitive position for the future.
After consideration of the unusual items described above, NGC's normalized
net income for the year ended December 31, 1997, approximated $108.7 million, or
$0.65 per share, compared with normalized net income of $115.8 million, or $0.85
per share, in 1996, and $48.1 million, or $0.43 per share, in 1995. The lower
normalized results in 1997 compared to 1996 generally resulted from lower
margins reflecting a softening commodity price environment during 1997 as
compared with significant commodity price volatility throughout 1996 and higher
costs period to period resulting principally from the acquisitions and
restructurings completed during 1997 and 1996. The business expansion resulting
from the Strategic Combinations resulted in the significant revenue growth
during the three year period. Operating cash flows totaled $278.6 million for
the year ended December 31, 1997, compared with a use of cash from operations
during the 1996 period of $31.0 million and a source of cash of $90.6 million in
1995. Such relationship principally resulted from an advance payment for future
gas deliveries received in 1997, the increased size and scope of the required
investment in operating assets resulting from the Strategic Combinations and
improved working capital management in 1997.
31
<PAGE>
Consolidated operating margin for each of the three years in the period
ended December 31, 1997, totaled $385.3 million, $369.5 million and $194.7
million, respectively. For the year ended December 31, 1997, the Company
reported an operating loss of $143.4 million compared with operating income of
$197.8 million for the comparable 1996 period and $81.7 million in 1995. The
1997 operating loss includes a portion of the aforementioned charges totaling
$275 million, on a pre-tax basis, as well as higher depreciation and
amortization and general and administrative expenses as compared with both 1996
and 1995. The increase in depreciation and amortization expense results
principally from depreciable assets acquired in the Trident and Chevron
Combinations, which were effective March 1, 1995 and September 1, 1996,
respectively, and the Destec acquisition, which was effective July 1, 1997, as
well as the continued expansion of the Company's depreciable asset base through
other asset acquisitions and capital projects completed during the three year
period. The increase in general and administrative expenses period to period
principally reflects the incremental costs associated with the operations
acquired in the strategic acquisitions, the restructuring of the Company's
businesses in Canada and the United Kingdom, the expansion of ECI's operations,
the growth of Global Energy's operations and non-capitalizable consulting and
other costs related to several information system and process improvement
initiatives arising as a result of the Company's recent growth and
reorganization.
Incremental to NGC's consolidated operating income is the Company's equity
share in the earnings of its unconsolidated affiliates which contributed an
aggregate $59.0 million to 1997 pre-tax results compared to $28.1 million during
the comparable 1996 period and $21.1 million in 1995. The increase in equity
earnings over the three-year period generally reflects the addition of equity
investments as part of the strategic acquisitions and the impact of the
restructuring of the Company's investments in NCL and Accord during 1997. The
following table provides a summary of equity earnings by investment for the
comparable periods:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Accord (1) $25,885 $17,131 $11,826
Gulf Coast Fractionators 6,624 3,360 1,896
West Texas LPG Pipeline Limited Partnership 7,162 1,661 ---
Venice Energy Services Company, L.L.C. 8,052 2,429 ---
Destec equity investments (aggregate) 12,780 --- ---
NCL and other, net (1) (1,544) 3,494 7,338
$58,959 $28,075 $21,060
</TABLE>
(1) For a discussion of the Accord and NCL restructurings, refer to Note 2 of
the Consolidated Financial Statements.
Interest expense totaled $63.5 million for the year ended December 31,
1997, compared with $46.2 million and $32.4 million for the comparable 1996 and
1995 periods. The higher interest expense period to period is attributed to
higher average outstanding principal amounts resulting primarily from debt
assumed in and resulting from the Chevron Combination and the Destec
acquisition.
Other income and expenses, net totaled $7.9 million in 1997, principally
reflecting the aforementioned one-time gains. The net charge of $10.0 million
reported for the year ended December 31, 1996, includes a $4.0 million charge
associated with the Company's relocation to its new downtown headquarters, $0.7
million in minority interests in certain majority owned subsidiaries and other
miscellaneous non-recurring costs and expenses. Other income and expenses, net,
of $5.1 million reported for the year ended December 31, 1995, includes a $1.8
million pretax charge for tornado damage at a gas processing plant, $2.4 million
in minority interests in certain majority owned subsidiaries and other
miscellaneous non-recurring costs and expenses.
During the second quarter of 1997, the Company sold $200 million of 8.316%
Company Obligated Preferred Securities of a Subsidiary Trust ("Securities") and
the accumulated distributions attributable to these Securities are reported as
minority interest in income of a subsidiary in the consolidated statements of
operations. Accumulated distributions associated with these Securities totaled
$9.8 million for the year ended December 31, 1997.
The Company reported an income tax benefit of $62.2 million for the year
ended December 31, 1997, compared to an income tax provision of $56.3 million
and a benefit of $27.5 million in 1996 and 1995, respectively, reflecting
effective rates of (41) percent, 33 percent and (42) percent, respectively.
During the first quarter of 1995, the Company recognized a $45.7 million income
tax benefit in connection with the Trident Combination. The income tax
32
<PAGE>
benefit, which can be used to reduce NGC's future income tax liabilities, was a
result of the recognition of the excess tax basis held by certain Clearinghouse
partners. Other differences between the aforementioned effective rates and the
statutory rate of 35 percent result primarily from refunds received related to
foreign taxes paid on dividends received from Accord, permanent differences
attributable to amortization of certain intangibles, permanent differences
arising from the effect of certain foreign equity investments and state income
taxes. Additionally, the effective tax rate in 1995 was impacted by pre-
combination earnings of Clearinghouse that were predominantly taxed as
partnership income.
NATURAL GAS AND ELECTRIC POWER MARKETING
Marketing's operating margin for the year ended December 31, 1997, totaled
$103.9 million, consisting of $99.4 million related to gas marketing operations
and $4.5 million related to electric power marketing operations. These amounts
correspond to 1996 operating margins of $103.6 million, $100.2 million and $3.4
million, respectively. During 1995, the segment's operating margin totaled
$63.7 million.
Marketing's business strategy includes expansion of relationships with
existing LDCs and industrial customers as a means for expanding its customer
base. The segment continues to execute its strategy of not competing directly
with LDCs and will initiate additional retail programs through alliances with
strategic partners. In addition, the segment expects to continue to capitalize
off the synergies provided by the Destec acquisition in expanding sales efforts
to industrials and expanding its power generation asset base.
The level operating margin in 1997 as compared to 1996 attributed to the
gas marketing operations reflects higher sales volumes offset by lower unit
margins period to period. The lower margin in 1995 is a result of significantly
lower volumes. Total natural gas volumes sold in North America increased to 8.0
billion cubic feet per day in 1997 from 4.3 billion cubic feet per day during
1996 and 3.5 billion cubic feet per day in 1995, principally as a result of the
Chevron Combination and the inclusion of volumes sold by NGC Canada, Inc.
Average unit margins in North America approximated $0.04 per thousand cubic feet
during 1997, reflecting higher unit margins on volumes sold in the U.S. offset
by lower unit margins on volumes sold in Canada during the period. During the
comparable 1996 and 1995 periods, unit margins approximated $0.06 and $0.05 per
thousand cubic feet on volumes sold in the U.S. only. The lower 1997 unit
margins as compared to margins realized in 1996 and 1995 reflect the mild winter
weather during 1997 and the inclusion of lower unit margins derived from the
Company's Canadian operations.
ECI's 1997 operating margin increased $1.1 million over the same 1996
period principally as a result of increased volume offset by lower unit margins.
The lower unit margins resulted principally from a higher quantity of low-margin
trading volume in the 1997 period. Comparative sales volumes increased six times
period to period, as incremental volumes derived from the Destec acquisition
combined with the continued growth of ECI's operations resulted in sales volume
of 94.7 million megawatt hours during 1997 compared to 14.9 million megawatt
hours sold in 1996. ECI's operations in 1995 were immaterial to the segment's
operating margin.
POWER GENERATION
The Company's power generation operations, managed through Destec,
contributed $19.0 million of operating margin and $12.8 million of equity
earnings during 1997. Destec's ownership of power generating assets is
predominantly through varying interests held in partnerships that own and
operate power generation facilities. During the period, the power generating
assets in which Destec maintains an interest generated 7.2 million megawatt
hours of electricity (4.3 million megawatt hours, net to Destec's interest).
The business strategy employed by Destec is to be a low-cost producer of
electric power and Destec will actively pursue expansion of its position as a
developer, manager and operator of power generation facilities. NGC expects the
expertise of Destec's personnel, displayed through proven knowledge of power
technology and engineering and experience in development, construction and
operation of power facilities, to provide a platform for expansion of its power
generating business worldwide.
NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION
Liquids reported a 1997 operating margin of $262.4 million, representing a
decrease of $3.5 million from the operating margin reported in the comparable
1996 period, and a $131.5 million increase over the segment's 1995 operating
margin. Generally, operating margins from businesses in this segment were
negatively impacted in 1997 by lower average commodity prices as compared with
commodity prices in the 1996 period. The 1997 operating results were negatively
impacted by high cost inventory purchased during the fourth quarter of 1996,
which was recognized in
33
<PAGE>
operating results during the first quarter of 1997 and culminated in a lower-of-
cost-or-market writedown of $12.3 million at March 31, 1997. Additionally,
included in the 1997 period are pre-tax charges related to a lower-of-cost-or-
market writedown of crude oil inventory of $2.7 million and a hedge-related loss
of $8.3 million.
Operationally, the segment's businesses reflect significantly improved
volumes period to period principally as a result of the Chevron Combination.
Aggregate natural gas liquids processing volumes averaged 136.2 thousand gross
barrels per day during the 1997 period as compared to 94.3 thousand gross
barrels per day in 1996. Throughput in the gathering systems supplying the
Company's field processing facilities increased 11 percent in 1997, partially
reflecting the improved operating results occurring as the segment executes its
aforementioned restructuring plan. Natural gas liquids marketing volumes
increased from 245.0 thousand barrels per day in the 1996 period to 413.9
thousand barrels per day in 1997 and crude oil sales volumes increased 62.3
thousand barrels per day period to period. As a result of the January 1, 1997,
sale of the Mont Belvieu fractionator, barrels received for fractionation
decreased period to period by 10.7 thousand barrels per day. Natural gas
gathering and transmission volumes increased slightly during the 1997 period.
Global LPG sales volumes totaled 33.5 million barrels during the 1997 period. A
comparison of the 1995 operating statistics with results in 1996 and 1997 are
inconsequential principally as a result of the Chevron Combination.
The segment's business strategy is predicated on being the low-cost
producer of energy products. The integration of the assets acquired in the
Chevron and Trident Combinations has resulted in improved capacity utilization
and enhanced operating performance. Further, management believes that the asset
rationalizations and restructuring occurring in the fourth quarter of 1997 and
into 1998 positions NGC's Liquids segment for improved operating results and an
enhanced competitive position for the future. The segment continues to actively
address other cost containment initiatives at existing facilities and will
pursue asset acquisitions and/or the construction of new assets when it is
considered economically and strategically appropriate in order to align its
operations with other commercial aspects of NGC's business. In addition, the
segment is actively pursuing acquisitions, strategic alliances, joint ventures
and construction projects in order to capitalize on new gas production in the
Gulf of Mexico.
Internationally, the Company, principally through its wholly owned
subsidiary NGC Global Energy, is pursuing economically viable near-term
strategic opportunities. The intent of the strategy is to expand the multi-
commodity concept in selected international locations and it is likely the
Company will leverage off foreign investments held by its major shareholders as
a means for initiating most of these near-term projects.
Operating Cash Flow
Cash flow from operating activities totaled $278.6 million during the year
ended December 31, 1997, an improvement of $309.6 million and $188.0 million
over the amounts reported in the 1996 and 1995 periods, respectively. The
improvement principally resulted from an advance payment for future gas
deliveries received in 1997, the increased size and scope of the required
investment in operating assets resulting from the strategic acquisitions and
improved working capital management in 1997. Changes in other working capital
accounts, which include prepayments, other current assets and accrued
liabilities, reflect expenditures or recognition of liabilities for insurance
costs, certain deposits, salaries, taxes other than on income, certain deferred
revenue accounts and other similar items. Fluctuations in these accounts, period
to period, reflect changes in the timing of payments or recognition of
liabilities and are not directly impacted by seasonal factors.
Capital Expenditures, Commitments and Dividend Requirements
Destec Acquisition. NGC acquired Destec on June 27, 1997, in a transaction
valued at $1.26 billion, or $21.65 per share of Destec common stock. Concurrent
with this acquisition, NGC sold Destec's international facilities and operations
to The AES Corporation for $439 million. In July and August 1997, the Company
sold Destec's interest in a partnership that owned a power generation facility
and certain oil, gas and lignite reserves, respectively, for aggregate proceeds
of $296 million. Proceeds from the sales of these non-strategic assets were used
to retire debt incurred in the acquisition. The Company is continuing to explore
other opportunities to monetize its investment in certain assets acquired from
Destec if, and when, it is determined that such divestitures are economically
and strategically appropriate.
34
<PAGE>
Capital Expenditures and Investing Activities. During the year ended
December 31, 1997, the Company spent a net $510.7 million, principally on the
Destec acquisition, the purchase of NCL's gas marketing operations and on
acquisitions of additional interests in gas processing facilities, pipelines and
other midstream assets. Expenditures were also made on capital improvements at
existing facilities and on capital additions at the Company's new headquarters.
The Company invested $27.7 million in its unconsolidated affiliates, principally
for amounts committed to VESCO. During the period, the Company divested itself
of the Mont Belvieu I fractionation facility pursuant to an agreement reached
with the Federal Trade Commission related to the Chevron Combination. Further,
NGC sold its 49.9 percent interest in NCL, as part of the restructuring of that
investment and consummated the aforementioned sales of certain non-strategic
Destec assets. Aggregate net proceeds from these dispositions, plus proceeds
from other immaterial dispositions, approximated $453 million.
During 1996, the Company spent a net $111 million in acquisition, capital
project and asset maintenance activities. These funds were expended principally
for maintenance of existing assets, the acquisition of processing plants,
gathering lines, pipelines and on discrete capital assets. In addition, during
1996, the Company completed the acquisitions of LPG Services Group, Inc., a
propane gas marketing and distribution company, and Wilmar Energy Marketing, a
Calgary based crude oil marketer. Investments in unconsolidated affiliates
included contributions of $18.6 million to VESCO. As reflected in the
accompanying notes to the consolidated financial statements, the Chevron
Combination was consummated principally through the assumption of debt and the
issuance of capital stock.
During 1995, the Company spent approximately $310 million in acquisition
and asset maintenance activities. The most significant component of cash used in
investing activities during the 1995 period related to the acquisition cost and
expenses associated with the Trident Combination. Approximately $166.9
million, exclusive of transaction related costs, was required to consummate the
tender offer related to the Trident Combination. These funds were provided by
British Gas, NOVA and Clearinghouse. Specifically, British Gas and NOVA each
contributed $67.5 million to their respective subsidiaries that participated in
the Trident Combination and Clearinghouse provided $31.9 million to fund the
balance. Clearinghouse funded the $31.9 million and certain other costs
associated with the Combination through a combination of cash on hand and $25.0
million in borrowings under its then existing credit agreement. In addition to
the Trident Combination, the Company spent an additional $145 million to acquire
other assets, the most significant of which were the Ozark Gas Transmission
System, the Kerr-McGee pipeline and Pan Alberta Gas, through a contribution to
NCL, as well as capital improvements at existing facilities and investments in
other unconsolidated affiliates.
Dividend Requirements and Stock Repurchases. NGC declares quarterly
dividends on its outstanding common stock at the discretion of its Board of
Directors. The holders of the Series A Preferred Stock are entitled to receive
dividends or distributions equal per share in amount and kind to any dividend or
distribution payable on shares of the Company's common stock, when and as the
same are declared by the Company's Board of Directors. Prior to the Trident
Combination, Clearinghouse made distributions primarily to enable
Clearinghouse's partners to pay tax liabilities incurred as a result of
Clearinghouse generated income which was taken into account by the Clearinghouse
partners in computing their personal income tax liabilities. During the years
ended December 31, 1997, 1996 and 1995, the Company paid approximately $7.9
million, $6.7 million and $9.3 million in cash dividends and distributions,
respectively.
In May 1997, the Board of Directors approved a stock repurchase program
that allows the Company to repurchase, from time to time, up to 1.6 million
shares of common stock in open market transactions. The timing and number of
shares ultimately repurchased will depend upon market conditions and
consideration of alternative investments. Pursuant to this program, the Company
has acquired 654,900 shares at a total cost of $10.5 million, or $16.04 per
share on a weighted average cost basis, through December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule of the Company
are set forth at pages F-1 through F-33 inclusive, found at the end of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item 10 will be contained in
the definitive Proxy Statement of the Company for its 1998 Annual Meeting of
Stockholders (the "Proxy Statement") under the headings "Proposal 1 -- Election
of Directors" and "Executive Compensation -- Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference. The Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after December 31, 1998. Reference is also made to the information
appearing in Part I of this Annual Report on Form 10-K under the caption "Item
1A. Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be contained in the
Proxy Statement under the heading "Executive Compensation" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding ownership of certain of the Company's outstanding
securities will be contained in the Proxy Statement under the heading "Principal
Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding related party transactions will be contained in the
Proxy Statement under the headings "Principal Stockholders", "Proposal 1 --
Election of Directors" and "Executive Compensation -- Indebtedness of
Management" and "-- Certain Relationships and Related Transactions" and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
The following documents, which have been filed by the Company with the
Securities and Exchange Commission pursuant to the Securities and Exchange Act
of 1934, as amended, are by this reference incorporated in and made a part of
this statement:
a. Financial Statements -- Consolidated financial statements of the
Company and its subsidiaries are incorporated under Item 8. of this
Form 10-K.
b. Financial Statements -- Consolidated financial statements of the Company
and its subsidiaries are incorporated Under Item 8. of this Form 10-K.
c. Exhibits -- The following instruments and documents are included as
exhibits to this Form 10-K.
Exhibit
Number Description
------- -----------
2.1 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by
and between NGC Corporation, Chevron U.S.A. Inc. and Midstream
Combination Corp.(1014)
2.2 - Amendment to Combination Agreement, dated as of August 29, 1996,
by and among NGC Corporation, Chevron U.S.A. Inc. and Midstream
Combination Corp.(811)
36
<PAGE>
2.3 - Agreement and Plan of Merger by and among Destec Energy, Inc.,
The Dow Chemical Company, NGC Corporation and NGC Acquisition
Corporation II dated as of February 17, 1997. (11)
2.4 - Asset Purchase Agreement by and between NGC Corporation and The AES
Corporation dated as of February 17, 1997. (11)
2.5 - First Amendment to Asset Purchase Agreement by and between NGC
Corporation and The AES Corporation dated June 29, 1997.(12)
2.6 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE
Enterprises, Inc. dated July 1, 1997.(12)
3.1 - Restated Certificate of Incorporation of NGC Corporation. (11)
3.2 - Amended and Restated By-Laws of NGC Corporation. (11)
4.1 - Indenture, dated as of September 9, 1993, between Trident NGL, Inc.
and Ameritrust Texas National Association, as Trustee.(5)
4.25 - Note Purchase Agreement, dated as of August 30, 1991, by and among
Trident NGL, Inc. and the Purchasers named therein.(2)
4.36 - Indenture, dated as of April 15, 1993, between Trident NGL, Inc.
and The First National Bank of Boston, as Trustee.(3)
4.4 - Indenture, dated as of September 9, 1993, between Trident NGL, Inc.
and Ameritrust Texas National Association, as Trustee.(5)
4.5 - Warrant exercisable for 6,228 shares of Common Stock of NGC
Corporation registered in the name of J. Otis Winters.(4)
4.5a - Indenture, dated as of December 11, 1995, by and between NGC
Corporation, the Subsidiary Guarantors named therein and the First
National Bank of Chicago, as Trustee.(7)
4.6 - First Supplemental Indenture, dated as of August 31, 1996, by and
among NGC Corporation, the Subsidiary Guarantors named therein, and
The First National Bank of Chicago, as Trustee, supplementing and
amending the Indenture dated as of December 11, 1995. (8)
4.7 - Second Supplemental Indenture, dated as of October 11, 1996, by and
among NGC Corporation, the Subsidiary Guarantors named therein, and
The First National Bank of Chicago, as Trustee, supplementing and
amending the Indenture dated as of December 11, 1995. (8)
4.8 - Amended and Restated Credit Agreement dated as of June 27, 1997,
among NGC Corporation and The First National Bank of Chicago,
Individually and as Agent, The Chase Manhattan Bank and NationsBank
of Texas, N.A., Individually and as Co-Agents, and the Lenders
Named therein.(12)
+4.9 - First Amendment to Amended and Restated Credit Agreement dated
November 24, 1997, among NGC Corporation and The First National
Bank of Chigaco, Individually and as Agent, The Chase Manhattan
Bank and NationsBank of Texas, N.A., Individually and as Co-Agents
for the Lenders named therein.
+4.10 - Second Amendment to Amended and Restated Credit Agreement, dated as
of February 20, 1998, among NGC Corporation and The First National
Bank of Chicago, Individually and as Agent, The Chase Manhattan
Bank and NationsBank of Texas, N.A., Individually and as Co-Agents
for the Lenders named therein.
37
<PAGE>
4.11 - Subordinated Debenture Indenture between NGC Corporation and The
First National Bank of Chicago, as Debenture Trustee, dated as of
May 28, 1997. (13)Credit Agreement dated as of March 14, 1995,
among NGC Corporation and The First National Bank of Chicago,
individually and as agent, The Chase Manhattan Bank National
Association and Nations Bank of Texas N.A., individually and as co-
agent, and certain other lenders named therein.(9)
4.12 - Amended and Restated Declaration of Trust among NGC Corporation,
Wilmington Trust Company, as Property Trustee and Delaware Trustee,
and the Administrative Trustees named therein, dated as of May 28,
1997. (13)Indenture, dated as of December 11, 1995, between NGC
Corporation, the Subsidiary Guarantors named therein and The First
National Bank of Chicago, as Trustee.(8)
4.13 - Amended and Restated Declaration of Trust among NGC Corporation,
Wilmington Trust Company, as Property Trustee and Delaware Trustee,
and the Administrative Trustees named therein, dated as of May 28,
1997. (13)
4.14 - Common Securities Guarantee of NGC Corporation dated as of May 28,
1997. (13)
4.15 - Registration Rights Agreement, dated as of May 28, 1997, among NGC
Corporation, NGC Corporation Capital Trust I, Lehman Brothers,
Salomon Brothers Inc. and Smith Barney Inc. (13)
4.16 - Second Supplemental Indenture among NGC Corporation, Destec Energy,
Inc. and The First National Bank of Chicago, as Trustee, dated as
of June 30, 1997, supplementing and amending the Indenture dated as
of June 30, 1997. (14)
4.17 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy,
Inc. and The First National Bank of Chicago, as Trustee, dated as
of June 30, 1997, supplementing and amending the Indenture dated as
of December 11, 1995. (14)
+4.18 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary
Guarantors named therein and The First National Bank of Chicago, as
Trustee, dated as of September 30, 1997, supplementing and amending
the Indenture dated as of December 11, 1995.
+4.19 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary
Guarantors named therein and The First National Bank of Chicago, as
Trustee, dated as of January 5, 1998, supplementing and amending
the Indenture dated as of December 11, 1995.
+4.20 - Seventh Supplemental Indenture among NGC Corporation, The
Subsidiary Guarantors named therein and The First National Bank of
Chicago, as Trustee, dated as of February 20, 1998, supplementing
and amending the Indenture dated as of December 11, 1995.
+4.21 - Indenture dated as of September 26, 1996, Restated as of March 23,
1998, to include amendments in the First through Fifth Supplemental
Indentures, between NGC Corporation and The First National Bank of
Chicago, as Trustee.
10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991,
as amended on June 6, 1991 and August 30, 1991, by and between OXY
USA Inc. and Trident Energy, Inc.(1)
10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and
between OXY USA Inc. and Trident NGL, Inc.(1)
10.3 - NGC Corporation Amended and Restated 1991 Stock Option Plan.(11)
10.4 - Stock Purchase Agreement between Trident NGL Holding, Inc. and J.
Otis Winters.(5)
10.5 - NGC Corporation Amended and Restated Employee Equity Option
Plan.(67) (See Appendix III to the Proxy Statement/Prospectus).
10.6 - The Amended and Restated Natural Gas Clearinghouse Deferred
Compensation Plan, dated February 28, 1992.(6)
10.7 - Employment Agreement dated April 2, 1996 by and between NGC
Corporation and Stephen A. Furbacher.(9)
38
<PAGE>
10.8 - Employment Agreement, dated as of November 15, 1996, between Thomas
M. Matthews and NGC Corporation. (11)
+10.9 - Employment Agreement, dated as of April 30, 1997, between Charles
L. Watson and NGC Corporation.
+10.10 - Employment Agreement, dated as of May 8, 1997, between Stephen W.
Bergstrom and NGC Corporation.
+10.11 _ Employment Agreement, dated as of April 14, 1997, between John U.
Clarke and NGC Corporation.
+10.12 _ Employment Agreement, dated as of May 21, 1997, between Kenneth E.
Randolph and NGC Corporation.
10.13 - Lease Agreement entered into on June 12, 1996 between
Metropolitan Life Insurance Company and Metropolitan Tower Realty
Company, Inc., as landlord, and NGC Corporation, as tenant.(9)
10.14 - First Amendment to Lease Agreement entered into on June 12, 1996
between Metropolitan Life Insurance Company and Metropolitan Tower
Realty Company, Inc., as landlord, and NGC Corporation, as
tenant.(9)
10.15 - Contribution and Assumption Agreement, dated as of August 31, 1996,
among Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron
Chemical Company and Midstream Combination Corp.(8)
10.16 - Scope of Business Agreement, dated May 22, 1996 between Chevron
Corporation and NGC Corporation.(9)
10.17 - Stockholders Agreement dated, May 22, 1996, among BG Holdings,
Inc., NOVA Gas Services (U.S.) Inc. and Chevron U.S.A. Inc.(9)
10.18 - Registration Rights Agreement, dated as of August 31,1996, among
NGC Corporation, BG Holdings, Inc., NOVA Gas Services (U.S.) Inc.
and Chevron U.S.A. Inc.(8)
10.19 - Master Alliance Agreement, dated as of September 1, 1996, among
Chevron U.S.A. Inc., Chevron Chemical Company, Chevron Pipe Line
Company, and other Chevron U.S.A. Inc. affiliates, NGC Corporation,
Natural Gas Clearinghouse, Warren Petroleum Company, Limited
Partnership, Electric Clearinghouse, Inc. and other NGC Corporation
affiliates.(8)
*10.20 - Natural Gas Purchase and Sale Agreement, dated as of August 30,
1996, among Chevron U.S.A. Inc. and Natural Gas Clearinghouse.(8)
*10.21 - Master Natural Gas Processing Agreement, dated as of
September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum
Company, Limited Partnership.(8)
*10.22 - Master Natural Gas Liquids Purchase Agreement, dated as of
September 1, 1996, among Warren Petroleum Company, Limited
Partnership and Chevron U.S.A. Inc.(8)
*10.23 - Gas Supply and Service Agreement, dated as of September 1, 1996,
among Chevron Products Company and Natural Gas Clearinghouse.(8)
10.24 - Master Power Service Agreement, dated as of May 16, 1996, among
Electric Clearinghouse, Inc. and Chevron U.S.A. Production
Company.(9)
39
<PAGE>
10.25 - Master Power Service Agreement, dated as of May 16, 1996, among
Electric Clearinghouse, Inc. and Chevron Chemical Company.(9)
10.26 - Master Power Service Agreement, dated as of May 16, 1996, among
Electric Clearinghouse, Inc. and Chevron Products Company.(9)
*10.27 - Feedstock Sale and Refinery Product Purchase Agreements, dated as
of September 1, 1996, among Chevron Products Company and Warren
Petroleum Company, Limited Partnership.(8)
*10.28 - Refinery Product Sale Agreement (Hawaii), dated as of September 1,
1996, among Warren Petroleum Company, Limited Partnership and
Chevron Products Company.(8)
*10.29 - Feedstock Sale and Refinery Product Master Services Agreement,
dated as of September 1, 1996, among Chevron Products Company and
Warren Petroleum Company, Limited Partnership.(8)
*10.30 - CCC Product Sale and Purchase Agreement dated as of September 1,
1996, among Warren Petroleum Company, Limited Partnership and
Chevron Chemical Company.(8)
*10.31 - CCC/WPC Services Agreement, dated as of September 1, 1996, among
Chevron Chemical Company and Warren Petroleum Company, Limited
Partnership.(8)
*10.32 - Operating Agreement, dated as of September 1, 1996, among Warren
Petroleum Company, Limited Partnership and Chevron Pipe Line
Company.(8)
10.33 - Galena Park Services Agreement, dated as of September 1, 1996,
among Chevron Products Company and Midstream Combination Corp.(8)
*10.34 - Venice Complex Operating Agreement, dated as of September 1, 1996,
among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited
Partnership.(9)
*10.35 - Product Storage Lease and Terminal Access Agreement, dated as of
September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum
Company, Limited Partnership.(9)
10.36 - Lone Star Swap Transaction Confirmation Term Sheet, dated as of
September 1, 1996, among Chevron U.S.A. Inc. and NGC
Corporation.(8)
*10.37 - West Texas LPG Pipeline Limited Partnership Agreement, dated as of
September 1, 1996, by and between Chevron Pipe Line Company, or an
affiliate thereof, and an affiliate of NGC Corporation.(8)
*10.38 - West Texas LPG Pipeline Operating Agreement, dated as of September
1, 1996, by and between Chevron Pipe Line Company, or an affiliate
thereof, and the West Texas LPG Pipeline Partnership.(8)
*10.39 - Time Charter, dated as of August 31, 1996, by and between Midstream
Barge Company, L.L.C. and Warren Petroleum Company, Limited
Partnership.(8)
*10.40 - Limited Liability Company Agreement of Midstream Barge Company,
L.L.C., dated as of August 31, 1996, by and between Chevron U.S.A.
Inc. and Warren Petroleum Company, Limited Partnership.(8)
+12.1 - Computation of Ratio of Earnings to Fixed Charges.
40
<PAGE>
+22.1 - Subsidiaries of the Registrant.
+23.1 - Consent of Arthur Andersen LLP.
+27.1 - Financial Data Schedule.
- ----------------
+ Filed herewith
* Exhibit omits certain information which the Company has filed separately
with the Commission pursuant to a confidential treatment request pursuant
to Rule 406 promulgated under the Securities Act of 1933, as amended.
(1) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL, Inc. on Form S-1, Registration No. 33-43871.
(2) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL, Inc. on Form S-1, Registration No. 33-46416.
(3) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended March 31, 1993 of Trident NGL, Inc.,
Commission File No. 1-11156.
(4) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding,
Inc., Commission File No. 1-11156.
(5) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL Holding, Inc. on Form S-1, Registration No. 33-68842
(6) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907.
(7) Incorporated by reference to the Registration Statement of NGC Corporation
on Form S-3, Registration No. 33-97368.
(8) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1996, of NGC Corporation,
Commission File No. 1-11156.
(9) Incorporated by reference to exhibits to the Registration Statement of
Midstream Combination Corp. on Form S-4, Registration No. 333-09419.
(10) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, dated May 22, 1996, Commission File No. 1-11156.
(11) Incorporated by reference to exhibits to the Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1996, of NGC Corporation, Commission
File No. 1-11156.
(12) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, Commission File No. 1-11156, dated June 27, 1997.
(13) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156.
(14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1997, Commission File
No. 1-11156
(b) Reports on Form 8-K of NGC Corporation.
None.
41
<PAGE>
SIGNATURES
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.
NGC CORPORATION
Date: March 30,1998 By: /s/ C. L. Watson
----------------------------------------
C. L. Watson, Chairman of the Board,
Chief Executive Officer and Director
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.
Date: March 30, 1998 By: /s/ C. L. Watson
----------------------------------------
C. L. Watson, Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 30, 1998 By: /s/ John U. Clarke
-----------------------------------------
John U. Clarke, Senior Vice President
and Chief Financial Officer (Principal
Financial Officer)
Date: March 30, 1998 By: /s/ Bradley P. Farnsworth
-----------------------------------------
Bradley P. Farnsworth, Vice President
and Controller (Principal Accounting
Officer)
Date: March 30, 1998 By: /s/ Thomas M. Matthews
-----------------------------------------
Thomas M. Matthews, President and
Director
Date: March 30, 1998 By: /s/ Stephen J. Brandon
----------------------------------------
Stephen J. Brandon, Director
Date: March 30, 1998 By: /s/ Frank J. Chapman
----------------------------------------
Frank J. Chapman, Director
Date: March 30, 1998 By: /s/ P. Nicholas Woollacott
-----------------------------------------
P. Nicholas Woollacott, Director
Date: March 30, 1998 By: /s/ Jack S. Mustoe
----------------------------------------
Jack S. Mustoe, Director
42
<PAGE>
Date: March 30, 1998 By: /s/ Jeffrey M. Lipton
----------------------------------------
Jeffrey M. Lipton, Director
Date: March 30, 1998 By: /s/ Albert Terrance Poole
----------------------------------------
Albert Terence Poole, Director
Date: March 30, 1998 By: /s/ Darald W. Callahan
-----------------------------------------
Darald W. Callahan, Director
Date: March 30, 1998 By: /s/ Patricia A. Woertz
----------------------------------------
Patricia A. Woertz, Director
Date: March 30, 1998 By: /s/ Peter J. Robertson
----------------------------------------
Peter J. Robertson, Director
Date: March 30, 1998 By: /s/ Daniel L. Dienstbier
----------------------------------------
Daniel L. Dienstbier, Director
Date: March 30, 1998 By: /s/ J. Otis Winters
----------------------------------------
J. Otis Winters, Director
43
<PAGE>
NGC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Report of Independent Public Accountants...................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................ F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995........ F-6
Notes to Consolidated Financial Statements.................... F-7
FINANCIAL STATEMENT SCHEDULE
Condensed Financial Statements of the Registrant.............. F-30
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of NGC Corporation:
We have audited the accompanying consolidated balance sheets of NGC
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997, 1996 and 1995.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 NGC Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule I is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
March 20, 1998
F-2
<PAGE>
NGC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 23,047 $ 50,209
Accounts receivable, net 1,536,451 1,373,560
Accounts receivable, affiliates 139,321 144,825
Inventories 136,485 257,005
Assets from risk management activities 127,929 98,433
Prepayments and other assets 55,547 12,689
---------- ----------
2,018,780 1,936,721
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 1,958,250 1,819,811
Less: accumulated depreciation (436,674) (128,432)
---------- ----------
1,521,576 1,691,379
---------- ----------
OTHER ASSETS
Investments in unconsolidated affiliates 470,477 181,688
Assets from risk management activities 111,341 171,528
Other assets 394,729 205,494
---------- ----------
$4,516,903 $4,186,810
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,404,736 $1,305,726
Accounts payable, affiliates 24,187 39,070
Accrued liabilities 192,159 117,777
Liabilities from risk management activities 132,012 86,414
--------- ----------
1,753,094 1,548,987
LONG-TERM DEBT 1,002,054 988,597
OTHER LIABILITIES
Liabilities from risk management activities 42,679 127,725
Deferred income taxes 254,059 328,280
Other long-term liabilities 245,892 76,488
---------- ----------
3,297,778 3,070,077
---------- ----------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 ---
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000 shares authorized:
8,000,000 shares designated as Series A Participating Preferred Stock,
7,815,363 shares issued and outstanding at December 31, 1997 and
1996, respectively 75,418 75,418
Common stock, $.01 par value, 400,000,000 shares authorized;
151,796,622 shares issued at December 31, 1997 and 149,846,503
shares issued and outstanding at December 31, 1996 1,518 1,498
Additional paid-in capital 919,720 896,432
Retained earnings 32,975 143,385
Less: treasury stock, at cost: 654,900 shares at December 31, 1997 (10,506) ---
---------- ----------
1,019,125 1,116,733
---------- ----------
$4,516,903 $4,186,810
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
NGC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Revenues $13,378,380 $7,260,202 $3,665,946
Cost of sales 12,993,086 6,890,702 3,471,286
----------- ---------- ----------
Operating margin 385,294 369,500 194,660
Depreciation and amortization 104,391 71,676 44,913
Impairment, abandonment and other charges 275,000 --- ---
General and administrative expenses 149,344 100,032 68,057
----------- ---------- ----------
Operating income (loss) (143,441) 197,792 81,690
Equity in earnings of unconsolidated affiliates 58,959 28,075 21,060
Other income 28,113 5,485 3,096
Relocation costs --- (4,000) ---
Interest expense (63,455) (46,202) (32,391)
Other expenses (20,230) (11,505) (8,221)
Minority interest in income of a subsidiary (9,841) --- ---
----------- ---------- ----------
Income (loss) before income taxes (149,895) 169,645 65,234
Income tax provision (benefit) (62,210) 56,323 (27,471)
----------- ---------- ----------
Net income (loss) from continuing operations before
cumulative effect of accounting change (87,685) 113,322 92,705
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) (14,800) --- ---
----------- ---------- ----------
NET INCOME (LOSS) $ (102,485) $ 113,322 $ 92,705
=========== ========== ==========
Net Income Per Share: PRO FORMA
Income (loss) before income taxes $ (149,895) $ 169,645 $ 65,234
Income tax provision (benefit) (62,210) 56,323 20,438
----------- ---------- ----------
Net income (loss) from continuing operations before
cumulative effect of accounting change (87,685) 113,322 44,796
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) (14,800) --- ---
Less: preferred stock dividends (391) (132) ---
----------- ---------- ----------
Net income (loss) applicable to common stockholders $ (102,876) $ 113,190 $ 44,796
=========== ========== ==========
Basic earnings (loss) per share $ (0.68) $ 0.99 $ 0.42
=========== ========== ==========
Diluted earnings per share $ n/a $ 0.83 $ 0.40
=========== ========== ==========
Basic shares outstanding 150,653 114,093 106,841
=========== ========== ==========
Diluted shares outstanding 167,009 136,099 113,176
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
NGC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (102,485) $ 113,322 $ 92,705
Items not affecting cash flows from operating activities:
Depreciation, amortization, impairment and abandonment 378,916 73,176 44,913
Equity in earnings of affiliates, net of cash distributions (4,073) (21,729) (9,169)
Risk management activities (8,757) (11,220) (2,951)
Deferred income taxes (86,424) 45,896 (28,281)
Amortization of bond premium (6,768) (4,892) (3,214)
Other 1,249 7,466 3,484
Change in assets and liabilities resulting from operating activities:
Accounts receivable (35,845) (954,418) (152,557)
Inventories 86,077 (116,353) (23,403)
Prepayments and other assets (20,686) 7,726 (16,518)
Accounts payable (22,601) 778,767 185,215
Accrued liabilities 14,064 47,148 11,611
Other, net 85,922 4,157 (11,187)
----------- ----------- -----------
Net cash provided by (used in) operating activities 278,589 (30,954) 90,648
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (220,003) (97,651) (128,871)
Investment in unconsolidated affiliates (27,708) (30,875) (15,457)
Business acquisitions, net of cash acquired (715,589) (714) (165,267)
Proceeds from asset sales 452,565 3,600 ---
Other, net --- 14,500 (1,028)
----------- ----------- -----------
Net cash used in investing activities (510,735) (111,140) (310,623)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 2,218,500 1,542,000 1,237,589
Repayments of long-term borrowings (2,198,275) (1,360,081) (1,143,039)
Proceeds from sale of capital stock, options and warrants 5,147 858 725
Issuance of company obligated preferred securities of a
subsidiary trust, net 198,043 --- ---
Capital contributions --- --- 135,000
Treasury stock acquisitions (10,506) --- ---
Dividends and other distributions, net (7,925) (6,740) (9,253)
----------- ----------- -----------
Net cash provided by financing activities 204,984 176,037 221,022
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (27,162) 33,943 1,047
Cash and cash equivalents, beginning of year 50,209 16,266 15,219
----------- ----------- -----------
Cash and cash equivalents, end of year $ 23,047 $ 50,209 $ 16,266
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
NGC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
NGC CORPORATION
------------------------------------------------------------------------------------------
SERIES A PREFERRED COMMON STOCK ADDITIONAL TREASURY STOCK
PARTNERSHIP ------------------- ------------------- PAID-IN RETAINED --------------------
CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
------------- -------- --------- ------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 $ 152,213 --- $ --- --- $ --- $ --- $ --- --- $ ---
Net income 52,930 --- --- --- --- --- 39,775 --- ---
Capital contribution 135,000 --- --- --- --- --- --- --- ---
Partnership
distributions (5,227) --- --- --- --- --- --- --- ---
Options granted 323 --- --- --- --- 1,692 --- --- ---
Trident Combination (335,239) --- --- 109,886 1,098 510,918 --- --- ---
Dividends and other
distributions --- --- --- --- --- --- (4,285) --- ---
401(k) plan stock
issuances --- --- --- 199 3 1,873 --- --- ---
Stock options exercised --- --- --- 408 4 1,302 --- --- ---
----------- ------ -------- ------- ------ -------- --------- ------ -------
Balance at December 31,
1995 --- --- --- 110,493 1,105 515,785 35,490 --- ---
Chevron Combination --- 7,815 75,418 38,623 386 372,328 --- --- ---
Net income --- --- --- --- --- --- 113,322 --- ---
Options exercised --- --- --- 374 3 1,320 --- --- ---
Dividends and other
distributions --- --- --- --- --- --- (5,427) --- ---
401(k) plan and profit
sharing stock
issuances --- --- --- 309 4 4,175 --- --- ---
Options granted --- --- --- --- --- 2,824 --- --- ---
Other --- --- --- 48 --- --- --- --- ---
----------- ------ -------- ------- ------ -------- --------- ------ ------
Balance at December 31,
1996 --- 7,815 75,418 149,847 1,498 896,432 143,385 --- ---
Net loss --- --- --- --- --- --- (102,485) --- ---
Options exercised --- --- --- 1,541 15 11,577 --- --- ---
Dividends and other
distributions --- --- --- --- --- --- (7,925) --- ---
401(k) plan and profit
sharing stock
issuances --- --- --- 385 5 7,401 --- --- ---
Options granted --- --- --- --- --- 4,044
Treasury stock
acquisitions --- --- --- --- --- --- --- (655) (10,506)
Other --- --- --- 24 --- 266 --- --- ---
----------- ------ -------- ------- ------ -------- --------- ------ ------
Balance at December 31,
1997 $ --- 7,815 $75,418 151,797 $1,518 $919,720 $ 32,975 (655) $(10,506)
=========== ====== ======== ======= ====== ======== ========= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
NGC Corporation ("NGC" or the "Company") is a holding company that
conducts substantially all of its business through its subsidiaries. The Company
is a leading aggregator, processor, transporter and marketer of energy products
and services in North America. NGC also markets natural gas and crude oil in the
United Kingdom and is an international transporter of natural gas liquids.
The accounting policies of NGC reflect industry practices and conform to
generally accepted accounting principles. The more significant of such
accounting policies are described below. The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
requires management to develop estimates and make assumptions that affect
reported financial position and results of operations and that impact the nature
and extent of disclosure, if any, of contingent assets and liabilities. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of intercompany accounts and transactions.
Investments in affiliates in which the Company has a significant ownership
interest, generally 20 percent to 50 percent, are accounted for by the equity
method. Other investments are carried at cost. Certain reclassifications have
been made to prior-period amounts to conform with current period financial
statement classifications.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of all demand
deposits and funds invested in short-term investments with original maturities
of three months or less.
CONCENTRATION OF CREDIT RISK. NGC provides multiple energy commodity needs
principally to customers in the electric and gas distribution industries and to
entities engaged in industrial and petrochemical businesses. These industry
concentrations have the potential to impact the Company's overall exposure to
credit risk, either positively or negatively, in that the customer base may be
similarly affected by changes in economic, industry or other conditions.
Receivables are generally not collateralized; however, NGC believes the credit
risk posed by industry concentration is offset by the diversification and
creditworthiness of the Company's customer base.
INVENTORIES. Inventories consisting primarily of natural gas in storage of
$35.2 million and $30.6 million, natural gas liquids of $55.4 million and $194.5
million, and crude oil of $23.2 million and $16.6 million at December 31, 1997
and 1996, respectively, are valued at the lower of weighted average cost or
market. Materials and supplies inventory of $19.8 million and $12.1 million at
December 31, 1997 and 1996, respectively, is carried at the lower of cost or
market using the specific identification method.
RECOVERABLE PROJECT COSTS. The Company capitalizes certain project costs
incurred to procure equipment, to connect utility transmission lines, and other
similar costs related to construction activities, once management determines
that it is probable such costs are recoverable. If the necessary contracts are
not executed, and the capitalized costs are not considered recoverable through
other means, the related costs are charged to expense at that time.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting
principally of gas gathering, processing, fractionation, terminaling and storage
facilities, natural gas transmission lines, pipelines, power generating
facilities and supporting infrastructure is recorded at cost. Expenditures for
major replacements and renewals are capitalized while expenditures for
maintenance, repairs and minor renewals to maintain facilities in operating
condition are expensed. Depreciation is provided using the straight-line method
over the estimated economic service lives of the assets, ranging from three to
30 years. Composite depreciation rates are applied to functional groups of
property having similar economic characteristics. Gains and losses are not
recognized for retirements of property, plant and equipment subject to composite
depreciation rates ("composite rate") until the asset group subject to the
composite rate is retired.
ENVIRONMENTAL COSTS. Environmental costs relating to current operations
are expensed or capitalized, as appropriate, depending on whether such costs
provide future economic benefit. Liabilities are recorded when
F-7
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
environmental assessment indicates that remedial efforts are probable and the
costs can be reasonably estimated. Measurement of liabilities is based on
currently enacted laws and regulations, existing technology and undiscounted,
site-specific costs. Environmental liabilities in connection with assets that
are sold or closed are realized upon such sale or closure, to the extent they
are probable, can be estimated and have not previously been reserved. In
assessing environmental liabilities, no offset is made for potential insurance
recoveries. Recognition of any joint and several liability is based upon the
Company's best estimate of its final pro rata share of such liability.
INTANGIBLE ASSETS. Intangible assets are generally amortized by the
straight-line method over an estimated useful life of up to 30 years.
REVENUE RECOGNITION. Revenues for product sales and gas processing and
marketing services are recognized when title passes to the customer or when the
service is performed. Fractionation and transportation revenues are recognized
based on volumes received in accordance with contractual terms. Revenues derived
from power generation, including electricity, steam and synthetic gas sales and
earned performance bonuses, are recognized upon output, product delivery or
satisfaction of specific targets, all as specified by contractual terms.
Revenues resulting from long-term engineering and project construction contracts
are recognized using the percentage-of-completion method. Fees derived from
engineering and construction contracts and development and other activities
received from joint ventures in which NGC holds an equity interest are deferred
to the extent of NGC's ownership interest and amortized on a straight-line basis
over appropriate periods, which vary according to the nature of the service
provided and the ventures' operations.
The Company accounts for its North American fixed-price natural gas
transactions using the mark-to-market method of accounting. Under such method,
all fixed-price natural gas contracts are recorded at fair value, net of future
servicing costs and reserves. Changes in the market value of these contracts are
recognized as gain or loss in the period of change. The resulting unrealized
gains and losses are recorded as assets and liabilities from risk management
activities. All other gas marketing activities are accounted for under the
accrual method of accounting.
The Company routinely enters into financial instrument contracts to hedge
purchase and sale commitments and inventories in its natural gas liquids, crude
oil, electricity and coal businesses in order to minimize the risk of market
fluctuations. NGC also monitors its exposure to fluctuations in interest rates
and foreign currency exchange rates and may execute swaps, forward-exchange
contracts or other financial instruments to manage these exposures. Gains and
losses from hedging transactions are recognized in income and are reflected as
cash flows from operating activities in the periods for which the underlying
commodity, interest rate or foreign currency transaction was hedged. If the
necessary correlation to the commodity, interest rate or foreign currency
transaction being hedged ceases to exist, the gain or loss associated with such
contract(s) is no longer deferred and is recognized in the period correlation is
lost.
INCOME TAXES. The Company files a consolidated United States federal
income tax return and, for financial reporting purposes, provides income taxes
for the difference in the tax and financial reporting bases of its assets and
liabilities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Prior to March 1, 1995, the
effective date of the merger between Natural Gas Clearinghouse ("Clearinghouse")
and Trident NGL Holding, Inc. ("Holding") (the "Trident Combination"), the
operations of Clearinghouse, a Colorado partnership, were generally not subject
to corporate federal income tax and Clearinghouse's earnings were generally
allocated to and taken into account in computing the taxable income of its
partners.
EARNINGS PER SHARE. Basic earnings per share represents the amount of
earnings for the period available to each share of common stock outstanding
during the period. Diluted earnings per share represents the amount of earnings
for the period available to each share of common stock outstanding during the
period plus each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period. Differences between basic and diluted shares outstanding in all periods
are attributed to options outstanding and a warrant. For the year ended
December 31, 1997, Basic and Diluted earnings per share are the same as a result
of antidilution resulting from the net loss in that period.
F-8
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma net income used to compute pro forma earnings per share for the
year ended December 31, 1995, reflects incremental statutory federal and state
income tax provisions applied to Clearinghouse's partnership income for the
period prior to the effective date of the Trident Combination. The incremental
tax provision represents an estimate of the aggregate federal and state income
taxes that would have been provided had Clearinghouse been a taxpaying entity
during that accounting period.
FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional currency
is other than U.S. dollar, assets and liabilities are translated at year-end
rates of exchange and revenues and expenses are translated at average exchange
rates prevailing during the year.
NOTE 2 -- BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS
THE DESTEC ACQUISITION. On June 27, 1997, NGC acquired Destec Energy, Inc.
("Destec"), an independent power producer, for $1.26 billion, or $21.65 per
share of Destec common stock. Concurrent with this acquisition, NGC sold
Destec's international facilities and operations to The AES Corporation for $439
million. NGC financed the transaction through cash on hand and advances on its
credit facilities provided by its existing commercial banks. The acquisition
related debt is to be retired from a combination of cash flows from operations,
sales of non-strategic domestic Destec assets, proceeds from issuance of new
corporate debt and proceeds from the issuance of preferred securities of a
subsidiary trust. During July and August 1997, the Company sold certain non-
strategic Destec assets for aggregate proceeds of $296 million. Such proceeds
were used to retire outstanding indebtedness.
The Destec acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $718 million,
inclusive of transaction costs and net of cash acquired, was allocated to the
Destec assets acquired and liabilities assumed based on their estimated fair
values as of June 30, 1997, the effective date of the acquisition for accounting
purposes. The purchase price allocation as presented herein is considered
preliminary and is dependent upon subsequent asset sales, if any, and the
ultimate resolution of certain pending legal and other contingencies existing at
the time of the acquisition. The results of operations of the acquired Destec
assets are consolidated with NGC's existing operations beginning July 1, 1997.
The following table reflects certain unaudited pro forma information for the
periods presented as if the Destec acquisition had occurred on January 1, 1996
(in thousands, except per share data):
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996
------------------------------
Pro forma revenues $13,498,207 $7,529,928
Pro forma net income (loss) (101,175) 125,962
Pro forma earnings (loss) per share (0.67) 0.93
RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company and
NOVA Corporation ("NOVA") completed the restructuring of the companies' Canadian
natural gas operations formerly executed through Novagas Clearinghouse, Ltd.,
Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse Pipelines
Limited Partnership (collectively "NCL"), a joint venture between NGC and NOVA.
Pursuant to the agreements, NGC Canada Inc. ("NGCCI"), a wholly owned indirect
subsidiary of NGC, acquired NCL's natural gas marketing business, excluding the
natural gas aggregation business of Pan-Alberta Gas Ltd. ("Pan-Alberta"), from
NCL and sold its aggregate 49.9 percent interest in NCL to NOVA Gas
International ("NGI"), a subsidiary of NOVA. NOVA assumed full ownership of
NCL's gathering and processing business and the operations of Pan-Alberta. The
restructuring included amendments to or termination of various agreements
between NCL, NGC, NOVA and certain affiliates of both NGC and NOVA. NGC realized
a pretax gain on the sale of its interest in NCL of $7.8 million, which is
classified as other income in the accompanying consolidated statements of
operations for the year ended December 31, 1997. The acquisition by NGC of NCL's
marketing business was accounted for under the purchase method of accounting.
Accordingly, the purchase price of $4.0 million, inclusive of transaction costs,
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values as of April 1, 1997, the effective date of
F-9
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the acquisition for accounting purposes. NGC and NOVA are pursuing separate
midstream asset businesses in Canada with NGC operating its Canadian marketing
and midstream asset businesses through NGCCI.
RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). In early 1997, British
Gas completed a restructuring whereby Centrica plc ("Centrica") was demerged
from British Gas and British Gas was renamed BG plc ("BG"). Centrica became the
Company's joint venture partner in Accord. BG holds the approximate 26 percent
stake in NGC's common stock formerly held by British Gas. On May 2, 1997,
Centrica and the Company completed a restructuring of Accord by converting
certain common stock interests in Accord to participating preferred stock
interests as of an effective date of January 1, 1997. Centrica and the Company
own 75 percent and 25 percent, respectively, of the outstanding participating
preferred stock shares of Accord. The participating preferred stock has (a) the
right to receive cumulative dividends on a priority basis to other corporate
distributions by Accord, and (b) limited voting rights. In addition, Centrica
has an option to purchase the Company's participating preferred stock interest
at any time after July 1, 2000, at a formula based price, as defined in the
agreement. As part of the reorganization, Centrica will operate Accord while NGC
obtained the right to market natural gas, gas liquids and crude oil in the
United Kingdom, which occurs through its wholly owned subsidiary NGC UK Limited
("NGC UK"). In addition, as part of the restructuring, NGC UK acquired Accord's
existing crude oil marketing business effective July 1, 1997. No gain or loss
was recognized as a result of this restructuring and NGC's investment in Accord
continues to be accounted for under the equity method.
THE CHEVRON COMBINATION. On August 31, 1996, NGC completed a strategic
combination (the "Chevron Combination") with Chevron U.S.A. Inc. and certain
Chevron affiliates ("Chevron") pursuant to which Chevron contributed
substantially all of its midstream assets (the "Contribution"), including
substantially all of the assets comprising Warren Petroleum Company and
Chevron's Natural Gas Business Unit and an undivided interest in those assets
that constitute the West Texas LPG Pipeline, into Midstream Combination Corp.
("Midstream"), a Delaware corporation formed for purposes of the transaction.
NGC was merged with and into Midstream immediately following the Contribution
and Midstream was renamed NGC Corporation. In exchange for the Contribution,
Chevron received approximately 38.6 million shares of NGC common stock and
approximately 7.8 million shares of NGC Series A Participating Preferred Stock
and NGC assumed approximately $283 million of indebtedness. Immediately
following closing of the Chevron Combination, NGC paid approximately $128
million to Chevron and funded such payment under its Credit Agreement. The
Chevron Combination was accounted for as an acquisition of assets under the
purchase method of accounting. The purchase price of approximately $740 million,
inclusive of assumed indebtedness and transaction costs, was allocated to the
assets acquired and liabilities assumed based on their estimated fair values as
of an effective date of September 1, 1996.
THE TRIDENT COMBINATION. On March 14, 1995, Clearinghouse consummated the
combination with Holding, a fully integrated natural gas liquids company. The
purchase price of approximately $350 million, excluding transaction costs and
liabilities assumed, was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of March 1, 1995, the effective
date of the Trident Combination for accounting purposes. The Trident
Combination was accounted for under the purchase method of accounting and the
results of operations of Holding are included in the accompanying financial
statements effective March 1, 1995.
The following table reflects certain unaudited pro forma information for
the period presented as if the Trident Combination had occurred on January 1,
1995 (in thousands, except per share amounts):
YEAR ENDED
December 31,
1995
---------------------
Pro forma revenues $3,744,870
Pro forma net income 46,067
Pro forma diluted earnings per share 0.39
F-10
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 -- IMPAIRMENT, ABANDONMENT AND OTHER CHARGES
During the fourth quarter of 1997, the Company recognized a $275
million charge principally related to impairment of certain long-lived assets,
abandonment of certain operating assets and reserves for obsolescence,
contingencies and other obligations. The charge primarily resulted from the
completion of a plan of restructuring of the Company's natural gas liquids and
crude oil businesses, which includes rationalization and consolidation of assets
acquired in both the Trident and Chevron Combinations, and the pursuit of a
joint venture partner in order to achieve critical mass in its crude oil
marketing business. In addition, a company-wide reorganization of reporting
responsibilities and improvements in business processes and computer information
systems resulted in the identification during the fourth quarter of 1997 of
other obsolete assets and a reduction of employees involved in non-strategic
operations. The charge, which was substantially non-cash in nature, consisted of
the following (in thousands):
Abandonment of long-lived operating assets $154,984
Impairment of operating assets and intangibles 79,550
Inventory obsolescence reserve and write-off 10,340
Write-off of other obsolete assets 12,011
Contingency and other obligation reserves 16,750
Severance charge 1,365
--------
$275,000
========
The fair values of the assets impaired and to be abandoned were
determined using a discounted cash flow methodology. Management anticipates that
the abandoned assets will be disposed of during 1998 and the carrying value of
these assets in the accompanying balance sheet is at estimated realizable value.
Pursuant to these restructuring decisions and in order to comply with required
accounting methodology, the Company anticipates recording an additional
severance charge of approximately $10 million during the first quarter of 1998.
Also during the fourth quarter of 1997, the Company changed its method
for accounting for certain business process re-engineering and information
technology transformation costs pursuant to a consensus reached in November 1997
by the Financial Accounting Standards Board's Emerging Issues Task Force
("EITF"). The EITF concluded that all re-engineering costs, including those
incurred in connection with a software installation, should be expensed as
incurred. The Company had previously capitalized certain re-engineering costs
and was amortizing such costs over the estimated useful lives of the projects.
The cumulative effect of this change in accounting of $14.8 million, or $0.10
per share, represents the one-time charge for the aggregate unamortized re-
engineering costs previously capitalized.
Note 4 -- RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
NGC's operating results are impacted by commodity price, interest rate
and foreign exchange rate fluctuations. The Company routinely enters into
financial instrument contracts to hedge purchase and sale commitments and
inventories in its natural gas, natural gas liquids, crude oil, electricity and
coal businesses in order to minimize the risk of market fluctuations. The
Company may, at times, have a bias in the market, within established guidelines,
resulting from the management of its commodity portfolios. Further, as a result
of marketplace liquidity and other factors, the Company may, at times, be unable
to fully hedge its portfolio for certain market risks. NGC also monitors its
exposure to fluctuations in interest rates and foreign currency exchange rates
and may execute swaps, forward-exchange contracts or other financial instruments
to manage these exposures.
The Natural Gas and Electric Power Marketing segment's operating
margin, exclusive of risk-management activities, is relatively insensitive to
commodity price fluctuations since most of this segment's purchase and sales
contracts do not contain fixed-price provisions. The Power Generation segment is
relatively insensitive to commodity price fluctuations since most of this
business's purchase and sales contracts contain variable power sales contract
features tied to a current spot or index natural gas price allowing revenues to
adjust directionally with changes in natural gas prices. The Natural Gas
Liquids, Crude Oil and Gas Transmission segment is generally sensitive to
F-11
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
changes in commodity prices principally as a result of contractual terms under
which products are sold by these businesses. The segment's operating margin is
particularly sensitive to natural gas liquids prices. However, operating margin
in these businesses is relatively insensitive to fluctuations in natural gas
prices as a result of the mitigating impact of fuel costs in the Company's
fractionation operations and residue gas sales in its gathering and processing
activities.
The commercial groups of NGC manage, on a portfolio basis, the market risks
inherent in their transactions, subject to parameters established by the NGC
Board of Directors. Market risks are monitored by a risk control group that
operates separately from the commercial units that create or actively manage
these risk exposures to ensure compliance with NGC's risk management policies.
Risk measurement is also practiced against the NGC portfolios with stress
testing and scenario analysis.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES -- NATURAL GAS. The
Company uses the mark-to-market method of accounting for its North American
fixed-price natural gas transactions. Under mark-to-market accounting, fixed-
price forwards, swaps, options, futures and other financial instruments with
third parties are reflected at market value, net of future servicing costs and
reserves, with resulting unrealized gains and losses recorded as assets and
liabilities from risk management activities in the consolidated balance sheets.
These assets and liabilities are affected by the actual timing of settlements
related to these contracts and current-period changes resulting primarily from
newly originated transactions and the impact of price movements. These changes
are recognized as revenues in the consolidated statements of operations in the
period in which the change occurs. Market prices used to value outstanding
financial instruments reflect management's consideration of, among other things,
closing exchange and over-the-counter quotations, the time value of money and
volatility factors underlying the commitments. These market prices are adjusted
to reflect the potential impact of liquidating NGC's position in an orderly
manner over a reasonable period of time under present market conditions.
MARKET RISK. NGC generally attempts to balance its fixed-price physical
and financial purchase and sales contracts in terms of contract volumes and the
timing of performance and delivery obligations. However, net open positions
often exist or are established due to the origination of new transactions and
the Company's assessment of, and response to, changing market conditions. NGC
will take advantage of its bias in the market when it believes, based upon
competitive information gained from its energy marketing activities, that future
price movements will be consistent with its net open position. To the extent a
net open position exists, NGC is exposed to the risk that fluctuating market
prices may adversely impact its financial position or results of operations. The
net open position is actively managed, and the impact of a change in price on
the Company's financial condition at a point in time is not necessarily
indicative of the impact of price movements throughout the year.
MARKET RESERVES. In connection with the market valuation of its fixed-
price contracts, the Company maintains certain reserves for a number of risks
and costs associated with these future commitments. Among others, these include
reserves for credit risks based on the financial condition of counterparties,
reserves for product location ("basis") differentials and consideration of the
time value of money for long-term contracts. Counterparties in its trading
portfolio consist principally of financial institutions, major oil and gas
companies and local distribution companies. The creditworthiness of these
counterparties may impact overall exposure to credit risk, either positively or
negatively; however, with regard to its counterparties NGC maintains credit
policies that management believes minimize overall credit risk. Determination of
the credit quality of its counterparties is based upon a number of factors,
including credit ratings, financial condition, project economics and collateral
requirements. When applicable, the Company employs standardized agreements that
allow for the netting of positive and negative exposures associated with a
single counterparty. Based on these policies, its current exposures and its
credit reserves, NGC does not anticipate a material adverse effect on its
financial position or results of operations as a result of counterparty
nonperformance. The following table displays the mark-to-market results of NGC's
natural gas fixed-price
F-12
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions at December 31, 1997 (amounts are net of the advance payment and
related obligations for future natural gas deliveries discussed in Note 11):
<TABLE>
<CAPTION>
BELOW
INVESTMENT INVESTMENT
GRADE CREDIT GRADE CREDIT
QUALITY QUALITY TOTAL
------------------ ----------------- ---------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Utilities and power generators $(4,157) $(11,174) $(15,331)
Financial institutions 7,279 86 7,365
Oil and gas producers 15,746 (7,771) 7,975
Industrial companies 10,028 1,690 11,718
Other 5,414 (797) 4,617
------- -------- --------
Value of fixed-price transactions before reserves $34,310 $(17,966) 16,344
======= ========
Reserves (8,911)
--------
Net fixed-price value $ 7,433
========
</TABLE>
At December 31, 1997, the term of NGC's natural gas portfolio extends to
2007, and the average remaining life of an individual transaction was 5 months.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair-value amounts have been determined by the
Company using available market information and selected valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies could have a material effect on the estimated fair-value amounts.
The carrying values of current assets and liabilities approximate fair
values due to the short-term maturities of these instruments. The carrying
amounts and fair values of the Company's other financial instruments were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1997 1996
----------------------------------- --------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------- ------------ ------------- --------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Credit Agreement $110,000 $110,000 $319,000 $319,000
6.75% Senior Notes, due 2005 150,000 152,000 150,000 148,000
7.625% Senior Notes, due 2026 175,000 188,000 175,000 180,000
Chevron Note 156,982 159,000 159,454 160,000
14% Senior Subordinated Notes, due 2001 70,063 71,000 73,405 75,000
10.25% Subordinated Notes, due 2003 110,234 111,000 111,733 114,000
Commercial Paper 229,500 229,500 --- ---
Preferred Securities of a Subsidiary Trust 200,000 223,000 --- ---
Interest rate risk-management contracts --- 3,470 --- ---
Foreign currency risk-management contracts 892 (375) --- ---
Commodity risk-management contracts (23,167) (25,047) --- 8,285
</TABLE>
The carrying amounts of the Credit Agreement and commercial paper in the
consolidated financial statements were assumed to approximate fair value. The
fair values of the Senior Notes, Senior Subordinated Notes, Subordinated Notes
and Preferred Securities of a Subsidiary Trust were based on quoted market
prices by financial institutions that actively trade these debt securities. The
fair value of the Chevron Note was determined by comparison to publicly traded
instruments having similar terms and conditions. The fair value of the Company's
cost basis
F-13
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investments was not estimated as the investments were considered immaterial. The
fair value of interest rate, foreign currency and commodity risk-management
contracts were based upon the estimated consideration that would be received to
terminate those contracts in a gain position and the estimated cost that would
be incurred to terminate those contracts in a loss position. The interest rate
swap contracts, foreign currency forward exchange contracts and commodity swap
and option agreements extend for periods of up to 5, 3 and 9 years,
respectively. The absolute notional contract amounts associated with the
commodity risk-management, interest rate and forward exchange contracts,
respectively, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
------------------ -------------------- ------------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 2.558 1.535 0.881
Electricity (Megawatt Hours) 2.244 --- ---
Natural Gas Liquids (Million Barrels) 4.355 3.270 2.523
Crude Oil (Million Barrels) 14.920 2.034 0.232
Interest Rate Swaps (in thousands of US Dollars) $180,000 $ --- $ ---
Fixed Interest Rate Paid on Swaps 6.603 --- ---
U.K. Pound Sterling (in thousands of US Dollars) $ 74,638 $ --- $ ---
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.5948 $ --- $ ---
Canadian Dollar (in thousands of US Dollars) $ 37,041 $ --- $ ---
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.7240 $ --- $ ---
</TABLE>
Cash-flow requirements for these commodity risk-management, interest rate
and foreign exchange contracts were estimated based upon market prices in effect
at December 31, 1997. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Beyond
--------- --------- --------- -------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows
based on year end
market prices/rates $9,155 $5,902 $4,085 $1,185 $ 806 $559
====== ====== ====== ====== ===== ====
</TABLE>
NOTE 5 -- CASH FLOW INFORMATION
Detail of supplemental disclosures of cash flow and non-cash investing
and financing information was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- -------------------
($ in thousands)
<S> <C> <C> <C>
Interest paid (net of amount capitalized) $ 60,323 $ 22,647 $ 32,909
========= ========= =========
Taxes paid (net of refunds) $ 8,043 $ 1,467 $ (150)
========= ========= =========
Detail of businesses acquired:
Current assets and other $ 547,505 $ 76,490 $ 87,416
Fair value of non-current assets 503,789 967,575 832,384
Liabilities assumed, including deferred taxes (268,092) (595,219) (572,680)
Capital stock issued and options exercised --- (448,132) (180,220)
Cash balance acquired (67,613) --- (1,633)
--------- --------- ---------
Cash paid, net of cash acquired $ 715,589 $ 714 $ 165,267
========= ========= =========
</TABLE>
In 1995, the Company recognized a one-time tax benefit of $45.7 million,
which occurred in conjunction with the Trident Combination. The deferred income
tax benefit, which can be used to reduce NGC's future income
F-14
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
tax liabilities, resulted from the recognition of the excess tax basis held by
certain Clearinghouse partners. Also in 1995, the Company assumed a liability of
$2.5 million related to the purchase of a crude oil pipeline.
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment by segment and sub-segment
consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996
---- ----
($ IN THOUSANDS)
<S> <C> <C>
Natural gas and power marketing $ 2,588 $ 204
Natural gas liquids, crude oil and gas transmission:
Natural gas processing 1,211,727 1,105,637
Fractionation 152,501 218,158
Liquids marketing 178,820 237,102
Natural gas gathering and transmission 275,116 213,609
Crude oil 44,977 21,220
Power generation 48,866 ---
Other 43,655 23,881
---------- ----------
1,958,250 1,819,811
Less: accumulated depreciation (436,674) (128,432)
---------- ----------
$1,521,576 $1,691,379
========== ==========
</TABLE>
Interest capitalized related to costs of projects in process of development
totaled $8.8 million, $1.2 million and $1.0 million for each of the three years
in the period ended December 31, 1997.
NOTE 7 -- UNCONSOLIDATED AFFILIATES
The equity method of accounting is used for investments in certain
partnerships and for investments in companies in which NGC has a voting interest
between 20 percent and 50 percent. Such investments include:
ACCORD ENERGY LIMITED. Accord was formed in 1994 to market energy
resources in the United Kingdom and Europe. Prior to 1997, NGC owned a 49
percent limited partner interest in Accord. In January 1997, such interest was
converted to a 25 percent participating preferred stock interest.
POWER GENERATION PARTNERSHIPS. As part of the Destec acquisition, NGC
acquired interests in sixteen partnerships, each formed to build, own and
operate cogeneration facilities. The Company's interests in these partnerships
range from eight to 50 percent. Each partnership interest is accounted for under
the equity method. Construction of the cogeneration facilities owned by each of
the partnerships was project financed and the obligations of the partnerships
are non-recourse to the Company. At December 31, 1997, the unamortized excess of
the Company's investment in these partnerships over its equity in the underlying
net assets of the affiliates approximated $165.1 million. This amount is being
amortized on the straight-line method over the estimated economic service lives
of the underlying assets.
GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership that
owns and operates a natural gas liquids fractionation facility located in Mont
Belvieu, Texas. NGC acquired its 38.75 percent limited partner interest in GCF
through the Trident Combination. At December 31, 1997, the unamortized excess of
the Company's investment in GCF over its equity in the underlying net assets of
the affiliate approximated $16.5 million. This amount is being amortized on the
straight-line method over the estimated economic service life of the GCF assets.
WEST TEXAS LPG PIPELINE PARTNERSHIP ("WEST TEXAS PARTNERSHIP"). The West
Texas Partnership, a Texas limited partnership, holds all of the assets
comprising the West Texas Pipeline, an interstate natural gas liquids pipeline.
NGC owns a 49 percent interest in the West Texas Partnership acquired as part of
the Chevron Combination. At December 31, 1997, the unamortized excess of the
Company's investment in the West Texas
F-15
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Partnership over its equity in the underlying net assets of the affiliate
approximated $45.2 million. This amount is being amortized on the straight-line
method over the estimated economic service life of the underlying assets.
Venice Energy Services Company, L.L.C. ("VESCO"). VESCO is a Delaware
limited liability company which owns and operates a natural gas processing,
extraction, fractionation and storage facility located in Plaquemines Parish,
Louisiana. NGC is operator of the facility and originally acquired a 37 percent
interest in Venice Gas Processing Company ("Venice") effective November 1, 1996.
In 1997, Venice reorganized as a limited liability company and, in September
1997, the VESCO members announced they had agreed to expand ownership in VESCO
to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell
Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's
commitment of certain offshore reserves to VESCO. The transaction reduced NGC's
interest in VESCO from 37 percent to approximately 32 percent, as of the
effective date. The VESCO members have entered into a definitive agreement with
Koch Energy Services Company ("Koch") pursuant to which Koch will contribute a
cryogenic gas processing unit to VESCO on NGC's behalf in exchange for
approximately 10 percent of NGC's interest in the limited liability company. The
transaction, which is expected to close in the second quarter of 1998, will
reduce NGC's interest in VESCO to approximately 23 percent. NGC operates the
facility and has commercial responsibility for product distribution and sales.
NICOR ENERGY, L.L.C. ("NICOR"). NICOR is a retail energy alliance formed
with NICOR Energy Management Services, a subsidiary of NICOR Inc., to provide
energy services to industrial, commercial and residential customers in the
midwest. NGC owns a 50 percent interest in this Delaware limited liability
company.
WASKOM GAS PROCESSING COMPANY ("WASKOM"). Waskom is a Texas general
partnership that owns and operates a natural gas processing, extraction and
fractionation facility located in Henderson County, Texas. NGC owns a 33.33
percent in Waskom. NGC operates the facility and has commercial responsibility
for product distribution and sales.
BARGE CO. Barge Co., a Delaware limited liability company, owns pressurized
LPG barges used in transporting LPGS principally in the Gulf of Mexico. NGC
owns a 25 percent interest in Barge Co. at December 31, 1997, the unamortized
excess of the Company's investment in Barge Co. over its equity in the
underlying net assets of the affiliate approximated $10.8 million. This amount
is being amortized on the straight-line method over the estimated economic
service lives of the underlying assets.
QUICKTRADE L.L.C. ("QUICKTRADE"). Quicktrade, a Delaware limited liability
company, was formed to develop, implement and operate an electronic trading
system. During 1997, the Company owned varying interests in Quicktrade and at
December 31, 1997, held a 65.5 percent interest. This limited liability company
is consolidated in the accompanying financial statements at December 31, 1997.
At December 31, 1996, the Company indirectly owned a 26 percent interest in
Quicktrade.
NOVAGAS CLEARINGHOUSE LTD. Pursuant to the April 1997 restructuring of NCL,
NGC sold its partnership interest to NGI, realizing a pretax gain of $7.8
million. Prior to the restructuring, NGC indirectly owned an aggregate 49.9
percent interest in the partnership.
Aggregate equity method investment at December 31, 1997, 1996 and 1995, was
$466.4 million, $177.8 million and $58.7 million, respectively. Dividends
received on these investments during each of the three years in the period ended
December 31, 1997, totaled $63.6 million, $7.3 million and $11.9 million,
respectively. Summarized aggregate financial information for these investments
and NGC's equity share thereof was:
F-16
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------- ------------------------------- ------------------------------
TOTAL EQUITY SHARE TOTAL EQUITY SHARE TOTAL EQUITY SHARE
------------------ ----------------- ----------------- ----------------- ----------- -----------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Current assets (1)(2) $ 283,787 $112,895 $ 93,949 $ 35,321 $ 14,922 $ 5,360
Non-current assets (1)(2) 1,830,106 736,667 324,210 122,882 102,898 37,609
Current liabilities (1)(2) 202,754 86,476 30,459 11,893 25,011 8,714
Non-current liabilities
(1)(2) 1,249,874 521,691 47,250 18,309 62,436 24,120
Operating margin (1)(2)(3) 209,877 86,154 37,296 14,500 14,293 5,539
Net income (1)(2)(3) 83,601 33,799 19,024 7,360 3,539 1,896
</TABLE>
1. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in Accord as disclosure data was
unavailable for the current period. NGC's share of Accord earnings for each
of the three years in the period ended December 31, 1997, totaled $25.9
million, $18.0 million and $11.8 million, respectively.
2. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in NCL as such information was not
comparable period-to-period, as a result of the NCL restructuring. NGC sold
its interest in NCL effective April 1, 1997. NGC's share of NCL's loss for
the three months ended March 31, 1997, totaled $892,000. NGC's share of NCL's
earnings for the years ended December 31, 1996 and 1995, totaled $3.6 million
and $7.3 million, respectively.
3. Equity earnings derived from investments acquired in the Destec acquisition
accrue to NGC commencing July 1, 1997.
The cost method of accounting is generally used to account for investment
in partnerships or companies in which NGC has a voting interest of less than 20
percent. At December 31, 1997, the Company had two cost basis investments:
Indeck North American Power Fund, L.P. and Indeck North American Power Partners,
L.P. (collectively "Indeck"). Indeck is engaged in the acquisition and operation
of electric power generating facilities. NGC's aggregate investment in these
entities totaled $4.0 million and $3.9 million at December 31, 1997 and 1996,
respectively, and NGC received an aggregate $0.5 million, $0.6 million and $0.5
million of dividends from Indeck during each of the three years in the period
ended December 31, 1997.
NOTE 8 -- LONG-TERM DEBT
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
------------- ----------
($ IN THOUSANDS)
<S> <C> <C>
Commercial paper $ 229,500 $ ---
Money market lines of credit --- ---
Credit Agreement 110,000 319,000
6.75% Senior Notes, due 2005 150,000 150,000
7.625% Senior Notes, due 2026 175,000 175,000
Chevron Note 155,373 155,373
14% Senior Subordinated Notes, due 2001 65,000 65,000
10.25% Subordinated Notes, due 2003 105,000 105,000
Other, non-interest bearing 550 825
Unamortized premium 11,906 18,674
---------- --------
1,002,329 988,872
Less: long-term debt due within one year 275 275
---------- --------
$1,002,054 $988,597
========== ========
</TABLE>
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. NGC initiated a
commercial paper program in the fourth quarter of 1997 for amounts up to $600
million, supported by its existing bank credit agreement. Also in the fourth
quarter, the Company established several uncommitted money market bank lines.
The Company utilizes commercial paper proceeds and borrowings under uncommitted
money market bank lines for general corporate purposes, including short-term
working capital requirements. At December 31, 1997, commercial paper outstanding
totaled $229.5
F-17
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million, at a weighted average interest rate of 6.8 percent, and
no amounts were outstanding under the uncommitted money market bank lines. Such
borrowings were classified as long-term debt based upon availability under
committed credit facilities and management's intent to maintain these
obligations for longer than one year, subject to an overall reduction in
corporate debt levels.
CREDIT AGREEMENT. NGC has a $550 million revolving Credit Agreement,
which matures on March 14, 2000, providing for letters of credit and borrowings
for working capital, capital expenditures and general corporate purposes. The
$550 million commitment under the Credit Agreement reduces by $22.5 million each
quarter beginning in June 1998 and continuing through maturity. During 1997, the
Credit Agreement was amended to provide, among other things, for the
establishment of a new two-year $400 million term loan facility. Proceeds from
the term loan facility were used to consummate the Destec acquisition.
Generally, borrowings under the Credit Agreement bear interest at a Eurodollar
rate plus a margin that is determined based on the Company's unsecured senior
debt rating. At December 31, 1997, such margin was 0.3 percent and the average
interest rate applicable to borrowings under the Credit Agreement approximated
7.4 percent. The Credit Agreement contains certain financial covenants that
require the Company to meet specified financial position and performance tests.
At December 31, 1997, letters of credit and borrowings under the Credit
Agreement aggregated approximately $130.9 million (which included $50 million
under the term loan facility). After consideration of the outstanding commercial
paper, the unused borrowing capacity under the revolving credit facility
approximated $240 million.
6.75% SENIOR NOTES DUE 2005. On December 15, 1995, the Company sold $150
million of 6.75% Senior Notes due December 15, 2005 ("Senior Notes"). The Senior
Notes were issued at a price of 99.984 percent, which, after deducting
underwriting discounts and commissions, resulted in net proceeds to the Company
of approximately $149 million. Proceeds from the sale of the Senior Notes were
used to repay a portion of the outstanding indebtedness under the Credit
Agreement. Interest on the Notes is payable semiannually on June 15 and December
15 of each year. Upon issuance, the Senior Notes were priced based on the then
existing yield for 10-year U.S. Treasury Notes ("10-Year Base Treasury Rate")
plus a spread based principally on the Company's credit rating. Prior to
issuing the Senior Notes, the Company entered into two separate transactions
with two separate financial institutions, the effect of which was to lock in the
10-Year Base Treasury Rate at approximately 6.2 percent on the full $150 million
face value of the Senior Notes.
7.625% SENIOR NOTES DUE 2026. In October 1996, NGC sold $175 million of
7.625 percent 30-year Senior Debentures ("Senior Debentures"). The Senior
Debentures were issued at a price of 99.522 percent, which, after deducting
underwriting discounts and commissions, resulted in net proceeds to the Company
of approximately $173 million. The net proceeds from the sale of such Senior
Debentures were used to repay a portion of the outstanding indebtedness under
the Credit Agreement. Interest on the Notes is payable semiannually on April 15
and October 15 of each year. The Senior Debentures are redeemable, at the
option of the Company, in whole or in part from time to time, at a formula based
redemption price as defined in the associated indenture. Upon issuance, the
Senior Debentures were priced based on the then existing yield for 30-year U.S.
Treasury Notes ("30-Year Base Treasury Rate") plus a spread based principally on
the Company's credit rating. Prior to issuing the Senior Debentures, the
Company entered into a transaction, the effect of which was to lock in the 30-
Year Base Treasury Rate at approximately 7.0 percent on $150 million of the $175
million face value of the Senior Debentures.
In February 1998, the Company completed an amendment to the Credit
Agreement and the filing of supplemental indentures to each of the Senior
Debentures and Senior Notes, the effect of which was to eliminate all clauses,
provisions and terms in such documents requiring certain wholly owned
subsidiaries of the Company to fully and unconditionally guarantee, on a joint
and several basis, the obligations of the Company under such credit agreement,
debentures and notes, respectively.
CHEVRON NOTE. The Chevron Note of approximately $155.4 was acquired in the
Chevron Combination and is payable to Chevron upon demand on or after August 31,
1998. The Chevron Note bears interest at 7.95 percent per annum, payable
semiannually in arrears each February and August. An unamortized premium
balance of $1.6 million associated with the Chevron Note is being amortized
using the interest method, resulting in an effective interest rate of 6.4
percent per annum. There are no financial covenants associated with this
indebtedness. Should Chevron choose not to demand payment of the Chevron Note
then principal plus accrued interest is payable in full on
F-18
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 14, 2004. NGC has the right, at any time on or after August 31, 1998, to
prepay in whole or in part the principal and accrued interest outstanding under
the Chevron Note. The Chevron Note was classified as long-term debt at December
31, 1997, based upon availability under committed credit facilities and
management's current intent to call this note on August 31, 1998 and re-finance
the obligation on a long-term basis.
SUBORDINATED DEBT. At December 31, 1997, outstanding indebtedness included
$105 million principal amount of 10.25% Subordinated Notes due 2003 and $65
million principal amount of 14% Senior Subordinated Notes due 2001. Unamortized
premium balances associated with each of these notes are being amortized using
the interest method, resulting in effective interest rates of 8.4 percent and
8.3 percent per annum, respectively.
In February 1998, the Company delivered Notices of Redemption to the
holders of the Subordinated Notes and Senior Subordinated Notes. The Company's
intent is to retire the Senior Subordinated Notes on March 31, 1998, and the
Subordinated Notes on April 15, 1998, pursuant to the redemption provisions
contained in the respective indentures. NGC will fund these redemptions through
a combination of cash on hand, borrowings under existing credit agreements
and/or a public debt issuance. NGC will not incur a financial statement charge
related to these redemptions since the carrying values of the notes were
adjusted at the time of the Trident Combination so that they would equal the
redemption prices on the redemption dates.
LETTER OF CREDIT AGREEMENT. The Letter of Credit Agreement was a $300
million credit facility, which provided for the issuance of letters of credit in
support of the Company's obligation to purchase substantially all of the natural
gas produced or controlled by Chevron in the United States (except Alaska).
Immediately after year-end, the Company replaced the majority of its obligation
under the Letter of Credit Agreement with a surety bond, applied the remaining
obligation under the Letter of Credit Agreement to the letter of credit capacity
under its Credit Agreement and canceled this arrangement. Prior to termination
of this agreement, the Company incurred fees associated with the available
credit capacity and issued and outstanding letters of credit under the credit
facility, respectively. At December 31, 1997, letters of credit outstanding
under the Letter of Credit Agreement totaled $246.0 million.
Aggregate maturities of all long-term indebtedness are: 1998 - $0.3
million; 1999 - $59.5 million; 2000 - $442.5 million; 2001 - $0.0 million; 2002
and beyond - $500.0 million.
NOTE 9 -- INCOME TAXES
The Company is subject to U.S. federal, foreign and state income taxes on
its operations. Components of income tax expense (benefit) were:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995
------------------- ----------------------- ------------------
($ in thousands)
<S> <C> <C> <C>
Current tax expense:
Domestic $ 13,230 $10,427 $ ---
Foreign 3,071 --- ---
Deferred tax expense (benefit):
Domestic (81,306) 45,510 (27,471)
Foreign 2,795 386 ---
-------- ------- --------
Income tax provision (benefit) $(62,210) $56,323 $(27,471)
======== ======= ========
</TABLE>
Included in the above table is a $45.7 million deferred tax benefit in 1995,
resulting from book and tax bases differences associated with the technical
termination of the Clearinghouse partnership resulting from the Trident
Combination. Components of earnings (loss) before income taxes were:
F-19
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- -------------------- --------------
($ in thousands)
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Domestic $(180,127) $150,705 $65,234
Foreign 30,232 18,940 ---
--------- -------- -------
$(149,895) $169,645 $65,234
========= ======== =======
</TABLE>
Deferred income taxes are provided for the temporary differences between
the tax basis of NGC's assets and liabilities and their reported financial
statement amounts. Significant components of deferred tax liabilities and assets
were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Clearinghouse partnership basis differential $ 19,211 $ 9,700
Loss carryforward 76,885 78,456
Tax credits 23,162 13,627
Other 8,499 9,383
-------- --------
127,757 111,166
Valuation allowance --- ---
-------- --------
127,757 111,166
-------- --------
Deferred tax liabilities:
Items associated with capitalized costs 381,816 439,446
-------- --------
Net deferred tax liability $254,059 $328,280
======== ========
</TABLE>
Realization of the aggregate deferred tax asset is dependent on the Company's
ability to generate taxable earnings in the future. No valuation allowance has
been established at December 31, 1997 or 1996, as management believes the
aggregate deferred asset will be fully realized in the future.
Income tax provision (benefit) for the years ended December 31, 1997, 1996 and
1995, was equivalent to effective rates of (41) percent, 33 percent and (42)
percent, respectively. Differences between taxes computed at the U.S. federal
statutory rate and the Company's reported income tax provision (benefit) were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995
--------------------- ----------------------- -------------------
($ in thousands)
<S> <C> <C> <C>
Expected tax at U.S. statutory rate $(52,463) $59,376 $ 22,832
State taxes (3,676) 3,393 1,305
Foreign tax benefit (5,415) (6,621) (3,846)
Clearinghouse partnership basis differential --- --- (45,736)
Partnership income --- --- (2,174)
Other (656) 175 148
-------- ------- --------
Income tax provision (benefit) $(62,210) $56,323 $(27,471)
======== ======= ========
</TABLE>
At December 31, 1997, the Company had approximately $208 million of
regular tax net operating loss carryforwards. The net operating loss
carryforwards expire from 2006 through 2012. Certain provisions of the Internal
Revenue Code place an annual limitation on the Company's ability to utilize tax
carryforwards existing as of the date of the Combination. Management believes
such carryforwards will be fully realized prior to expiration.
F-20
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST
In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a private
transaction, $200 million aggregate liquidation amount of 8.316% Subordinated
Capital Income Securities ("Trust Securities") representing preferred undivided
beneficial interests in the assets of the Trust. The Trust invested the
proceeds from the issuance of the Trust Securities in an equivalent amount of
8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The
sole assets of the Trust are the Subordinated Debentures. The Trust Securities
are subject to mandatory redemption in whole but not in part on June 1, 2027,
upon payment of the Subordinated Debentures at maturity, or in whole but not in
part at any time, contemporaneously with the optional prepayment of the
Subordinated Debentures, as allowed by the associated indenture. The
Subordinated Debentures are redeemable, at the option of the Company, in whole
at any time or in part from time to time, at formula-based redemption prices, as
defined in the indenture. The Subordinated Debentures represent unsecured
obligations of the Company and rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
associated indenture. The Company has irrevocably and unconditionally
guaranteed, on a subordinated basis, payment for the benefit of the holders of
the Trust Securities the obligations of the Trust to the extent the Trust has
funds legally available for distribution to the holders of the Trust Securities,
as described in the indenture ("Guarantee"). Distributions on the Trust
Securities are payable each June 1 and December 1, coinciding with the interest
payment due dates on the Subordinated Debentures, and are classified in the
accompanying Statement of Operations as "minority interest in income of a
subsidiary." The periodic distributions accruing at an annual rate of 8.316
percent of the aggregate liquidation amount are recorded as minority interest in
income of a subsidiary in the Company's consolidated statement of operations. So
long as no Debenture Event of Default, as defined, has occurred and continues,
the Company has the right to defer the payment of interest on the Subordinated
Debentures for any Extension Period elected by the Company, which period cannot
extend beyond 10 consecutive semi-annual periods, end on a date other than an
Interest Payment Date or extend beyond the Stated Maturity Date. During October
1997, the Trust completed an exchange offer through which all of the outstanding
Trust Securities were exchanged by the holders thereof for registered securities
having substantially the same rights and obligations.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
LITIGATION. On April 17, 1997, Pacific Gas and Electric Company ("PG&E")
filed a lawsuit in the Superior Court of the State of California, City and
County of San Francisco, against Destec, Destec Holdings, Inc. ("Holdings"),
Destec Operating Company and San Joaquin CoGen, Inc., wholly owned direct and
indirect subsidiaries of the Company as well as against San Joaquin CoGen
Limited ("San Joaquin" or the "Partnership"), a limited partnership in which the
Company has an indirect twenty-five percent general partner ownership interest.
In the lawsuit, PG&E asserts claims and alleges unspecified damages for fraud,
negligent misrepresentation, unfair business practices, breach of contract and
breach of the implied covenant of good faith and fair dealing. PG&E alleges that
due to the insufficient use of steam by San Joaquin's steam host, the
Partnership did not qualify as a cogenerator pursuant to the California Public
Utilities Code ("CPUC") Section 218.5, and thus was not entitled under CPUC
Section 454.4 to the discount the Partnership received under gas transportation
agreements entered into between PG&E and San Joaquin in 1989, 1991, 1993 and
1995. All of PG&E's claims in this suit arise out of the Partnership's alleged
failure to comply with CPUC Section 218.5. The defendants filed a response to
the suit on May 15, 1997. The parties are actively engaged in discovery, and a
trial has been set by the Court for September 28, 1998. On October 20, 1997,
PG&E named Libbey-Owens-Ford, the Partnership's steam host, as an additional
defendant in the action. On February 23, 1998, PG&E served by mail its Second
Amended Complaint on all defendants. On March 30, 1998, the defendants filed
their response to PG&E's Second Amended Complaint, denying PG&E's allegations
and alleging certain counterclaims against PG&E. The Company's subsidiaries
intend to vigorously defend this action. In the opinion of management, the
ultimate resolution of this lawsuit will not have a material adverse effect on
the Company's financial position or results of operations.
On March 24, 1995, Southern California Gas Company ("SOCAL") filed a
lawsuit in the Superior Court of the State of California for the County of Los
Angeles, against Destec, Destec Holdings and Destec Gas Services, Inc., wholly-
owned direct and indirect subsidiaries of the Company (collectively, the "Destec
Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited
(collectively, the "Partnerships"), limited partnerships in which the Company
has an indirect twenty-five percent general partner interest together with an
indirect 20 percent
F-21
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
limited partner interest and an indirect fifty percent limited partner interest,
respectively. All general partners of the Partnerships are also named
defendants. The lawsuit alleges breach of contract against the Partnerships and
their respective general partners, and interference and conspiracy to interfere
with contracts against the Destec Defendants. The breach of contract claims
arise out of the "transport-or-pay" provisions of the gas transportation service
agreements between the Partnerships and SOCAL. SOCAL has sought damages from the
Partnerships for past damages and anticipatory breach damages in an amount equal
to approximately $31,000,000. On October 24, 1997, the Court granted SOCAL's
Motion for Summary Judgment relating to the breach of contract causes of action
against the Partnerships and their respective general partners, and requested
that SOCAL submit a proposed order consistent with that ruling for the Court's
signature. On November 21, 1997, the Partnerships filed for voluntary Chapter
11 bankruptcy protection in the Eastern District of California. Normal business
operations by the Partnerships will continue throughout the course of these
reorganization proceedings. On January 12, 1998, the Court entered a Final
Order that (a) severs out the Partnerships due to their Chapter 11 bankruptcy
filings, (b) includes a finding of contract liability against the Destec
Defendants, (c) dismisses the tortious interference claims against the Destec
Defendants, and (d) assesses damages in an aggregate amount of approximately
$31,000,000. The liability of the Destec Defendants under the judgment will be
limited to that portion of the damage award not paid to SOCAL by the
partnerships through the Chapter 11 bankruptcy proceedings. On January 12,
1998, the Destec Defendants filed their Notice of Appeal, and posted a security
bond, with the Second Appellate District in Los Angeles based on the lack of
allegations made or proven by SOCAL which support holding those entities liable
in contract. On March 11, 1998, the Partnerships and their respective general
partners filed Notices of Appeal with respect to those findings in the Court's
January 12, 1998, Final Order that were adverse to those defendants. The appeal
process is anticipated to take approximately eighteen months.
The PG&E and SOCAL litigations represent pre-acquisition contingencies
acquired by NGC in the Destec acquisition. Resolution of these lawsuits could
impact the purchase price allocation contained in the accompanying balance sheet
as described in Note 2. In a related matter, Chalk Cliff and San Joaquin have
each guaranteed the obligations of the other partnership, represented by the
project financing loans used to construct the power generation facilities owned
by the respective partnerships. Chalk Cliff and San Joaquin believe there is
little incentive for their lenders to call on this cross-guarantee at this time.
In the opinion of management, the Company's financial position or results of
operations would not be materially adversely affected if the lenders chose to
exercise their option under the terms of such arrangements.
In March 1998, NGC settled all outstanding issues arising under a gas
marketing contract between Apache Corporation and Clearinghouse. A previously
recognized contingency reserve was sufficient to offset the confidential cash
settlement.
The Company assumed liability for various claims and litigation in
connection with the Chevron Combination, the Trident Combination, the Destec
acquisition and in connection with the acquisition of certain gas processing and
gathering facilities from Mesa Operating Limited Partnership. NGC believes,
based on its review of these matters and consultation with outside legal
counsel, that the ultimate resolution of such items will not have a material
adverse effect on the Company's financial position or results of operations.
Further, the Company is subject to various legal proceedings and claims, which
arise in the normal course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse affect on the financial position or results of operations of
the Company.
Changes in federal and state regulatory statutes will likely occur over the
foreseeable future that will impact the Company's businesses. The nature and
impact of such changes on the Company's projects, operations and contracts is
unknown at this time. NGC actively monitors these developments directly and
through industry trade groups to determine such impacts as well as to evaluate
new business opportunities created by restructuring of the electric power
industry. Depending on the outcome of these legislative matters, changes in
legislation could have an adverse effect on current operations or contract
terms.
COMMITMENTS. In October 1997, NGC received $103.5 million from a gas
purchaser as an advance payment for future natural gas deliveries of 16,650
MMBtu per day over a ten-year period commencing November 1, 1997 ("Advance
Agreement"). As a condition of the Advance Agreement, NGC entered into a
natural gas swap with a
F-22
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
third party under which NGC became a fixed-price payor on identical volumes to
those to be delivered under the Advance Agreement at prices based on then
current market rates. The payment will be classified as an advance on the
balance sheet and will be reduced ratably as gas is delivered to the purchaser
under the terms of the Advance Agreement. In addition, the purchaser will pay a
monthly fee to NGC associated with delivered volumes. The Advance Agreement
contains certain non-performance penalties that impact both parties and as a
condition precedent, NGC purchased a surety bond in support of its obligations
under the Advance Agreement.
For a two-year period beginning January 1, 1998, the Company contracted for
1.3 billion cubic feet per day of firm transportation capacity to California on
the El Paso Natural Gas pipeline system. The arrangement has been implemented
but is subject to regulatory approval in a pending proceeding in which
challenges have been filed. Pursuant to this arrangement, NGC is obligated to
pay a minimum of $70 million of reservation charges over the two-year term.
A wholly owned subsidiary of the Company leases certain power generating
assets under agreements that are classified as operating leases. These
agreements have aggregate future minimum lease payments of approximately $435
million at December 31, 1997.
Minimum commitments in connection with office space, equipment, reservation
charges under gas purchase and firm transportation contracts, power generating
and other leased assets were: 1998 - $127.2 million; 1999 - $108.5 million; 2000
- - $218.9 million; 2001 - $224.3 million; and 2002 and beyond - $87.0 million.
Rental payments made under the terms of these arrangements totaled $85.2 million
in 1997, $45.2 million in 1996 and $24.9 million in 1995.
NOTE 12 -- CAPITAL STOCK
The Company has authorized capital stock consisting of 450,000,000 shares,
of which 50,000,000 shares, par value $0.01 per share, are designated preferred
stock and 400,000,000 shares, par value $0.01 per share, are designated common
stock.
PREFERRED STOCK. The Company's preferred stock may be issued from time to
time in one or more series, the shares of each series to have such designations
and powers, preferences, rights, qualifications, limitations and restrictions
thereof as described in the Company's Certificate of Incorporation. In order to
provide for issuance of preferred shares pursuant to the terms of the Chevron
Combination, 8,000,000 shares of preferred stock were designated during 1996 as
NGC Series A Participating Preferred Stock ("Series A Preferred"), of which
7,815,363 shares were issued effective September 1, 1996.
Except as provided by law, the holders of the Series A Preferred have no
voting rights and such shares are not redeemable. At the holders option, each
share of the Series A Preferred may be converted, subject to certain adjustments
and certain defined conditions precedent, into one share of NGC common stock.
Such shares have certain preferences, as defined, in the event of liquidation or
dissolution of NGC over all stock having a junior ranking. Subject to certain
anti-dilutive adjustments, as defined, the holders of the Series A Preferred are
entitled to receive dividends or distributions equal per share in amount and
kind to any dividend or distribution payable on shares of the Company's common
stock, when and as the same are declared by the Company's Board of Directors out
of funds legally available therefor and paid to the holders of the Company's
common stock.
Beginning in the third quarter of 1996, the Company paid quarterly cash
dividends on the Series A Preferred of $0.0125 per share, or $0.05 per share on
an annual basis.
COMMON STOCK. At December 31, 1997, there were 151,796,622 shares of
common stock issued. NGC pays quarterly cash dividends on common stock of
$0.0125 per share, or $0.05 per share on an annual basis.
In May 1997, the Board of Directors approved a stock repurchase program
that allows the Company to repurchase, from time to time, up to 1.6 million
shares of common stock in open market transactions. The timing and number of
shares ultimately repurchased will depend upon market conditions and
consideration of alternative
F-23
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investments. Pursuant to this program, the Company has acquired 654,900 shares
at a total cost of $10.5 million, or $16.04 per share on a weighted average cost
basis, through December 31, 1997.
STOCK WARRANTS. At December 31, 1997, the Company had warrants outstanding
that entitle the holder thereof to purchase an aggregate 6,228 shares of common
stock at an exercise price of $8.13 per share. The warrants expire in October
2003.
STOCK OPTIONS. Each option granted is valued at an option price which
ranges from $2.03 per share to the fair market value per share at date of grant.
The difference between the option price and the fair market value, if any, of
each option on the date of grant is recorded as compensation expense over a
vesting period. Options granted at prices below fair market do not become
exercisable until the fifth anniversary date of the grant, at which time they
become fully exercisable. Options granted at market value vest and become
exercisable ratably over a three-year period. The average exercise price of
vested options at December 31, 1997 was $4.43. Compensation expense related to
options granted totaled $4.0 million, $2.8 million and $1.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, employee stock options aggregating 2.9 million shares
were exercisable at prices ranging from $2.03 to $18.75 per share. Employee
stock option grants made from 1993 to 1997 will become exercisable during 1998
and 1999, respectively, resulting in the potential exercise of approximately 7.7
million options during that two-year period, at exercise prices ranging from
$2.03 to $21.63. Other options currently granted under the Company's option
plans will fully vest periodically and become exercisable through the year 2000
at prices ranging from $2.03 to $21.63. Grants made under the Company's option
plans may be canceled under certain circumstances as provided in the plans.
While the Company cannot predict the timing or the number of shares which may be
issued upon the exercise of option grants by individual employees, the Company
is pursuing a variety of alternatives to help assure an orderly distribution of
shares which may become available to the market. Stock option transactions for
1997, 1996 and 1995 were (shares in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ---------------------------- ----------------------------
SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
---------- ---------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 13,920 $2.03 - 18.75 12,615 $2.03 - $ 9.38 11,918 $2.03 - $ 8.44
Options arising from
Trident Combination --- --- --- --- 1,468 6.40 - 8.64
Granted 2,284 2.03 - 21.63 1,842 2.03 - 18.75 1,645 5.95 - 9.38
Exercised (1,469) 2.03 - 9.38 (737) 2.03 - 9.38 (1,452) 2.13 - 8.64
Canceled or expired (629) 2.03 - 18.75 (313) 2.03 - 9.38 (964) 2.13 - 5.95
Other, contingent share issuance (91) 2.03 - 5.66 513 2.03 - 8.13 --- ---
------ ------------- ------ -------------- ------ --------------
Outstanding at end of period 14,015 $2.03 - 21.63 13,920 $2.03 - $18.75 12,615 $ 2.03 - $9.38
====== ============= ====== ============== ====== ==============
Exercisable at end of period 2,861 $2.03 - 18.75 469 $2.03 - $9.38 272 $ 6.40 - $8.81
====== ============= ====== ============== ====== ==============
Weighted average fair value of
options granted during the period
at market $ 11.14 $ 15.30 $ 18.00
============= ============== ==============
Weighted average fair value of
options granted during the period
at below market $ 14.63 $ 21.38 $ 19.50
============= ============== ==============
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following weighted-
average assumptions used for grants in 1997, 1996 and 1995: dividends per year
of $0.05 per annum for all years; expected volatility of 42.0 percent, 43.3
percent and 43.3 percent, respectively; risk-free interest rate of 6.28 percent,
5.9 percent and 5.9 percent, respectively; and an expected life of 10 years for
all periods. The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Had compensation cost been determined consistent with SFAS
F-24
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the
Company's net income (loss) and per share amounts would have approximated the
following pro forma amounts for the years ended December 31, 1997, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------ ----------------------
LOSS DILUTED DILUTED
NET LOSS PER SHARE NET INCOME EPS NET INCOME EPS
------------ ------------- ------------- --------- -------------- -------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Pro forma amounts (a) $(108,007) $(0.72) $107,580 $0.79 $43,570 $0.39
========= ====== ======== ======= ========== =======
</TABLE>
(a) 1995 pro forma net income excludes the effect of one-time tax benefit with
the Trident Combination. of $45.7 million which occurred in conjunction
with the Trident Combination.
As allowed by the transitional disclosure requirements of SFAS No. 123,
the preceding pro forma net income and pro forma EPS amounts do not include the
impact, if any, of applying the accounting methodology of SFAS No. 123 to
options granted prior to January 1, 1995. As a result, the compensation cost
included in the pro forma net income amounts for each of the three years in the
period ended December 31, 1997, may not be indicative of amounts to be expected
in future periods.
NOTE 13 -- EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS
CORPORATE INCENTIVE PLAN. NGC maintains a discretionary incentive plan to
provide employees competitive and meaningful rewards for reaching corporate and
individual objectives. Specific rewards are at the discretion of the
Compensation Committee of the Board of Directors ("Compensation Committee").
PROFIT SHARING/SAVINGS PLAN. The Company established the NGC Profit
Sharing/401(k) Savings Plan ("Plan"), which meets the requirements of Section
401(k) of the Internal Revenue Code, and is a defined contribution plan subject
to the provisions of the Employee Retirement Income Security Act of 1974. The
Plan and related trust fund are established and maintained for the exclusive
benefit of participating employees in the United States and certain expatriates.
Similar plans are available to other employees resident in foreign countries
subject to the laws of each country. All eligible employees may participate in
the plans and employee contributions are generally matched dollar-for-dollar for
the first 5 percent of compensation, subject to Company performance. Employees
vest in the Company's contributions over various periods. The Company also makes
profit sharing contributions to employees' accounts regardless of their
participation in the Profit Sharing/Savings Plans.
Matching contributions to the Plan and certain discretionary profit
sharing contributions are made in Company common stock, other contributions are
made in cash. During the years ended December 31, 1997, 1996 and 1995, NGC
recognized aggregate costs related to these employee compensation plans of $9.7
million, $5.3 million and $4.4 million, respectively.
PENSION PLAN. Prior to the Trident Combination, Holding had adopted a
noncontributory defined benefit pension plan and such plan remains in existence
at December 31, 1997. The Trident NGL, Inc. Retirement Plan ("Retirement Plan")
is a qualified plan under the Internal Revenue Service regulations, and all
full-time hourly employees of Holding were eligible for participation in the
Retirement Plan. Benefits are based on years of service and final average pay,
as defined in the Retirement Plan document. Contributions to the Retirement Plan
in 1997 and 1996 totaled $497,000 and $1.1 million, respectively, representing
the minimum amount required by federal law and regulation. The Retirement Plan's
funded status and amount recognized in NGC's balance sheet at December 31, 1997
and 1996, were:
F-25
<PAGE>
NCG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996
-------- -------------
($ in thousands)
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5.6 million
in 1997 and $4.8 million in 1996 $ 6,043 $ 5,320
======= =======
Projected benefit obligation $ 9,378 $ 8,908
Plan assets (8,480) (6,031)
------- -------
Projected benefit obligation in excess of plan assets 898 2,877
Unrecognized net gain from past experience different from that assumed 5,025 3,090
------- -------
Pension liability $ 5,923 $ 5,967
======= =======
</TABLE>
Current year pension expense is based on measurements of the projected benefit
obligation and the market related value of the Retirement Plan assets as of the
end of the year. The projected benefit obligation at December 31, 1997, was
based on a discount rate of 7.75 percent and an average long-term rate of
compensation growth of 3.5 percent. The expected long-term rate of return on the
Retirement Plan assets was estimated at 8.0 percent.
The components of net pension expense for the Retirement Plan were:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1997 1996
-------------------------------
($ IN THOUSANDS)
<S> <C> <C>
Service cost benefits earned during period $ 712 $ 660
Interest cost on projected benefit obligation 686 602
Expected return on plan assets (502) (376)
Amortization of unrecognized gain (115) (110)
----- -----
Net periodic pension cost $ 781 $ 776
===== =====
</TABLE>
Note 14 -- RELATED PARTY TRANSACTIONS
The Company is a leading North American marketer of natural gas, natural gas
liquids, crude oil and electric power. NGC is also engaged in natural gas
gathering, processing, fractionation and transportation and electric power
generating activities. The Company has operations in Canada and the United
Kingdom and transports liquid petroleum gas through its international deepwater
LPG business. The Company routinely transacts business directly or indirectly
with three of its significant shareholders, Chevron, NOVA and BG, each of which
owns approximately 26 percent of the outstanding shares of the Company's common
stock. Chevron holds all of the outstanding shares of the Series A Preferred.
Transactions between the Company and Chevron result principally from the
ancillary agreements entered into as part of the Chevron Combination.
Transactions between NGC, NOVA and BG result from purchases and sales of natural
gas, natural gas liquids and crude oil between subsidiaries of NGC and these
companies. It is management's opinion that these transactions are executed at
prevailing market rates. During the years ended December 31, 1997, 1996 and
1995, the Company recognized in its statement of operations aggregate sales to,
and aggregate costs from, these significant shareholders of $788.9 million and
$2.4 billion; $286.7 million and $1.1 billion; and $2.3 million and $152.6
million, respectively.
Effective June 1, 1995, NGC entered into a service agreement with NCL whereby
NGC Futures, Inc. ("NGCF"), a wholly owned subsidiary of NGC, provides NCL and
its affiliates natural gas marketing and risk management services. As a result,
NGC shared disproportionately in NCL's economic returns resulting from the
services provided. For the year ended December 31, 1995, NGC, in addition to its
share of equity in the earnings of NCL, recognized $6.8 million of pretax
earnings related to services rendered NCL by NGCF.
F-26
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 -- SEGMENT INFORMATION
Operating segment information for 1997, 1996 and 1995 is presented below.
<TABLE>
<CAPTION>
NATURAL GAS
NATURAL GAS AND LIQUIDS, CRUDE
ELECTRIC POWER POWER OIL AND GAS CORPORATE
MARKETING GENERATION TRANSMISSION AND ELIMINATION TOTAL
--------------- ------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
1997 Summary Data:
Unaffiliated revenues $8,586,130 $116,973 $4,675,277 $ --- $13,378,380
Intersegment revenues 114,524 --- 438,881 (553,405) ---
---------- -------- ---------- --------- -----------
Total revenues 8,700,654 116,973 5,114,158 (553,405) 13,378,380
---------- -------- ---------- --------- -----------
Operating margin 103,901 18,987 262,406 --- 385,294
Depreciation and
amortization 9,014 5,833 88,252 1,292
Equity in earnings of
unconsolidated affiliates (2,425) 12,780 48,604 ---
Identifiable assets 1,630,655 589,658 2,270,910 25,680 4,516,903
Capital expenditures (1) 31,813 780,897 186,828 5,121 1,004,659
</TABLE>
(1) Amounts include the value assigned assets acquired in the Destec
acquisition, before disposition of non-strategic assets acquired in the
transaction.
<TABLE>
<CAPTION>
NATURAL NATURAL
GAS AND GAS LIQUIDS,
ELECTRIC CRUDE OIL CORPORATE
POWER AND GAS AND
MARKETING TRANSMISSION ELIMINATION TOTAL
------------------ -------------------- -------------------- ------------------
($ in thousands)
<S> <C> <C> <C> <C>
1996 SUMMARY DATA:
Unaffiliated revenues $4,422,838 $2,837,353 $ 11 $7,260,202
Intersegment revenues 80,954 242,297 (323,251) ---
---------- ---------- --------- ----------
Total revenues 4,503,792 3,079,650 (323,240) 7,260,202
---------- ---------- --------- ----------
Operating margin 103,624 265,876 --- 369,500
Depreciation and
amortization 3,667 67,513 496 71,676
Equity in earnings of 28,075
unconsolidated affiliates 20,696 7,379 ---
Identifiable assets 1,512,923 2,656,509 17,378 4,186,810
Capital expenditures (1) 2,860 818,384 6,928 828,172
</TABLE>
(1) Amounts include the value assigned assets acquired in the Chevron
Combination.
F-27
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NATURAL NATURAL
GAS AND GAS LIQUIDS,
ELECTRIC CRUDE OIL CORPORATE
POWER AND GAS AND
MARKETING TRANSMISSION ELIMINATION TOTAL
------------------- -------------------- -------------------- -----------------
($ in thousands)
<S> <C> <C> <C> <C>
1995 SUMMARY DATA:
Unaffiliated revenues $2,423,136 $1,242,810 $ --- $3,665,946
Intersegment revenues 36,629 81,472 (118,101) ---
---------- ---------- --------- ----------
Total revenues 2,459,765 1,324,282 (118,101) 3,665,946
---------- ---------- --------- ----------
Operating margin 63,746 130,914 --- 194,660
Depreciation and
amortization 2,092 42,625 196 44,913
Equity in earnings of
unconsolidated affiliates 19,164 1,896 --- 21,060
Identifiable assets 663,440 1,197,702 14,110 1,875,252
Capital expenditures (1) 5,070 956,110 2,966 964,146
</TABLE>
(1) Amounts include the value assigned assets acquired in the Trident
Combination.
NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the Company's unaudited quarterly financial
information for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1997 1997 1997 1997
------------------ ------------------ ------------------ ------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $3,272,080 $2,684,339 $3,657,456 $3,764,505
Operating margin 67,347 97,767 110,848 109,332
Income (loss) before income taxes 4,429 43,575 37,326 (235,225)
Net income (loss) (1) 4,614 32,128 25,028 (164,255)
Net income (loss) per share (2) 0.03 0.19 0.15 (1.09)
</TABLE>
F-28
<PAGE>
NGC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1996 1996 1996 1996
------------------- ------------------ ------------------ -----------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $1,647,123 $1,163,151 $1,495,482 $2,954,446
Operating margin 90,082 51,995 82,311 145,112
Income before income taxes 46,621 17,224 31,854 73,946
Net income 30,328 13,838 21,452 47,704
Net income per share (2) 0.26 0.12 0.16 0.28
</TABLE>
_______________________
1. Fourth quarter results include the impairment, abandonment and other charges
of $275 million, on a pre-tax basis, and the $14.8 million effect of the
change in accounting principle.
2. Net income (loss) per share amounts have been restated to conform to the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share."
Note 17 -- SUBSEQUENT EVENTS
In January 1998, the Company announced an agreement to sell the Ozark Gas
Transmission System for $55 million, resulting in an estimated pre-tax gain of
approximately $27 million. Closing of the transaction is expected in the third
quarter of 1998, subject to certain conditions, including FERC and other
governmental approvals.
F-29
<PAGE>
Schedule I
NGC CORPORATION
CONDENSED BALANCE SHEETS OF REGISTRANT
(in thousands, except share data)
<TABLE>
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 375 $ ---
Accounts receivable 32 108
Intercompany accounts receivable 177,479 337,876
Prepayments and other assets 4,992 2,793
---------- ----------
182,878 340,777
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 9,590 8,216
Less: accumulated depreciation (3,755) (2,193)
---------- ----------
5,835 6,023
---------- ----------
OTHER ASSETS
Investments in affiliates 1,483,092 1,219,027
Intercompany note receivable 160,000 237,000
Deferred taxes and other assets 77,366 13,262
---------- ----------
$1,909,171 $1,816,089
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Intercompany accounts payable $ 8,289 $ 16,295
Accrued liabilities 16,764 18,914
---------- ----------
25,053 35,209
LONG-TERM DEBT 664,500 644,000
OTHER LIABILITIES 493 20,147
---------- ----------
690,046 699,356
---------- ----------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 ---
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares
authorized: 8,000,000 shares designated as Series A
Participating Preferred Stock, 7,815,363 shares issued and
outstanding at December 31, 1997 and 1996 75,418 75,418
Common stock, $0.01 par value, 400,000,000 shares
authorized: 151,796,622 shares issued at December 31, 1997,
and 149,846,503 shares issued and outstanding at December 31, 1996 1,518 1,498
Additional paid-in capital 919,720 896,432
Retained earnings 32,975 143,385
Less: treasury stock, at cost: 654,900 shares at December 31, 1997 (10,506) ---
---------- ----------
1,019,125 1,116,733
---------- ----------
$1,909,171 $1,816,089
========== ==========
</TABLE>
See Note to Registrant's Financial Statements.
F-30
<PAGE>
SCHEDULE I
NGC CORPORATION
STATEMENTS OF OPERATIONS OF THE REGISTRANT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE TEN MONTH PERIOD FROM INCEPTION (MARCH 1, 1995)
THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Depreciation and amortization $ (1,292) $ (496) $ (196)
Impairment, abandonment and other charges (3,886) --- ---
General and administrative expenses --- --- ---
--------- -------- --------
Operating loss (5,178) (496) (196)
Equity in earnings of affiliates (115,108) 182,159 60,744
Intercompany interest and other income 16,928 17,968 13,570
Interest expense (35,949) (28,071) (18,152)
Minority interest in income of a subsidiary (9,841) --- ---
Other expenses (747) (1,915) (135)
--------- -------- --------
Income (loss) before income taxes (149,895) 169,645 55,831
Income tax provision (benefit) (62,210) 56,323 16,056
--------- -------- --------
Net income (loss) from continuing operations before
cumulative effect of change in accounting (87,685) 113,322 39,775
Cumulative effect of change in accounting principle
(net of income tax benefit of $7,913) (14,800) --- ---
--------- -------- --------
NET INCOME (LOSS) $(102,485) $113,322 $ 39,775
========= ======== ========
</TABLE>
See Note to Registrant's Financial Statements.
F-31
<PAGE>
Schedule I
NGC CORPORATION
STATEMENTS OF CASH FLOWS OF THE REGISTRANT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR THE
TEN MONTH PERIOD FROM INCEPTION (MARCH 1, 1995) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (102,485) $ 113,322 $ 39,775
Items not affecting cash flows from operating activities:
Depreciation and amortization 9,631 1,996 196
Equity in earnings of affiliates, net of cash distributions 115,108 (182,159) (60,744)
Deferred taxes (86,424) 45,896 17,303
Other 12,344 7,466 1,475
Change in assets and liabilities resulting from operating activities:
Accounts receivable 76 (108) ---
Intercompany transactions 636,063 (298,592) (60,398)
Prepayments and other assets (2,749) 2,260 (5,053)
Accrued liabilities 1,529 8,487 2,427
Other, net 2,493 (1,193) 4,150
----------- ----------- ----------
Net cash used in operating activities 585,586 (302,625) (60,869)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,121) (2,055) ---
Acquisitions (785,349) --- (166,900)
Other --- --- (1,333)
----------- ----------- ----------
Net cash used in investing activities (790,470) (2,055) (168,233)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 2,218,500 1,542,000 1,224,039
Repayments of long-term borrowings (2,198,000) (1,231,000) (891,039)
Intercompany advances --- --- (237,000)
Proceeds from sale of capital stock, options and warrants 203,190 858 725
Treasury stock acquisitions (10,506) --- ---
Capital contributions --- --- 135,000
Dividends and other distributions (7,925) (7,184) (2,617)
----------- ----------- ----------
Net cash provided by financing activities 205,259 304,674 229,108
----------- ----------- ----------
Net (decrease) increase in cash and cash equivalents 375 (6) 6
Cash and cash equivalents, beginning of period --- 6 ---
----------- ----------- ----------
Cash and cash equivalents, end of period $ 375 $ --- $ 6
=========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (net of amount capitalized) $ 60,323 $ 22,341 $ 16,339
=========== =========== ==========
Taxes paid (net of refunds) $ 8,043 $ 1,444 $ ---
=========== =========== ==========
Cash dividends paid to parent by consolidated or
unconsolidated subsidiaries $ --- $ --- $ ---
=========== =========== ==========
</TABLE>
See Note to Registrant's Financial Statements.
F-32
<PAGE>
Schedule I
NGC CORPORATION
NOTE TO REGISTRANT'S FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
NGC Corporation ("NGC" or the "Company") is a holding company that
principally conducts all of its business through its subsidiaries. The Company
is the result of a strategic business combination ("Trident Combination")
between Natural Gas Clearinghouse and Trident NGL Holding, Inc. ("Holding"),
under which Holding was renamed NGC Corporation. Pursuant to the terms of the
Trident Combination, Holding was the legally surviving corporation and
Clearinghouse was considered the acquiring company for accounting purposes
resulting in a new historical cost basis for Holding beginning March 1, 1995,
the effective date of the Trident Combination. The accompanying condensed
Registrant Financial Statements were prepared pursuant to rules promulgated by
the Securities and Exchange Commission. In accordance with these rules, the
accompanying statements reflect the financial position, results of operations
and cash flows of NGC, the holding company of NGC Corporation, at December 31,
1997 and 1996, and for the years then ended, and for the ten month period from
the effective date of the Trident Combination through December 31, 1995,
respectively. These statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto of NGC Corporation
incorporated by reference into this Form 10-K.
F-33
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.9
<SEQUENCE>2
<DESCRIPTION>FIRST AMENDMENT TO CREDIT AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 4.9
- --------------------------------------------------------------------------------
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
among
NGC CORPORATION,
as the Borrower,
and
THE FIRST NATIONAL BANK OF CHICAGO,
as the Agent for the Lenders,
and
THE CHASE MANHATTAN BANK
and
NATIONSBANK OF TEXAS, N.A.,
Individually and as Co-Agents for the Lenders,
and
THE LENDERS PARTY THERETO
Dated as of November 24, 1997
- --------------------------------------------------------------------------------
<PAGE>
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of
November 24, 1997, is among NGC Corporation, a Delaware corporation, as Borrower
(the "Borrower"), the Lenders parties thereto, The First National Bank of
Chicago, as Agent, and The Chase Manhattan Bank and NationsBank of Texas, N.A.,
as Co-Agents (the "Co-Agents"). Capitalized terms used herein, unless otherwise
defined, have the meanings assigned to them in the Credit Agreement. The
parties hereto agree as follows:
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co-
Agents have heretofore entered into a certain Amended and Restated Credit
Agreement, dated as of June 27, 1997 (herein called the "Credit Agreement"); and
WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co-
Agents now intend to amend the Credit Agreement in certain respects as
hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Borrower, the Lenders, the Issuers, the Agent and the Co-
Agents hereby agree as follows:
SECTION 1. Amendment to Credit Agreement. (a) Section 2.8 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
"2.8 Optional Principal Payments. The Borrower may from time to time
pay, without penalty or premium (other than amounts payable as provided in
Section 3.4, if any, as a result of such prepayment being made other than
on the last day of a Eurodollar Interest Period with respect to any
Eurodollar Advance as provided in Section 3.4), all outstanding Advances,
or, in a minimum aggregate amount of $5,000,000 or any integral multiple of
$1,000,000 in excess thereof, any portion of the outstanding Advances upon
three Business Days' prior notice (or in the case of outstanding Advances
bearing interest at a Floating Rate, upon notice by 11:00 a.m. on the same
Business Day) to the Agent; provided that a Competitive Bid Advance which
the Borrower indicated was not prepayable in the related Competitive Bid
Quote Request may not be prepaid prior to such last day unless agreed by
the relevant Tranche A Lender."
(b) Section 2.9 of the Credit Agreement is hereby amended by (i) deleting
the time "10:00 a.m." in the eighth line thereof and by inserting the time
"11:00 a.m." in lieu thereof, (ii) by deleting the phrase "at least one Business
Day before" appearing immediately after the term "(Chicago time)"
<PAGE>
in the eighth line thereof and by inserting the word "on" in lieu thereof, and
(iii) by deleting the time "noon" in the second to last sentence thereof and
inserting the time "2:00 p.m." in lieu thereof.
(c) Section 2.10 of the Credit Agreement is hereby amended by deleting the
last sentence and inserting the following sentence in lieu thereof:
"The Borrower shall give the Agent irrevocable notice (a
"Conversion/Continuation Notice") of each conversion of a Tranche A
Advance, a Tranche B Advance or continuation of a Eurodollar Committed
Advance not later than 11:00 a.m. (Chicago time) on the date of the
requested conversion, in the case of a conversion into a Floating Rate
Advance, or not later than 11:00 a.m. (Chicago time) three Business Days
prior to the date of the requested conversion or continuation, in the case
of a conversion into or continuation of a Eurodollar Advance, in each case
specifying:
(i) the requested date which shall be a Business Day, of such
conversion or continuation;
(ii the aggregate amount, whether a Tranche A Advance or a Tranche B
Advance and Type of the Advance which is to be converted or continued; and
(ii the amount and Type(s) of Advance(s) into which such Advance is
to be converted or continued and, in the case of a conversion into or
continuation of a Eurodollar Committed Advance, the duration of the
Interest Period applicable thereto."
SECTION 2. This Amendment (or the portions thereof) shall be deemed to
be an amendment to the Credit Agreement, and the Credit Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Credit Agreement in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Credit Agreement
as amended hereby.
SECTION 3. THIS AMENDMENT SHALL BE A CONTRACT GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF ILLINOIS.
SECTION 4. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument, and
any party hereto may execute this Amendment by signing one or more counterparts.
2
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders, the Issuers, the Agent and
the Co-Agents have executed this Agreement as of the date first above written.
NGC CORPORATION
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as agent
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE CHASE MANHATTAN BANK
individually and as co-agent
By:
---------------------------------
Print Name:
Title:
<PAGE>
NATIONSBANK OF TEXAS, N.A.
individually and as co-agent
By:
---------------------------------
Print Name:
Title:
<PAGE>
ABN AMRO BANK, N.V.
By:
---------------------------------
Print Name:
Title:
By:
---------------------------------
Print Name:
Title:
<PAGE>
BANKBOSTON, N.A.
By:
---------------------------------
Print Name:
Title:
<PAGE>
BANK OF MONTREAL
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE BANK OF NEW YORK
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By:
---------------------------------
Print Name:
Title:
<PAGE>
BANK OF SCOTLAND
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE BANK OF TOKYO-MITSUBISHI, LTD.,
HOUSTON AGENCY
By:
---------------------------------
Print Name:
Title:
<PAGE>
CHRISTIANIA BANK, NEW YORK BRANCH
By:
---------------------------------
Print Name:
Title:
By:
---------------------------------
Print Name:
Title:
<PAGE>
CIBC INC.
By:
---------------------------------
Print Name:
Title:
<PAGE>
CREDIT AGRICOLE INDOSUEZ
By:
---------------------------------
Print Name:
Title:
By:
---------------------------------
Print Name:
Title:
<PAGE>
CITIBANK, N.A.
By:
---------------------------------
Print Name:
Title:
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE FUJI BANK, LIMITED,
HOUSTON AGENCY
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LTD.
By:
---------------------------------
Print Name:
Title:
<PAGE>
LTCB TRUST COMPANY
By:
---------------------------------
Print Name:
Title:
<PAGE>
MELLON BANK, N.A. (WEST)
By:
---------------------------------
Print Name:
Title:
<PAGE>
ROYAL BANK OF CANADA
By:
---------------------------------
Print Name:
Title:
<PAGE>
SOCIETE GENERALE, SOUTHWEST AGENCY
By:
---------------------------------
Print Name:
Title:
<PAGE>
SOUTHWEST BANK OF TEXAS, N.A.
By:
---------------------------------
Print Name:
Title:
<PAGE>
THE TORONTO-DOMINION BANK
By:
---------------------------------
Print Name:
Title:
<PAGE>
WESTDEUTSCHE LANDESBANK
By:
---------------------------------
Print Name:
Title:
By:
---------------------------------
Print Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.10
<SEQUENCE>3
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 4.10
- --------------------------------------------------------------------------------
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
among
NGC CORPORATION,
as the Borrower,
and
THE FIRST NATIONAL BANK OF CHICAGO,
as the Agent for the Lenders,
and
THE CHASE MANHATTAN BANK
and
NATIONSBANK OF TEXAS, N.A.,
Individually and as Co-Agents for the Lenders,
and
THE LENDERS PARTY THERETO
Dated as of February 20, 1998
- --------------------------------------------------------------------------------
<PAGE>
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of
February 20, 1998, is among NGC Corporation, a Delaware corporation, as Borrower
(the "Borrower"), the Lenders parties thereto, The First National Bank of
Chicago, as Agent, and The Chase Manhattan Bank and NationsBank of Texas, N.A.,
as Co-Agents (the "Co-Agents"). Capitalized terms used herein, unless otherwise
defined, have the meanings assigned to them in the Credit Agreement. The
parties hereto agree as follows:
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co-
Agents have heretofore entered into a certain Amended and Restated Credit
Agreement, dated as of June 27, 1997 as amended by that certain First Amendment
to Amended and Restated Credit Agreement, dated as of November 24, 1997 (herein,
as so amended, called the "Credit Agreement"); and
WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co-
Agents now intend to amend the Credit Agreement in certain respects as
hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Borrower, the Lenders, the Issuers, the Agent and the Co-
Agents hereby agree as follows:
SECTION 1. Amendment of Credit Agreement
A. Amendment of Section 1.1.
(i) The term "Additional Guaranty", its definition and all references to
such term are hereby deleted in their entirety.
(ii) The term "Guarantor", its definition and all references to such term
are hereby deleted in their entirety.
(iii) The term "Guarantor Discontinuance Test", its definition and all
references to such term are hereby deleted in their entirety.
(iv) The term "Subsidiary Guaranty", its definition and all references to
such term are hereby deleted in their entirety.
<PAGE>
B. Amendment of Section 6.1.3. Section 6.1.3 of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:
[INTENTIONALLY OMITTED]
C. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:
[INTENTIONALLY OMITTED]
D. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:
[INTENTIONALLY OMITTED]
E. Amendment of Section 8.2 (v). Section 8.2 (v) is hereby amended and
restated in its entirety to read as follows:
[INTENTIONALLY OMITTED]
F. Amendment of Section 12.2.2. Section 12.2.2 is hereby amended by
deleting the words "any Guarantor of any such Loan or Letter of Credit or
releases" appearing in the penultimate line of Section 12.2.2.
G. Amendment of Exhibit "J-1". Exhibit "J-1" to the Credit Agreement
and all references to Exhibit "J-1" in the Credit Agreement are hereby deleted
in their entirety.
SECTION 2. The Borrower, the Administrative Agent and the Lenders each
acknowledge and agree that each of Natural Gas Clearinghouse's, NGC Oil Trading
and Transportation, Inc.'s, NGC Futures, Inc.'s, Electric Clearinghouse, Inc.'s,
Kansas Gas Supply Corporation's, NGC Great Britain, Ltd.'s, NGC Canada Inc.'s,
Warren Energy Resources, Limited Partnership's, Warren Gas Liquids, Inc.'s,
Warren Gas Marketing, Inc.'s, Warren Intrastate Gas Supply, Inc.'s, Warren NGL,
Inc.'s, Warren NGL Pipeline Company's, Warren Petroleum Company, Limited
Partnership's, WPC LP, Inc.'s, WTLPS, Inc.'s and Destec Energy, Inc.'s
Subsidiary Guaranties are hereby released and terminated.
SECTION 3. This Amendment (or the portions thereof) shall be deemed to be
an amendment to the Credit Agreement, and the Credit Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Credit Agreement in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Credit Agreement
as amended hereby.
2
<PAGE>
SECTION 4. THIS AMENDMENT SHALL BE A CONTRACT GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF ILLINOIS.
SECTION 5. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument, and
any party hereto may execute this Amendment by signing one or more counterparts.
IN WITNESS WHEREOF, the Borrower, the Lenders, the Issuers, the Agent and
the Co-Agents have executed this Agreement as of the date first above written.
NGC CORPORATION
By:
----------------------------
Print Name:
Title:
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as agent
By:
--------------------------
Print Name:
Title:
<PAGE>
THE CHASE MANHATTAN BANK
individually and as co-agent
By:
--------------------------
Print Name:
Title:
<PAGE>
NATIONSBANK OF TEXAS, N.A.
individually and as co-agent
By:
--------------------------
Print Name:
Title:
<PAGE>
ABN AMRO BANK, N.V.
By:
--------------------------
Print Name:
Title:
By:
--------------------------
Print Name:
Title:
<PAGE>
BANKBOSTON, N.A.
By:
--------------------------
Print Name:
Title:
<PAGE>
BANK OF MONTREAL
By:
--------------------------
Print Name:
Title:
<PAGE>
THE BANK OF NEW YORK
By:
--------------------------
Print Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By:
--------------------------
Print Name:
Title:
<PAGE>
BANK OF SCOTLAND
By:
--------------------------
Print Name:
Title:
<PAGE>
THE BANK OF TOKYO-MITSUBISHI, LTD.,
HOUSTON AGENCY
By:
--------------------------
Print Name:
Title:
<PAGE>
CHRISTIANIA BANK, NEW YORK BRANCH
By:
--------------------------
Print Name:
Title:
By:
--------------------------
Print Name:
Title:
<PAGE>
CIBC INC.
By:
--------------------------
Print Name:
Title:
<PAGE>
CREDIT AGRICOLE INDOSUEZ
By:
--------------------------
Print Name:
Title:
By:
--------------------------
Print Name:
Title:
<PAGE>
CITIBANK, N.A.
By:
--------------------------
Print Name:
Title:
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By:
--------------------------
Print Name:
Title:
<PAGE>
THE FUJI BANK, LIMITED,
HOUSTON AGENCY
By:
--------------------------
Print Name:
Title:
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LTD.
By:
--------------------------
Print Name:
Title:
<PAGE>
LTCB TRUST COMPANY
By:
--------------------------
Print Name:
Title:
<PAGE>
MELLON BANK, N.A. (WEST)
By:
--------------------------
Print Name:
Title:
<PAGE>
ROYAL BANK OF CANADA
By:
--------------------------
Print Name:
Title:
<PAGE>
SOCIETE GENERALE, SOUTHWEST AGENCY
By:
--------------------------
Print Name:
Title:
<PAGE>
SOUTHWEST BANK OF TEXAS, N.A.
By:
--------------------------
Print Name:
Title:
<PAGE>
THE TORONTO-DOMINION BANK
By:
--------------------------
Print Name:
Title:
<PAGE>
WESTDEUTSCHE LANDESBANK
By:
--------------------------
Print Name:
Title:
By:
--------------------------
Print Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.18
<SEQUENCE>4
<DESCRIPTION>FIFTH SUPPLEMENTAL INDENTURE
<TEXT>
<PAGE>
NGC CORPORATION,
THE SUBSIDIARY GUARANTORS
NAMED HEREIN
AND
THE FIRST NATIONAL BANK OF CHICAGO,
TRUSTEE
_______________
FIFTH SUPPLEMENTAL INDENTURE
Dated as of September 30, 1997
________________
Supplementing and Amending the Indenture
dated as of
December 11, 1995
<PAGE>
THIS FIFTH SUPPLEMENTAL INDENTURE, dated as of September 30, 1997, is among
NGC Corporation, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
1000 Louisiana Street, Suite 5800, Houston, Texas 77002, the Subsidiary
Guarantors parties hereto (the "Subsidiary Guarantors") and The First National
Bank of Chicago, a national banking association, as Trustee (herein called the
"Trustee"). Any capitalized term used in this Third Supplemental Indenture and
not defined herein shall have the meaning specified in the Original Indenture
(as defined below).
RECITALS OF THE COMPANY
The Company and each of the Initial Subsidiary Guarantors heretofore have
made, executed and delivered to the Trustee an Indenture dated as of December
11, 1995 (the "Original Indenture") to provide for the issuance from time to
time of unsecured debentures, notes or other evidences of indebtedness of the
Company (herein called the "Securities"), to be issued in one or more series as
provided in the Original Indenture.
The Company's obligations under the Original Indenture and the Securities
are guaranteed by the Subsidiary Guarantors.
The Company has duly authorized and issued a series of $150,000,000
aggregate principal amount of its 6 3/4% Senior Notes due December 15, 2005 (the
"Notes") as Securities pursuant to the Original Indenture.
Pursuant to a First Supplemental Indenture dated as of August 31, 1996 (the
"First Supplemental Indenture"), (i) Warren Petroleum Company, Limited
Partnership, a Delaware limited partnership ("Warren Petroleum"), (ii) WPC LP,
Inc., a Delaware corporation ("WPC"), and (iii) WTLPS, Inc., a Delaware
corporation ("WTLPS"), each became an Additional Subsidiary Guarantor.
Pursuant to a Second Supplemental Indenture dated as of October 11, 1996
(the "Second Supplemental Indenture"), Electric Clearinghouse, Inc. ("ECI")
became an Additional Subsidiary Guarantor.
Pursuant to a Third Supplemental Indenture dated as of April 23, 1997 (the
"Third Supplemental Indenture"), (i) Warren Petroleum was reclassified as an
Initial Subsidiary Guarantor rather than an Additional Subsidiary Guarantor,
(ii) Warren Energy Resources, Limited Partnership, Warren Gas Marketing, Inc.,
Warren NGL Pipeline Company, Kansas Gas Supply Corporation, Warren Intrastate
Gas Supply, Inc., NGC Great Britain Ltd., NGC Canada, Inc. and NGC Futures, Inc.
were each reclassified as Additional Subsidiary Guarantors rather than Initial
Subsidiary Guarantors and (iii) NGC Storage, Inc., HUB Services, Inc. and NGC
Anadarko Gathering Systems, Inc. were permanently released as guarantors of the
Securities. In addition, the names of certain Subsidiary Guarantors were
changed in the Third Supplemental Indenture.
1
<PAGE>
Pursuant to a Fourth Supplemental Indenture dated as of June 30, 1997 (the
"Fourth Supplemental Indenture"), Destec Energy, Inc. ("Destec") became an
Additional Subsidiary Guarantor.
Section 901(11) of the Original Indenture provides that under certain
conditions, the Company, the Subsidiary Guarantors and the Trustee may, without
the consent of any Holders of Securities, from time to time and at any time,
enter into an indenture or indentures supplemental thereto, for the purpose of
releasing an Additional Subsidiary Guarantor from its Subsidiary Guarantee
pursuant to Section 1506 of the Original Indenture, as supplemented and amended.
The Original Indenture, as so supplemented and amended by the First
Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture, the Fourth Supplemental Indenture, and this Fifth
Supplemental Indenture, being sometimes referred to herein as the "Indenture".
It is deemed necessary and desirable to supplement and amend the Original
Indenture in accordance with Section 901 of the Indenture to permanently release
NGC Futures, Inc.; Electric Clearinghouse, Inc.; Kansas Gas Supply Corporation;
NGC Great Britain Ltd.; NGC Canada, Inc.; Warren Gas Marketing, Inc.; Warren
Intrastate Gas Supply, Inc.; Warren NGL Pipeline Company; WPC LP, Inc.; and
WTLPS, Inc. as guarantors of the Securities.
The Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, stating that this Fifth Supplemental Indenture has been duly
authorized and executed by the Company and the Subsidiary Guarantors.
All things necessary to make this Fifth Supplemental Indenture and the
Original Indenture a valid agreement of the Company and each of the Subsidiary
Guarantors, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
(together with the related Subsidiary Guarantees) by the Holders thereof, it is
mutually agreed, for the equal and proportionate benefit of all Holders of the
Securities or of a series thereof (together with the related Subsidiary
Guarantees), as follows:
ARTICLE ONE
MODIFICATION OF THE INDENTURE
Section 1.1. Amendment to Section 205 of the Indenture. The signature
block containing the names of the Subsidiary Guarantors at the end of Section
205 is hereby amended in its entirety to read as follows:
2
<PAGE>
NATURAL GAS CLEARINGHOUSE
By: Clearinghouse Holdings, Inc., its general partner
WARREN NGL, INC.
WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP
By: Warren Energy, Inc., its general partner
WARREN GAS LIQUIDS, INC.
NGC OIL TRADING AND TRANSPORTATION, INC.
WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP
By: Warren Petroleum GP, Inc., its general partner
DESTEC ENERGY, INC.
By _____________________________
ARTICLE TWO
ADDITIONAL REPRESENTATIONS
AND COVENANTS OF THE COMPANY
AND THE SUBSIDIARY GUARANTORS
SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and warrants
that it is duly authorized by a resolution of the Board of Directors to execute
and deliver this Fifth Supplemental Indenture, and all corporate action on its
part required for the execution and delivery of this Fifth Supplemental
Indenture has been duly and effectively taken.
SECTION 2.2 AUTHORITY OF SUBSIDIARY GUARANTORS. Each of the Subsidiary
Guarantors represents and warrants that it is duly authorized by a resolution of
its respective Board of Directors to execute and deliver this Fifth Supplemental
Indenture, and all corporate action on the part of each required for the
execution and delivery of this Fifth Supplemental Indenture has been duly and
effectively taken.
SECTION 2.3 RECITALS AND STATEMENTS. The Company warrants that the
recitals of fact and statements contained in this Fifth Supplemental Indenture
are true and correct, and that the recitals of fact and statements contained in
all certificates and other documents furnished hereunder will be true and
correct.
ARTICLE THREE
CONCERNING THE TRUSTEE
SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust hereunder
and agrees to perform the same, but only upon the terms and conditions set forth
in the Indenture, to all of which the Company, Subsidiary Guarantors and the
respective Holders of Securities at any time hereafter outstanding agree by
their acceptance thereof.
3
<PAGE>
SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals and
statements contained in this Fifth Supplemental Indenture shall be taken as the
recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Fifth Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Fifth Supplemental Indenture.
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Fifth
Supplemental Indenture shall be deemed to be effective immediately upon the
execution and delivery hereof. This Fifth Supplemental Indenture and all the
terms and provisions herein contained shall form a part of the Indenture as
fully and with the same effect as if all such terms and provisions had been set
forth in the Original Indenture. The Original Indenture is hereby ratified and
confirmed and shall remain and continue in full force and effect in accordance
with the terms and provision thereof, as supplemented and amended by the First
Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture, the Fourth Supplemental Indenture and this Fifth
Supplemental Indenture. The Original Indenture as so supplemented shall be
read, taken and construed together as one instrument.
SECTION 4.2 COUNTERPARTS OF FIFTH SUPPLEMENTAL INDENTURE. This Fifth
Supplemental Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
SECTION 4.3 GOVERNING LAW. This Fifth Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York,
without regard to principles of conflicts of laws.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental
Indenture to be duly executed, all as of the day and year first above written.
COMPANY
NGC CORPORATION
By:
Robert D. Doty, Jr.
Vice President and Treasurer
SUBSIDIARY GUARANTORS
NATURAL GAS CLEARINGHOUSE
By: Clearinghouse Holdings, Inc., its general
partner
WARREN NGL, INC.
WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP
By: Warren Energy, Inc., its general partner
WARREN GAS LIQUIDS, INC.
NGC OIL TRADING AND TRANSPORTATION, INC.
WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP
By: Warren Petroleum G.P., Inc., its general
partner
DESTEC ENERGY, INC.
By: _____________________________
Robert D. Doty, Jr.
Vice President and Treasurer
5
<PAGE>
TRUSTEE
THE FIRST NATIONAL BANK OF CHICAGO
By
Name:
Title:
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.19
<SEQUENCE>5
<DESCRIPTION>SIXTH SUPPLEMENTAL INDENTURE
<TEXT>
<PAGE>
EXHIBIT 4.19
- --------------------------------------------------------------------------------
NGC CORPORATION,
THE SUBSIDIARY GUARANTORS
NAMED HEREIN
AND
THE FIRST NATIONAL BANK OF CHICAGO,
TRUSTEE
_______________
SIXTH SUPPLEMENTAL INDENTURE
Dated as of January 5, 1998
________________
Supplementing and Amending the Indenture
dated as of
December 11, 1995
<PAGE>
THIS SIXTH SUPPLEMENTAL INDENTURE, dated as of January 5, 1998, is among
NGC Corporation, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
1000 Louisiana Street, Suite 5800, Houston, Texas 77002, the Subsidiary
Guarantors parties hereto (the "Subsidiary Guarantors") and The First National
Bank of Chicago, a national banking association, as Trustee (herein called the
"Trustee"). Any capitalized term used in this Sixth Supplemental Indenture and
not defined herein shall have the meaning specified in the Original Indenture
(as defined below).
RECITALS OF THE COMPANY
The Company and each of the Initial Subsidiary Guarantors heretofore have
made, executed and delivered to the Trustee an Indenture dated as of December
11, 1995 (the "Original Indenture") to provide for the issuance from time to
time of unsecured debentures, notes or other evidences of indebtedness of the
Company (herein called the "Securities"), to be issued in one or more series as
provided in the Original Indenture.
The Company's obligations under the Original Indenture and the Securities
are guaranteed by the Subsidiary Guarantors.
The Company has duly authorized and issued a series of $150,000,000
aggregate principal amount of its 6 3/4% Senior Notes due December 15, 2005 (the
"Notes") as Securities pursuant to the Original Indenture.
Pursuant to a First Supplemental Indenture dated as of August 31, 1996 (the
"First Supplemental Indenture"), (i) Warren Petroleum Company, Limited
Partnership, a Delaware limited partnership ("Warren Petroleum"), (ii) WPC LP,
Inc., a Delaware corporation ("WPC"), and (iii) WTLPS, Inc., a Delaware
corporation ("WTLPS"), each became an Additional Subsidiary Guarantor.
Pursuant to a Second Supplemental Indenture dated as of October 11, 1996
(the "Second Supplemental Indenture"), Electric Clearinghouse, Inc. ("ECI")
became an Additional Subsidiary Guarantor.
Pursuant to a Third Supplemental Indenture dated as of April 23, 1997 (the
"Third Supplemental Indenture"), (i) Warren Petroleum was reclassified as an
Initial Subsidiary Guarantor rather than an Additional Subsidiary Guarantor,
(ii) Warren Energy Resources, Limited Partnership, Warren Gas Marketing, Inc.,
Warren NGL Pipeline Company, Kansas Gas Supply Corporation, Warren Intrastate
Gas Supply, Inc., NGC Great Britain Ltd., NGC Canada, Inc. and NGC Futures, Inc.
were each reclassified as Additional Subsidiary Guarantors rather than Initial
Subsidiary Guarantors and (iii) NGC Storage, Inc., HUB Services, Inc. and NGC
Anadarko Gathering Systems, Inc. were permanently released as Subsidiary
Guarantors of the Securities. In addition, the names of certain Subsidiary
Guarantors were changed in the Third Supplemental Indenture.
Pursuant to a Fourth Supplemental Indenture dated as of June 30, 1997 (the
"Fourth Supplemental Indenture"), Destec Energy, Inc. ("Destec") became an
Additional Subsidiary Guarantor.
1
<PAGE>
Pursuant to a Fifth Supplemental Indenture dated as of September 30, 1997
(the "Fifth Supplemental Indenture"), NGC Futures, Inc.; Electric Clearinghouse,
Inc.; Kansas Gas Supply Corporation; NGC Great Britain Ltd.; NGC Canada, Inc.;
Warren Gas Marketing, Inc.; Warren Intrastate Gas Supply, Inc.; Warren NGL
Pipeline Company; WPC LP, Inc.; and WTLPS, Inc. were permanently released as
Subsidiary Guarantors of the Securities.
Section 902 of the Original Indenture provides that under certain
conditions, the Company, the Subsidiary Guarantors and the Trustee, may, with
the consent of the Holders of a majority in principal amount of the Outstanding
Securities, by Act of said Holders, from time to time enter into an indenture
supplemental thereto, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Original Indenture or of
modifying in any manner the rights of the Holders of Securities.
It is deemed necessary and desirable to supplement and amend the Original
Indenture in accordance with Section 902 of the Original Indenture to (i)
reclassify all of the Initial Subsidiary Guarantors as Additional Subsidiary
Guarantors, (ii) delete all references and provisions relating to Initial
Subsidiary Guarantors and (iii) permit the deletion of all references and
provisions relating to Subsidiary Guarantees and Subsidiary Guarantors in the
event that all Additional Subsidiary Guarantors are permanently released under
the Indenture.
The approval of the substance of this Sixth Supplemental Indenture by the
Holders of at least a majority in principal amount of the Outstanding Notes has
been embodied in and evidenced by that certain Consent Letter relating to the
Consent Solicitation Statement dated December 4, 1997 issued by the Company
relating to the Notes.
The Original Indenture, as so supplemented and amended by the First
Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture, the Fourth Supplemental Indenture, the Fifth
Supplemental Indenture and this Sixth Supplemental Indenture, being sometimes
referred to herein as the "Indenture".
The Company has delivered to the Trustee an Opinion of Counsel stating that
the execution by the Company and the Subsidiary Guarantors of this Sixth
Supplemental Indenture is authorized and permitted by the Indenture and that
this Sixth Supplemental Indenture has been duly authorized and executed by the
Company and the Subsidiary Guarantors.
All things necessary to make this Sixth Supplemental Indenture and the
Original Indenture a valid agreement of the Company and each of the Subsidiary
Guarantors, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
(together with the related Subsidiary Guarantees) by the Holders thereof, it is
mutually agreed, for the equal and proportionate benefit of all Holders of the
Securities or of a series thereof (together with the related Subsidiary
Guarantees), as follows:
2
<PAGE>
ARTICLE ONE
MODIFICATION OF THE INDENTURE
SECTION 1.1. AMENDMENTS TO SECTION 101 OF THE INDENTURE.
(a) The definition of "Additional Subsidiary Guarantors" is hereby amended
to read in its entirety as follows:
"Additional Subsidiary Guarantors" means (i) Clearinghouse,
Warren NGL, Warren Energy Resources, Warren Liquids, NGC Oil Trading,
Warren Petroleum and Destec and (ii) any Subsidiary (direct or
indirect) of the Company that delivers a Subsidiary Guarantee pursuant
to Section 1505 hereof, and each of their respective successors and
assigns.
(b) The definition of "Destec" is hereby added to Section 101 to read in
its entirety as follows:
"Destec" means Destec Energy, Inc., a Delaware corporation.
(c) The definition of "Initial Subsidiary Guarantors" is hereby deleted in
its entirety from Section 101 of the Indenture.
(d) The definition of "Subsidiary Guarantor" is hereby amended to read in
its entirety as follows:
"Subsidiary Guarantor" means each Additional Subsidiary
Guarantor, if any, but excluding any Subsidiary of the Company
released from its Subsidiary Guarantee pursuant to Section 805 or
Section 1505 (unless such Subsidiary becomes an Additional Subsidiary
Guarantor pursuant to Section 1505 subsequent to such release).
SECTION 1.2. AMENDMENTS TO SECTION 901 OF THE INDENTURE. A new clause
(13) is hereby added to Section 901 of the Indenture. The word "or" at the end
of clause (11) of Section 901 of the Indenture is hereby deleted. The period at
the end of clause (12) of Section 901 of the Indenture is hereby deleted and
replaced with a semi-colon and the word "or." The new clause (13) shall read in
its entirety as follows:
(13) to permanently remove any definitions, references,
provisions or sections relating to Subsidiary Guarantors or Subsidiary
Guarantees at any time that all Additional Subsidiary Guarantors are
or have been released pursuant to Section 1506 hereof.
3
<PAGE>
ARTICLE TWO
ADDITIONAL REPRESENTATIONS
AND COVENANTS OF THE COMPANY
AND THE SUBSIDIARY GUARANTORS
SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and
warrants that it is duly authorized by a resolution of the Board of Directors to
execute and deliver this Sixth Supplemental Indenture, and all corporate action
on its part required for the execution and delivery of this Sixth Supplemental
Indenture has been duly and effectively taken.
SECTION 2.2 AUTHORITY OF SUBSIDIARY GUARANTORS. Each of the Subsidiary
Guarantors represents and warrants that it is duly authorized by a resolution of
its respective Board of Directors to execute and deliver this Sixth Supplemental
Indenture, and all corporate action on the part of each required for the
execution and delivery of this Sixth Supplemental Indenture has been duly and
effectively taken.
SECTION 2.3 RECITALS AND STATEMENTS. The Company warrants that the
recitals of fact and statements contained in this Sixth Supplemental Indenture
are true and correct, and that the recitals of fact and statements contained in
all certificates and other documents furnished hereunder will be true and
correct.
ARTICLE THREE
CONCERNING THE TRUSTEE
SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust
hereunder and agrees to perform the same, but only upon the terms and conditions
set forth in the Indenture, to all of which the Company, the Subsidiary
Guarantors and the respective Holders of Securities at any time hereafter
outstanding agree by their acceptance thereof.
SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals
and statements contained in this Sixth Supplemental Indenture shall be taken as
the recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Sixth Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Sixth Supplemental Indenture.
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Sixth
Supplemental Indenture shall become effective immediately upon the execution and
delivery hereof. This Sixth Supplemental Indenture and all the terms and
provisions herein contained shall form a part of the
4
<PAGE>
Indenture as fully and with the same effect as if all such terms and provisions
had been set forth in the Original Indenture. The Original Indenture is hereby
ratified and confirmed and shall remain and continue in full force and effect in
accordance with the terms and provision thereof, as supplemented and amended by
the First Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture, the Fourth Supplemental Indenture, the Fifth
Supplemental Indenture and this Sixth Supplemental Indenture. The Original
Indenture as so supplemented shall be read, taken and construed together as one
instrument.
SECTION 4.2 COUNTERPARTS OF SIXTH SUPPLEMENTAL INDENTURE. This Sixth
Supplemental Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
SECTION 4.3 GOVERNING LAW. This Sixth Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York,
without regard to principles of conflicts of laws.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Sixth Supplemental
Indenture to be duly executed, all as of the day and year first above written.
COMPANY
NGC CORPORATION
By:
----------------------------------
Robert D. Doty, Jr.
Vice President and Treasurer
SUBSIDIARY GUARANTORS
NATURAL GAS CLEARINGHOUSE
By: Clearinghouse Holdings, Inc., its general partner
WARREN NGL, INC.
WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP
By: Warren Energy, Inc., its general partner
WARREN GAS LIQUIDS, INC.
NGC OIL TRADING AND TRANSPORTATION, INC.
WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP
By: Warren Petroleum G.P., Inc., its general partner
DESTEC ENERGY, INC.
By:
-----------------------------------
Robert D. Doty, Jr.
Vice President and Treasurer
6
<PAGE>
TRUSTEE
THE FIRST NATIONAL BANK OF CHICAGO
By
--------------------------------
Name:
Title:
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.20
<SEQUENCE>6
<DESCRIPTION>SEVENTH SUPPLEMENTAL INDENTURE
<TEXT>
<PAGE>
Exhibit 4.20
______________________________________________________________________
NGC CORPORATION,
AND
THE FIRST NATIONAL BANK OF CHICAGO,
TRUSTEE
_______________
SEVENTH SUPPLEMENTAL INDENTURE
Dated as of February 20, 1998
________________
Supplementing and Amending the Indenture
dated as of
December 11, 1995
______________________________________________________________________
<PAGE>
THIS SEVENTH SUPPLEMENTAL INDENTURE (the "Seventh Supplemental Indenture"),
dated as of February 20, 1998, is among NGC Corporation, a corporation duly
organized and existing under the laws of the State of Delaware (herein called
the "Company"), having its principal office at 1000 Louisiana Street, Suite
5800, Houston, Texas 77002, and The First National Bank of Chicago, a national
banking association, as Trustee (herein called the "Trustee"). Any capitalized
term used in this Seventh Supplemental Indenture and not defined herein shall
have the meaning specified in the Indenture (as defined below).
RECITALS OF THE COMPANY
The Company and each of the initial Subsidiary Guarantors heretofore have
made, executed and delivered to the Trustee an Indenture dated as of December
11, 1995 (the "Original Indenture") to provide for the issuance from time to
time of unsecured debentures, notes or other evidences of indebtedness of the
Company (herein called the "Securities"), to be issued in one or more series as
provided in the Original Indenture.
The Company's obligations under the Original Indenture and the Securities
have been guaranteed by the Subsidiary Guarantors.
The Company has duly authorized and issued a series of $150,000,000
aggregate principal amount of its 6 3/4% Senior Notes due December 15, 2005 as
Securities pursuant to the Original Indenture.
The Original Indenture, as supplemented and amended by the First
Supplemental Indenture dated as of August 31, 1996 (the "First Supplemental
Indenture"), the Second Supplemental Indenture dated as of October 11, 1996 (the
"Second Supplemental Indenture"), the Third Supplemental Indenture dated as of
April 23, 1997 (the "Third Supplemental Indenture"), the Fourth Supplemental
Indenture dated as of June 30, 1997 (the "Fourth Supplemental Indenture"), the
Fifth Supplemental Indenture dated as of September 30, 1997 (the "Fifth
Supplemental Indenture"), the Sixth Supplemental Indenture dated as of January
5, 1998 (the "Sixth Supplemental Indenture") and this Seventh Supplemental
Indenture, being sometimes referred to herein as the "Indenture".
Section 901(13) of the Indenture provides that under certain conditions the
Company and the Trustee may, without the consent of any Holders of Securities,
from time to time and at any time, enter into an indenture or indentures
supplemental thereto, for the purpose of permanently removing any definitions,
references, provisions or sections relating to Subsidiary Guarantors or
Subsidiary Guarantees at any time that all Additional Subsidiary Guarantors have
been released pursuant to Section 1506 of the Indenture.
The Company has determined that each of the Additional Subsidiary
Guarantors has satisfied the conditions to release set forth in Section 1506 of
the Indenture.
Therefor, the Company has deemed it necessary and desirable to supplement
and amend the Indenture in accordance with Section 901(13) of the Indenture to
(i) permanently release all of the Subsidiary Guarantors and (ii) permanently
delete all definitions, references, provisions and sections of the Indenture
relating to Subsidiary Guarantors and Subsidiary Guarantees.
1
<PAGE>
In addition, Section 901(9) of the Indenture provides that under certain
conditions the Company and the Trustee may, without the consent of any Holders
of Securities, from time to time and at any time, enter into an indenture or
indentures supplemental thereto, for the purpose, inter alia, of making certain
provisions with respect to matters arising under the Indenture; provided that
such action shall not adversely affect the interests of the Holders in any
material respect.
The Company has deemed it necessary and desirable to supplement and amend
the Indenture in accordance with Section 901(9) to amend the definition of
"Indenture" set forth in the Indenture to include restatements of the Indenture
that cumulate the terms of supplemental indentures entered into pursuant to the
Indenture.
The Company has delivered to the Trustee (i) an Opinion of Counsel stating
that the execution by the Company of this Seventh Supplemental Indenture is
authorized and permitted by the Indenture and that this Seventh Supplemental
Indenture has been duly authorized and executed by the Company and (ii) an
Officers' Certificate to the effect that each Additional Subsidiary Guarantor
has satisfied the conditions to release set forth in Section 1506 of the
Indenture.
All things necessary to make this Seventh Supplemental Indenture and the
Indenture a valid agreement of the Company, in accordance with its terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
by the Holders thereof, it is mutually agreed, for the equal and proportionate
benefit of all Holders of the Securities or of a series thereof, as follows:
ARTICLE ONE
MODIFICATION OF THE INDENTURE
SECTION 1.1. AMENDMENTS TO SECTION 101 OF THE INDENTURE.
(a) The following definitions are hereby deleted in their entirety from
Section 101 of the Indenture:
"Additional Subsidiary Guarantors"
"Adjusted Net Assets"
"Clearinghouse"
"Destec"
"ECI"
"HUB Services, Inc."
"Kansas Gas"
"NGC Anadarko Gathering Systems, Inc."
"NGC Canada"
"NGC Futures"
"NGC GB"
"NGC Oil Trading"
2
<PAGE>
"NGC Storage, Inc."
"Subsidiary Guarantee"
"Subsidiary Guarantor"
"Warren Energy Resources"
"Warren Liquids"
"Warren Marketing"
"Warren NGL"
"Warren Petroleum"
"Warren Pipeline"
"WIGS"
"WPC"
"WTLPS"
(b) The definition of "Indenture" is hereby amended to read in its entirety
as follows:
"Indenture" means this instrument as originally executed or as it
may from time to time be (i) supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof or (ii) restated to cumulate the terms of such
supplemental indentures, and shall include the terms of a particular
series of Securities established as contemplated by Section 301 and
the provisions of the Trust Indenture Act that are deemed to be a part
of and govern this instrument.
(c) The definition of "Officers' Certificate" is hereby amended by deleting
the phrase "or a Subsidiary Guarantor, as the case may be,".
(d) The definition of "Outstanding" is hereby amended by deleting the
phrase ", any Subsidiary Guarantor" in each place where it appears.
SECTION 1.2. AMENDMENTS TO SECTION 102 OF THE INDENTURE. The first
paragraph of Section 102 of the Indenture is hereby amended in its entirety to
read as follows:
"Upon any application or request by the Company to the Trustee to
take any action under any provision of this Indenture, the Company
shall furnish to the Trustee such certificates and opinions as may be
required under the Trust Indenture Act. Each such certificate or
opinion shall be given in the form of an Officers' Certificate, if to
be given by an officer of the Company, or an Opinion of Counsel, if to
be given by counsel, and shall comply with the requirements of the
Trust Indenture Act and any other requirements set forth in this
Indenture."
SECTION 1.3. AMENDMENTS TO SECTION 110 OF THE INDENTURE. Section 110
of the Indenture is hereby amended in its entirety to read as follows:
3
<PAGE>
"All covenants and agreements in this Indenture by the Company
shall bind its successors and assigns, whether so expressed or not."
SECTION 1.4. AMENDMENTS TO SECTION 113 OF THE INDENTURE. Section 113
of the Indenture is hereby amended by deleting the phrase ", the Subsidiary
Guarantees".
SECTION 1.5. AMENDMENTS TO SECTION 201 OF THE INDENTURE. The first
paragraph of Section 201 of the Indenture is hereby amended by deleting the
phrase "(including the notations thereon relating to the Subsidiary Guarantees
contemplated by Section 205)". The third paragraph of Section 201 of the
Indenture is hereby amended in its entirety to read as follows:
"The definitive Securities and coupons, if any, shall be printed,
lithographed or engraved on steel engraved borders or may be produced
in any other manner, all as determined by the officers executing such
Securities as evidenced by their execution of such Securities or
coupons."
SECTION 1.6. AMENDMENTS TO SECTION 205 OF THE INDENTURE. Section 205
of the Indenture is hereby deleted in its entirety.
SECTION 1.7. AMENDMENTS TO SECTION 303 OF THE INDENTURE. The third
paragraph of Section 303 of the Indenture is hereby amended by deleting the
phrase "and having the notation of Subsidiary Guarantees thereon executed by the
Subsidiary Guarantors,". Clause (a) of Section 303 of the Indenture is hereby
amended by deleting the phrase ", including its requirements for notations
thereon relating to the Subsidiary Guarantees". Clause (c) of Section 303 of
the Indenture is hereby amended by deleting the phrase "and the Subsidiary
Guarantors".
SECTION 1.8. AMENDMENTS TO SECTION 304 OF THE INDENTURE. The first
paragraph and the second paragraph of Section 304 of the Indenture are hereby
amended by deleting the phrase "and having the notations of Subsidiary
Guarantees thereon" and by deleting the phrase "and notations of Subsidiary
Guarantees" in each place where such phrases appear. The fourth paragraph of
Section 304 of the Indenture is hereby amended by deleting the phrase
"(including the notations thereon relating to the Subsidiary Guarantees
contemplated by section 205)".
SECTION 1.9. AMENDMENTS TO SECTION 305 OF THE INDENTURE. The second
paragraph of Section 305 of the Indenture is hereby amended by deleting the
phrase ", each such Security having a notation of Subsidiary Guarantees
thereon". The third, fifth and sixth paragraphs of Section 305 of the Indenture
are hereby amended by deleting the phrase "(including the notations thereon
relating to the Subsidiary Guaranties contemplated by Section 205)" and the
phrase "(including the notations thereon relating to the Subsidiary Guarantees
contemplated by Section 205)". The seventh paragraph of Section 305 of the
Indenture is hereby amended (i) by deleting the phrase "and the Subsidiary
Guarantees noted thereon" and (ii) by deleting the phrase "and the Subsidiary
Guarantors, respectively,".
SECTION 1.10. AMENDMENTS TO SECTION 306 OF THE INDENTURE. The first
paragraph of Section 306 of the Indenture is hereby amended by deleting the
phrase "(including the notations
4
<PAGE>
thereon relating to the Subsidiary Guarantees contemplated by Section 205)". The
fifth paragraph of Section 306 of the Indenture is hereby amended by deleting
the phrase "and the respective Subsidiary Guarantors".
SECTION 1.11. AMENDMENTS TO SECTION 308 OF THE INDENTURE. The first
paragraph of Section 308 of the Indenture is hereby amended by deleting the
phrase ", the Subsidiary Guarantors" in each place where such phrase appears.
SECTION 1.12. AMENDMENTS TO SECTION 501 OF THE INDENTURE. Clause (4) of
Section 501 of the Indenture is hereby amended in its entirety to read as
follows:
"(4) INTENTIONALLY OMITTED;"
Clauses (5), (6) and (7) of Section 501 of the Indenture are hereby amended by
deleting the phrase "or any Subsidiary Guarantor" in each place where such
phrase appears.
SECTION 1.13. AMENDMENTS TO SECTION 502 OF THE INDENTURE. Clause (1) of
Section 502 of the Indenture is hereby amended by deleting the phrase "or any
Subsidiary Guarantor".
SECTION 1.14. AMENDMENTS TO SECTION 503 OF THE INDENTURE. Section 503
of the Indenture is hereby amended by deleting the phrase ", any Subsidiary
Guarantor" in each place where such phrase appears.
SECTION 1.15. AMENDMENTS TO SECTION 504 OF THE INDENTURE. The first
paragraph of Section 504 of the Indenture is hereby amended by deleting the
phrase "or the Subsidiary Guarantors" and by deleting the phrase "or any of the
Subsidiary Guarantors". The second paragraph of Section 504 of the Indenture is
hereby amended by deleting the phrase "or the Subsidiary Guarantees".
SECTION 1.16. AMENDMENTS TO SECTION 505 OF THE INDENTURE. Section 505
of the Indenture is hereby amended by deleting the phrase "or Subsidiary
Guarantees".
SECTION 1.17. AMENDMENTS TO SECTION 509 OF THE INDENTURE. Section 509
of the Indenture is hereby amended by deleting the phrase "the Subsidiary
Guarantors,".
SECTION 1.18. AMENDMENTS TO SECTION 514 OF THE INDENTURE. Section 514
of the Indenture is hereby amended by deleting the phrase "or the Subsidiary
Guarantors".
SECTION 1.19. AMENDMENTS TO SECTION 515 OF THE INDENTURE. Section 515
of the Indenture is hereby amended in its entirety to read as follows:
"The Company covenants (to the extent that it may lawfully do so)
that it will not at any time insist upon, or plead, or in any manner
whatsoever claim to take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force,
which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so)
5
<PAGE>
hereby expressly waives all benefit or advantage of any such law and
covenants that it will not hinder, delay or impede the execution of
any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been
enacted."
SECTION 1.20. AMENDMENTS TO SECTION 604 OF THE INDENTURE. Section 604
of the Indenture is hereby amended (i) by deleting the phrase "and the notations
of Subsidiary Guarantees thereon", (ii) by deleting the phrase "or the
Subsidiary Guarantors, as the case may be" and (iii) by deleting the phrase
"(including the notation of Subsidiary Guarantees thereon)".
SECTION 1.20. AMENDMENTS TO SECTION 605 OF THE INDENTURE. Section 605
of the Indenture is hereby amended by deleting the phrase "or any Subsidiary
Guarantor" and by deleting the phrase "and the Subsidiary Guarantors".
SECTION 1.21. AMENDMENTS TO SECTION 606 OF THE INDENTURE. Section 606
of the Indenture is hereby amended by deleting the phrase "or any Subsidiary
Guarantor".
SECTION 1.22. AMENDMENTS TO SECTION 613 OF THE INDENTURE. Section 613
of the Indenture is hereby amended by deleting the phrase "or any Subsidiary
Guarantor" in each place where such phrase appears.
SECTION 1.23. AMENDMENTS TO SECTION 702 OF THE INDENTURE. Clause (c) of
Section 702 of the Indenture is hereby amended by deleting the phrase ", the
Subsidiary Guarantors" and by deleting the phrase "nor the Subsidiary
Guarantors".
SECTION 1.24. AMENDMENTS TO SECTION 704 OF THE INDENTURE. Section 704
of the Indenture is hereby amended by deleting the phrase "(and the Subsidiary
Guarantors, if applicable)".
SECTION 1.25. AMENDMENTS TO SECTION 803 OF THE INDENTURE. Section 803
of the Indenture is hereby deleted in its entirety.
SECTION 1.26. AMENDMENTS TO SECTION 804 OF THE INDENTURE. Section 804
of the Indenture is hereby deleted in its entirety.
SECTION 1.27. AMENDMENTS TO SECTION 805 OF THE INDENTURE. Section 805
of the Indenture is hereby deleted in its entirety.
SECTION 1.28. AMENDMENTS TO SECTION 901 OF THE INDENTURE. The first
paragraph of Section 901 of the Indenture is hereby amended by deleting the
phrase "the Subsidiary Guarantors, when authorized by a Board Resolution,".
Clause (1) of Section 901 of the Indenture is hereby amended in its entirety to
read as follows:
"(1) to evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the
Company herein and in the Securities pursuant to Article Eight; or".
6
<PAGE>
The phrase "; or" at the end of clause (9) of Section 901 of the Indenture is
hereby deleted and replaced with a period. Clauses (10), (11), (12) and (13) of
Section 901 of the Indenture are hereby deleted in their entirety.
SECTION 1.29. AMENDMENTS TO SECTION 902 OF THE INDENTURE. The first
paragraph of Section 902 of the Indenture is hereby amended by deleting the
phrase "the Subsidiary Guarantors, when authorized by Board Resolutions,".
SECTION 1.30. AMENDMENTS TO SECTION 906 OF THE INDENTURE. Section 906
of the Indenture is hereby amended by deleting the phrase "with the notations of
Subsidiary Guarantees thereon executed by the Subsidiary Guarantors,".
SECTION 1.31. AMENDMENTS TO SECTION 1002 OF THE INDENTURE. The first
paragraph of Section 1002 of the Indenture is hereby amended by deleting the
phrase "and each of the Subsidiary Guarantors". The second paragraph of Section
1002 of the Indenture is hereby amended (i) by deleting the phrase ", the
related Subsidiary Guarantees"in each place where such phrase appears, (ii) by
deleting the phrase "and the Subsidiary Guarantors", and (iii) by deleting the
phrase ", the Subsidiary Guarantees thereof".
SECTION 1.32. AMENDMENTS TO SECTION 1007 OF THE INDENTURE. Clause (b)
of Section 1007 of the Indenture is hereby amended by deleting the phrase "and
the Subsidiary Guarantors" and by deleting the phrase "or any Subsidiary
Guarantor".
SECTION 1.33. AMENDMENTS TO SECTION 1302 OF THE INDENTURE. Section 1302
of the Indenture is hereby amended by deleting the phrase "and the Subsidiary
Guarantors" and by deleting the phrase "and the Subsidiary Guarantors'
respective". In addition, the first sentence of Section 1302 is hereby amended
by deleting the phrase "their respective" and replacing such phrase with "its".
SECTION 1.34. AMENDMENTS TO SECTION 1303 OF THE INDENTURE. Section 1303
of the Indenture is hereby amended by deleting clause (ii) in its entirety and
by deleting the number "(iii)" and replacing it with the number "(ii)".
SECTION 1.35. AMENDMENTS TO SECTION 1306 OF THE INDENTURE. Section 1306
of the Indenture is hereby amended (i) by deleting the phrase "and the
Subsidiary Guarantors' respective", (ii) by deleting the phrase "(and the
related Subsidiary Guarantees)", (iii) by deleting the phrase "or any Subsidiary
Guarantor", and (iv) by deleting the phrase "or the Subsidiary Guarantor, as the
case may be".
SECTION 1.36. AMENDMENTS TO ARTICLE FIFTEEN OF THE INDENTURE. Article
Fifteen of the Indenture is hereby deleted in its entirety.
SECTION 1.37. AMENDMENTS TO SIGNATURE BLOCKS OF THE INDENTURE. The
signature blocks for each of the Subsidiary Guarantors are hereby deleted in
their entirety.
7
<PAGE>
SECTION 1.38. AMENDMENTS TO EXHIBIT B OF THE INDENTURE. The first
paragraph of Exhibit B to the Indenture is hereby amended by deleting the phrase
"the Subsidiary Guarantors named therein" and by inserting the following on the
sixth line after the word "hereof":
"as supplemented, amended or restated".
SECTION 1.39. AMENDMENTS TO RECITALS OF THE INDENTURE. The second
paragraph of the Recitals to the Original Indenture is hereby deleted in its
entirety. The fourth paragraph of the Recitals to the Original Indenture is
hereby amended by deleting the phrase "and each of the Initial Subsidiary
Guarantors,". The last paragraph of the Recitals to the Original Indenture is
hereby amended by deleting the phrase "(together with the related Subsidiary
Guarantees)" in each place where such phrase appears.
ARTICLE TWO
ADDITIONAL REPRESENTATIONS
AND COVENANTS OF THE COMPANY
SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and
warrants that it is duly authorized by a resolution of the Board of Directors to
execute and deliver this Seventh Supplemental Indenture, and all corporate
action on its part required for the execution and delivery of this Seventh
Supplemental Indenture has been duly and effectively taken.
SECTION 2.2 RECITALS AND STATEMENTS. The Company warrants that the
recitals of fact and statements contained in this Seventh Supplemental Indenture
are true and correct, and that the recitals of fact and statements contained in
all certificates and other documents furnished hereunder will be true and
correct.
ARTICLE THREE
CONCERNING THE TRUSTEE
SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust
hereunder and agrees to perform the same, but only upon the terms and conditions
set forth in the Indenture, to all of which the Company and the respective
Holders of Securities at any time hereafter outstanding agree by their
acceptance thereof.
SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals
and statements contained in this Seventh Supplemental Indenture shall be taken
as the recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Seventh Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Seventh Supplemental Indenture.
8
<PAGE>
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Seventh
Supplemental Indenture shall become effective immediately upon the execution and
delivery hereof. This Seventh Supplemental Indenture and all the terms and
provisions herein contained shall form a part of the Indenture as fully and with
the same effect as if all such terms and provisions had been set forth in the
Original Indenture. The Original Indenture is hereby ratified and confirmed and
shall remain and continue in full force and effect in accordance with the terms
and provision thereof, as supplemented and amended by the First Supplemental
Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture,
the Fourth Supplemental Indenture, the Fifth Supplemental Indenture, the Sixth
Supplemental Indenture and this Seventh Supplemental Indenture. The Original
Indenture as so supplemented shall be read, taken and construed together as one
instrument.
SECTION 4.2 COUNTERPARTS OF SEVENTH SUPPLEMENTAL INDENTURE. This
Seventh Supplemental Indenture may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
SECTION 4.3 GOVERNING LAW. This Seventh Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York,
without regard to principles of conflicts of laws.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Seventh
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
COMPANY
NGC CORPORATION
By:
-----------------------------
Robert D. Doty, Jr.
Vice President and Treasurer
S-1
<PAGE>
TRUSTEE
THE FIRST NATIONAL BANK OF CHICAGO
By:
--------------------------------
Name
Title:
S-2
<PAGE>
The provisions of this Seventh Supplemental Indenture
have been agreed to and acknowledged this
20th day of February, 1998 by:
NATURAL GAS CLEARINGHOUSE
By: Clearinghouse Holdings, Inc., its general partner
WARREN NGL, INC.
WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP
By: Warren Energy, Inc., its general partner
WARREN GAS LIQUIDS, INC.
NGC OIL TRADING AND TRANSPORTATION, INC.
WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP
By: Warren Petroleum G.P., Inc., its general partner
DESTEC ENERGY, INC.
By: _____________________________
Robert D. Doty, Jr.
Vice President and Treasurer
S-3
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.21
<SEQUENCE>7
<DESCRIPTION>INDENTURE
<TEXT>
<PAGE>
EXHIBIT 4.21
NGC CORPORATION,
AND
THE FIRST NATIONAL BANK OF CHICAGO
TRUSTEE
_______________
INDENTURE
_______________
DATED AS OF SEPTEMBER 26, 1996
RESTATED AS OF MARCH 23, 1998
TO INCLUDE AMENDMENTS IN THE FIRST THROUGH FIFTH SUPPLEMENTAL INDENTURES
<PAGE>
NGC CORPORATION
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND
INDENTURE DATED AS OF SEPTEMBER 26, 1996, AS AMENDED AND RESTATED ON
MARCH 23, 1998
Trust Indenture
Act Section Indenture Section
----------------- -----------------
(S) 310(a)(1).................................. 609
(a)(2)...................................... 609
(a)(3)...................................... Not Applicable
(a)(4)...................................... Not Applicable
(a)(5)...................................... 609
(b)......................................... 608
(c)......................................... Not Applicable
610
(S) 311(a)..................................... 613
(b)......................................... 613
(c)......................................... Not Applicable
(S) 312(a)..................................... 701
702
(b)......................................... 702
(c)......................................... 702
(S) 313(a)..................................... 703
(b)......................................... 703
(c)......................................... 703
(d)......................................... 703
(S) 314(a)(1)-(3).............................. 704
(a)(4)...................................... 101
1004
(b)......................................... Not Applicable
(c)(1)...................................... 102
(c)(2)...................................... 102
(c)(3)...................................... Not Applicable
(d)......................................... Not Applicable
(e)......................................... 102
(S) 315(a)..................................... 601
(b)......................................... 602
(c)......................................... 601
(d)......................................... 601
(e)......................................... 514
(f)......................................... Not Applicable
(S) 316(a)..................................... 101
(a)(1)(A)................................... 502
512
(a)(1)(B)................................... 513
(a)(2)...................................... Not Applicable
(b)......................................... 508
(c)......................................... 104
(S) 317(a)(1).................................. 503
(a)(2)...................................... 504
(b)......................................... 1003
(S) 318(a)..................................... 108
- --------------
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be
part of the Indenture.
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TABLE OF CONTENTS
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RECITALS OF THE COMPANY......................................................................... 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION..................................... 1
SECTION 101. Definitions............................................................. 1
SECTION 102. Compliance Certificates and Opinions.................................... 7
SECTION 103. Form of Documents Delivered to Trustee.................................. 7
SECTION 104. Acts of Holders......................................................... 8
SECTION 105. Notices, Etc., to Trustee and Company................................... 9
SECTION 106. Notice to Holders of Securities; Waiver................................. 10
SECTION 107. Language of Notices, Etc................................................ 10
SECTION 108. Conflict with Trust Indenture Act....................................... 10
SECTION 109. Effect of Headings and Table of Contents................................ 11
SECTION 110. Successors and Assigns.................................................. 11
SECTION 111. Separability Clause..................................................... 11
SECTION 112. Benefits of Indenture................................................... 11
SECTION 113. Governing Law........................................................... 11
SECTION 114. Legal Holidays.......................................................... 11
ARTICLE TWO
SECURITY FORMS......................................................................... 11
SECTION 201. Forms Generally......................................................... 11
SECTION 202. Form of Trustee's Certificate of Authentication......................... 12
SECTION 203. Securities in Global Form............................................... 12
SECTION 204. Form of Legend for Book-Entry Securities................................ 13
ARTICLE THREE
THE SECURITIES......................................................................... 13
SECTION 301. Amount Unlimited; Issuable in Series.................................... 13
SECTION 302. Denominations........................................................... 15
SECTION 303. Execution, Authentication, Delivery and Dating.......................... 15
SECTION 304. Temporary Securities.................................................... 17
SECTION 305. Registration, Registration of Transfer and Exchange..................... 19
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities and Coupons............ 21
SECTION 307. Payment of Interest; Interest Rights Preserved.......................... 22
SECTION 308. Persons Deemed Owners................................................... 23
SECTION 309. Cancellation............................................................ 23
SECTION 310. Computation of Interest................................................. 24
ARTICLE FOUR
SATISFACTION AND DISCHARGE............................................................. 24
SECTION 401. Satisfaction and Discharge of Indenture................................. 24
SECTION 402. Application of Trust Money.............................................. 25
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ARTICLE FIVE
REMEDIES............................................................................... 25
SECTION 501. Events of Default....................................................... 25
SECTION 502. Acceleration of Maturity; Rescission and Annulment...................... 26
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee......... 27
SECTION 504. Trustee May File Proofs of Claim........................................ 28
SECTION 505. Trustee May Enforce Claims Without Possession of Securities or Coupons.. 28
SECTION 506. Application of Money Collected.......................................... 28
SECTION 507. Limitation on Suits..................................................... 29
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. 30
SECTION 509. Restoration of Rights and Remedies...................................... 30
SECTION 510. Rights and Remedies Cumulative.......................................... 30
SECTION 511. Delay or Omission Not Waiver............................................ 30
SECTION 512. Control by Holders of Securities........................................ 30
SECTION 513. Waiver of Past Defaults................................................. 31
SECTION 514. Undertaking for Costs................................................... 31
SECTION 515. Waiver of Stay or Extension Laws........................................ 31
ARTICLE SIX
THE TRUSTEE............................................................................ 31
SECTION 601. Certain Duties and Responsibilities..................................... 31
SECTION 602. Notice of Defaults...................................................... 32
SECTION 603. Certain Rights of Trustee............................................... 32
SECTION 604. Not Responsible for Recitals or Issuance of Securities.................. 33
SECTION 605. May Hold Securities..................................................... 33
SECTION 606. Money Held in Trust..................................................... 33
SECTION 607. Compensation and Reimbursement.......................................... 33
SECTION 608. Disqualification; Conflicting Interests................................. 34
SECTION 609. Corporate Trustee Required; Eligibility................................. 34
SECTION 610. Resignation and Removal; Appointment of Successor....................... 34
SECTION 611. Acceptance of Appointment by Successor.................................. 35
SECTION 612. Merger, Conversion, Consolidation or Succession to Business............. 36
SECTION 613. Preferential Collection of Claims Against Company....................... 36
SECTION 614. Appointment of Authenticating Agent..................................... 36
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY...................................... 38
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders............... 38
SECTION 702. Preservation of Information; Communications to Holders.................. 38
SECTION 703. Reports by Trustee...................................................... 38
SECTION 704. Reports by Company...................................................... 39
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE................................... 39
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.................... 39
SECTION 802. Successor Substituted................................................... 39
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<TABLE>
<S> <C> <C>
ARTICLE NINE
SUPPLEMENTAL INDENTURES................................................................ 40
SECTION 901. Supplemental Indentures without Consent of Holders...................... 40
SECTION 902. Supplemental Indentures with Consent of Holders......................... 41
SECTION 903. Execution of Supplemental Indentures.................................... 42
SECTION 904. Effect of Supplemental Indentures....................................... 42
SECTION 905. Conformity with Trust Indenture Act..................................... 42
SECTION 906. Reference in Securities to Supplemental Indentures...................... 42
ARTICLE TEN
COVENANTS.............................................................................. 42
SECTION 1001. Payment of Principal, Premium and Interest.............................. 42
SECTION 1002. Corporate Existence and Maintenance of Office or Agency................. 43
SECTION 1003. Money for Securities Payments to Be Held in Trust....................... 44
SECTION 1004. Additional Amounts...................................................... 45
SECTION 1005. Purchase of Securities by Company or Subsidiary......................... 45
SECTION 1006. Limitation on Liens..................................................... 45
SECTION 1007. Statement by Officer as to Default...................................... 46
SECTION 1008. Waiver of Certain Covenants............................................. 47
ARTICLE ELEVEN
REDEMPTION OF SECURITIES............................................................... 47
SECTION 1101. Applicability of Article................................................ 47
SECTION 1102. Election to Redeem; Notice to Trustee................................... 47
SECTION 1103. Selection of Securities to Be Redeemed.................................. 47
SECTION 1104. Notice of Redemption.................................................... 48
SECTION 1105. Deposit of Redemption Price............................................. 48
SECTION 1106. Securities Payable on Redemption Date................................... 49
SECTION 1107. Securities Redeemed in Part............................................. 49
ARTICLE TWELVE
SINKING FUNDS.......................................................................... 50
SECTION 1201. Applicability of Article................................................ 50
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities................... 50
SECTION 1203. Redemption of Securities for Sinking Fund............................... 50
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE..................................................... 50
SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance............ 50
SECTION 1302. Defeasance and Discharge................................................ 51
SECTION 1303. Covenant Defeasance..................................................... 51
SECTION 1304. Conditions to Defeasance or Covenant Defeasance......................... 51
SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust;
Other Miscellaneous Provisions.......................................... 53
SECTION 1306. Reinstatement........................................................... 53
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ARTICLE FOURTEEN
MEETINGS OF HOLDERS OF BEARER SECURITIES............................................... 53
SECTION 1401. Purposes for Which Meetings May Be Called............................... 53
SECTION 1402. Call, Notice and Place of Meetings...................................... 53
SECTION 1403. Persons Entitled to Vote at Meetings.................................... 54
SECTION 1404. Quorum; Action.......................................................... 54
SECTION 1405. Determination of Voting Rights; Conduct and Adjournment of Meetings..... 55
SECTION 1406. Counting Votes and Recording Action of Meetings......................... 55
</TABLE>
iv
<PAGE>
INDENTURE, originally made and entered into as of September 26, 1996, among
NGC Corporation, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
1000 Louisiana Street, Suite 5800, Houston, Texas 77002, and The First National
Bank of Chicago, a national banking association, as Trustee (herein called the
"Trustee"), as amended by the First Supplemental Indenture dated as of April 23,
1997 (the "First Supplemental Indenture"), the Second Supplemental Indenture
dated as of June 30, 1997 (the "Second Supplemental Indenture"), the Third
Supplemental Indenture dated as of September 30, 1997 (the "Third Supplemental
Indenture"), the Fourth Supplemental Indenture dated as of January 5, 1998(the
"Fourth Supplemental Indenture"), and the Fifth Supplemental Indenture dated as
of February 20, 1998 (the "Fifth Supplemental Indenture"), is hereby restated as
of March 23, 1998.
RECITALS OF THE COMPANY
The Company and the Trustee originally entered into this Indenture on
September 26, 1996. Thereafter, the Indenture was amended by the First
Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture, the Fourth Supplemental Indenture and the Fifth
Supplemental Indenture. The Company wishes to restate the Indenture to cumulate
the amendments set forth in the First through Fifth Supplemental Indentures.
The Company has duly authorized the execution and delivery of this restated
Indenture to provide for the issuance from time to time of its unsecured
debentures, notes or other evidences of indebtedness (herein called the
"Securities"), to be issued in one or more series as in this Indenture provided.
This Indenture is subject to the provisions of the Trust Indenture Act of
1939, as amended, that are required to be part of this Indenture and shall, to
the extent applicable, be governed by such provisions.
All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
by the Holders thereof, it is mutually agreed, for the equal and proportionate
benefit of all Holders of the Securities or of a series thereof, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles in the United States of America, and, except as otherwise herein
expressly provided, the term "generally accepted accounting principles"
1
<PAGE>
with respect to any computation required or permitted hereunder shall mean such
accounting principles as are generally accepted in the United States of America
at the date of this Indenture; and
(4) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision, and the words "date of this
Indenture" and "date hereof" and other words of similar import refer to the
effective date of the original execution and delivery of this Indenture,
viz. September 26, 1996.
"Act," when used with respect to any Holder of a Security, has the meaning
specified in Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition
"control," when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee pursuant
to Section 614 to act on behalf of the Trustee to authenticate Securities of one
or more series.
"Authorized Newspaper" means a newspaper, in the English language or in an
official language of the country of publication, customarily published on each
Business Day, whether or not published on Saturdays, Sundays or holidays, and of
general circulation in the place in connection with which the term is used or in
the financial community of such place. Where successive publications are
required to be made in Authorized Newspapers, the successive publications may be
made in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any Business Day.
"Bearer Security" means any Security in the form established pursuant to
Section 201 which is payable to bearer, including, without limitation, a
Security in temporary or permanent global form.
"Board of Directors" means, with respect to the Company, either the board
of directors of the Company or any duly authorized committee of that board, and,
with respect to any Subsidiary of the Company, either the board of directors of
such Subsidiary or any duly authorized committee of that board or, if the
Subsidiary is not a corporation, the group of Persons having authority to manage
the Subsidiary or any duly authorized committee of that group.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company or a Subsidiary of the Company to have
been duly adopted by the Board of Directors of the Company or such Subsidiary,
as the case may be, and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Book-Entry Security" means a Security bearing the legend specified in
Section 204, evidencing all or part of a series of Securities, issued to the
Depository for such series or its nominee, and registered in the name of such
Depository or nominee. Book-Entry Securities shall not be deemed to be
Securities in global form for purposes of Sections 201 and 203 and Article Three
of this Indenture.
"Business Day," when used with respect to any Place of Payment or any other
particular location referred to in this Indenture or in the Securities, means
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in that Place of Payment or other location are authorized
or obligated by law or executive order to close.
2
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"Certification Date" means with respect to Securities of any series (i), if
Bearer Securities of such series are not to be initially represented by a
temporary global Security, the date of delivery of the definitive Bearer
Security and (ii), if Bearer Securities of such series are initially represented
by a temporary global Security, the earlier of (A) the Exchange Date with
respect to Securities of such series and (B), if the first Interest Payment Date
with respect to Securities of such series is prior to such Exchange Date, such
Interest Payment Date.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this instrument such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
"Common Depositary" has the meaning specified in Section 304.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, its President or
a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or
an Assistant Secretary, and delivered to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee in
Chicago, Illinois, at which at any particular time its corporate trust business
shall be administered.
The term "corporation" means a corporation, association, limited liability
company, joint-stock company, business trust or similar organization.
The term "coupon" means any interest coupon appertaining to a Bearer
Security.
"Defaulted Interest" has the meaning specified in Section 307.
"Depository" means, with respect to the Securities of any series issuable
or issued in whole or in part in the form of one or more Book-Entry Securities,
the clearing agency registered under the Securities Exchange Act of 1934, as
amended, specified for that purpose as contemplated by Section 301.
"Dollar" or "$" means a dollar or other equivalent unit in such coin or
currency of the United States of America as at the time shall be legal tender
for the payment of public and private debts.
"Euro-clear" means the operator of the Euro-clear System.
"Event of Default" has the meaning specified in Section 501.
"Exchange Date" has the meaning specified in Section 304.
"Funded Indebtedness" means all outstanding indebtedness (including
indebtedness incurred under any revolving credit, letter of credit or working
capital facility) that matures by its terms, or that is renewable at the option
of any obligor thereon to a date, more than one year after the date on which
such indebtedness is originally incurred.
3
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"Holder," when used with respect to any Security, means in the case of a
Registered Security the Person in whose name the Security is registered in the
Security Register and in the case of a Bearer Security the bearer thereof and,
when used with respect to any coupon, means the bearer thereof.
"Indenture" means this instrument as originally executed or as it may from
time to time be (i) supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof or
(ii) restated to cumulate the terms of such supplemental indentures, and shall
include the terms of a particular series of Securities established as
contemplated by Section 301 and the provisions of the Trust Indenture Act that
are deemed to be a part of and govern this instrument.
The term "interest," when used with respect to an Original Issue Discount
Security which by its terms bears interest only after Maturity, means interest
payable after Maturity.
"Interest Payment Date," when used with respect to any Security, means the
Stated Maturity of an installment of interest on such Security.
"Issue Date" means the Date on which Securities are originally issued under
this Indenture.
"Maturity," when used with respect to any Security, means the date on which
the principal of such Security or an installment of principal becomes due and
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption or otherwise.
"Net Tangible Assets" means the total amount of assets appearing on a
consolidated balance sheet of the Company and its Subsidiaries less, without
duplication: (a) total current liabilities (excluding current maturities of
long-term debt and preferred stock); (b) all reserves for depreciation and other
asset valuation reserves but excluding reserves for deferred federal and state
income taxes; (c) all intangible assets such as goodwill, trademarks, trade
names, patents and unamortized debt discount and expense carried as an asset;
and (d) all appropriate adjustments on account of minority interests of other
Persons holding common stock in any Subsidiary.
"Officers' Certificate" means a certificate complying with the provisions
of Section 102 signed by the Chairman of the Board, the President or a Vice
President, and by the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary, of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be an
employee of or counsel for the Company, and who shall be reasonably acceptable
to the Trustee.
"Original Issue Discount Security" means any Security which is issued at a
price lower than the principal amount payable upon the Stated Maturity thereof
and which provides for an amount less than the principal amount thereof to be
due and payable upon redemption thereof or upon a declaration of acceleration of
the Maturity thereof pursuant to Section 502.
"Outstanding," when used with respect to Securities, means, as of the date
of determination, all Securities theretofore authenticated and delivered under
this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for
4
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the Holders of such Securities and any coupons appertaining thereto,
provided that, if such Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision
therefor satisfactory to the Trustee has been made; and
(iii) Securities which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Truste