<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 2000
REGISTRATION NO. 333-32502
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
DUKE ENERGY FIELD SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
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<CAPTION>
1321 DELAWARE 58-2511048
<S> <C> <C>
(Primary Standard Industrial (State or other jurisdiction of (I.R.S. Employer
Classification Code Number) incorporation or organization) Identification No.)
</TABLE>
370 17TH STREET
SUITE 900
DENVER, COLORADO 80202
(303) 595-3331
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
DAVID D. FREDERICK
SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
370 17TH STREET
SUITE 900
DENVER, COLORADO 80202
(303) 595-3331
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C> <C>
JEFFERY B. FLOYD, ESQ. MARTHA B. WYRSCH, ESQ. ROBERT H. CRAFT, JR., ESQ.
VINSON & ELKINS L.L.P. DUKE ENERGY FIELD SERVICES SULLIVAN & CROMWELL
2300 FIRST CITY TOWER CORPORATION 1701 PENNSYLVANIA AVE., NW
1001 FANNIN STREET 370 17TH STREET, SUITE 900 WASHINGTON, D.C. 20004
HOUSTON, TEXAS 77002-6760 DENVER, COLORADO 80202 (202) 956-7500
(713) 758-2222 (303) 595-3331
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued May 23, 2000
26,300,000 Shares
Duke Energy Field Services Corporation
COMMON STOCK
---------------------
DUKE ENERGY FIELD SERVICES CORPORATION IS OFFERING 26,300,000 SHARES OF ITS
COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING, AND NO PUBLIC MARKET
CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $20 AND $22 PER SHARE.
---------------------
OUR COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE, ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "DEF."
---------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
---------------------
PRICE $ A SHARE
---------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
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<S> <C> <C> <C>
Per Share....................... $ $ $
Total........................... $ $ $
</TABLE>
Duke Energy Field Services Corporation has granted the underwriters the right to
purchase up to an additional 3,945,000 shares of common stock to cover
over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on , 2000.
---------------------
MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
LEHMAN BROTHERS
J.P. MORGAN & CO.
PAINEWEBBER INCORPORATED
PETRIE PARKMAN & CO.
, 2000
<PAGE> 3
ART/MAPS/DIAGRAMS
[two photographs of Duke Energy Field Services Mooreland Plant in Oklahoma]
[fold-out map of Duke Energy Field Services System Assets depicting plants,
pipelines, offices and operating areas]
<PAGE> 4
OWNERSHIP OF OUR COMPANY
We are the issuer of the common stock offered by this prospectus and the
parent and owner of Duke Energy Field Services, LLC. On March 31, 2000, the
North American midstream natural gas gathering, processing, marketing and
natural gas liquids businesses of Duke Energy Corporation ("Duke Energy") and
Phillips Petroleum Company ("Phillips") were combined into Duke Energy Field
Services, LLC.
The following diagram is a summary of the ownership structure of our
company after giving effect to the offering of our common stock. After the
offering, Duke Energy and Phillips will together hold approximately 81.24%
(79.02% if the underwriters fully exercise their over-allotment option) of the
outstanding common stock in our company. Approximately 110,500 shares are
expected to be issued to employees under restricted stock awards granted
concurrently with the offering.
DUKE
The exact allocation of shares between Duke Energy and Phillips will be
determined based on the average of the closing prices of our common stock on the
New York Stock Exchange Composite Tape on its first five trading days. Assuming
that the five-day average equals the assumed initial public offering price of
$21.00 per share, after the offering Duke Energy will indirectly own
approximately 58.65% (57.05% if the underwriters fully exercise their
over-allotment option) and Phillips will indirectly own approximately 22.59%
(21.97% if the underwriters fully exercise their over-allotment option) of our
outstanding common stock. Although the exact allocation between Duke Energy and
Phillips may vary, upon completion of the offering, Duke Energy will, in any
event, control our company through its share ownership and representation on our
Board of Directors. For a description of the combination of the North American
midstream natural gas businesses of Duke Energy and Phillips, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- The
Combination." For a description of the relationships among Duke Energy, Phillips
and our company, see "Relationship with Duke Energy and Phillips."
<PAGE> 5
TABLE OF CONTENTS
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PAGE
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 12
Cautionary Statement About Forward-Looking Statements....... 19
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Dilution.................................................... 20
Capitalization.............................................. 21
Selected Historical and Pro Forma Combined Financial and
Other Data................................................ 22
Additional Financial and Other Data......................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 41
Management.................................................. 61
Relationship with Duke Energy and Phillips.................. 68
Principal Stockholders...................................... 74
Description of Capital Stock................................ 75
Shares Eligible for Future Sale............................. 79
Material United States Federal Tax Consequences to
Non-United States Holders of
Common Stock.............................................. 80
Underwriters................................................ 83
Validity of the Common Stock................................ 85
Experts..................................................... 86
Where You Can Find More Information......................... 86
Index to Financial Statements............................... F-1
</TABLE>
---------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information from that
contained in this prospectus. We are offering to sell shares of our common stock
and seeking offers to buy shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus or as of an earlier indicated
date, regardless of the date of delivery of this prospectus or of any sale of
our common stock. Our business, financial condition, results of operations and
prospects may have changed since those dates.
---------------------
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE SHARES OF
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including the historical and pro forma financial statements and
related notes, before making an investment decision.
Duke Energy Field Services Corporation is a new company that holds the
combined North American midstream natural gas gathering, processing, marketing
and natural gas liquids businesses of Duke Energy Corporation and Phillips
Petroleum Company. The transaction in which those businesses were combined is
referred to in this prospectus as the "Combination." Our certificate of
incorporation limits the scope of our business to the midstream natural gas
industry in the United States and Canada, the marketing of natural gas liquids
in Mexico and the transportation, marketing and storage of other petroleum
products, unless otherwise approved by our Board of Directors and Duke Energy
(so long as it owns a majority of our outstanding common stock).
Unless the context otherwise requires, descriptions of assets, operations
and results in this prospectus give effect to the Combination and related
transactions, the transfer to us of additional midstream natural gas assets
acquired by Duke Energy or Phillips prior to the Combination and the transfer to
us of the general partner of TEPPCO Partners, L.P., all of which are described
in more detail under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- The Combination." In this prospectus, the
terms "we," "us" and "our" refer to Duke Energy Field Services Corporation and
our subsidiaries, including our principal subsidiary, Duke Energy Field
Services, LLC (which we refer to as "Field Services LLC"), giving effect to the
Combination and the other transactions described above.
OUR COMPANY
The midstream natural gas industry is the link between the exploration and
production of raw natural gas and the delivery of its components to end-use
markets. We operate in the two principal segments of the midstream natural gas
industry:
- natural gas gathering, processing, transportation, marketing and storage;
and
- natural gas liquids ("NGLs") fractionation, transportation, marketing and
trading.
We believe that we are one of the largest gatherers of raw natural gas,
based on wellhead volume, in North America. We are the largest producer, and we
believe that we are one of the largest marketers, of NGLs in North America. In
1999:
- we gathered and/or transported an average of approximately 7.3 billion
cubic feet per day of raw natural gas;
- we produced an average of approximately 400,000 barrels per day of NGLs;
and
- we marketed and traded an average of approximately 486,000 barrels per
day of NGLs.
During 1999, our natural gas gathering, processing, transportation,
marketing and storage segment produced $981.5 million of gross margin and $583.1
million of earnings before interest, taxes and depreciation and amortization
("EBITDA"), excluding general and administrative expenses, and our NGL
fractionation, transportation, marketing and trading segment produced $38.3
million of gross margin and $38.1 million of EBITDA, excluding general and
administrative expenses.
We gather raw natural gas through gathering systems located in seven major
natural gas producing regions: Permian Basin, Mid-Continent, East Texas-Austin
Chalk-North Louisiana, Onshore Gulf of Mexico, Rocky Mountains, Offshore Gulf of
Mexico and Western Canada. Our gathering systems consist of approximately 57,000
miles of gathering pipe, with approximately 38,000 connections to active
producing wells.
4
<PAGE> 7
Our natural gas processing operations involve the separation of raw natural
gas gathered both by our gathering systems and by third-party systems into NGLs
and residue gas. We process the raw natural gas at our 70 owned and operated
plants and at 13 third-party operated facilities in which we hold an equity
interest.
The NGLs separated from the raw natural gas by our processing operations
are either sold and transported as "NGL raw mix" or further separated through a
process known as fractionation into their individual components (ethane,
propane, butanes and natural gasoline) and then sold as components. We
fractionate NGL raw mix at our 12 owned and operated processing facilities and
at two third-party operated fractionators located on the Gulf Coast in which we
hold an equity interest.
We sell NGLs to a variety of customers ranging from large, multi-national
petrochemical and refining companies to small regional retail propane
distributors. Substantially all of our NGL sales are made at market-based
prices, including approximately 40% of our NGL production that is committed to
Phillips under an existing 15-year contract. We market approximately 370,000
barrels per day of our NGLs processed at our owned and operated facilities and
approximately 40,000 barrels per day of NGLs processed at third-party operated
facilities and trade approximately 75,000 barrels per day of NGLs at market
centers.
The residue gas that results from our processing is sold at market-based
prices to marketers or end-users, including large industrial customers and
natural gas and electric utilities serving individual consumers. We market
residue gas through our wholly owned gas marketing company. We also store
residue gas at our 8.5 billion cubic foot natural gas storage facility.
On March 31, 2000, we obtained by transfer from Duke Energy the general
partner of TEPPCO Partners, L.P., a publicly traded limited partnership which
owns and operates a network of pipelines for refined products and crude oil. The
general partner is responsible for the management and operations of TEPPCO. We
believe that our ownership of the general partner of TEPPCO improves our
business position in the transportation sector of the midstream natural gas
industry and provides additional flexibility in pursuing our disciplined
acquisition strategy by providing an alternative acquisition vehicle. It also
provides us with an opportunity to sell appropriate assets currently held by our
company to TEPPCO. Through our ownership of the general partner of TEPPCO we
have the right to receive from TEPPCO incentive cash distributions in addition
to a 2% share of distributions based on our general partner interest. At
TEPPCO's 1999 per unit distribution level, the general partner:
- receives approximately 14% of the cash distributed by TEPPCO to its
partners, which consists of 12% from the incentive cash distribution and
2% from the general partner interest; and
- under the incentive cash distribution provisions, receives 50% of any
increase in TEPPCO's per unit cash distributions.
TEPPCO has agreed to acquire from Atlantic Richfield Company, for $318.5
million, its ownership interests in a 500-mile crude oil pipeline that extends
from a marine terminal at Freeport, Texas to Cushing, Oklahoma, a 416-mile crude
oil pipeline that extends from Jal, New Mexico to Cushing, a 400-mile crude oil
pipeline that extends from West Texas to Houston, crude oil terminal facilities
in Midland, Cushing and the Houston area and receipt and delivery pipelines
centered around Midland. The transaction is contingent upon satisfaction of
regulatory requirements.
OUR BUSINESS STRATEGY
We believe that we are one of the largest gatherers of raw natural gas in
North America. We are the largest producer, and we believe that we are one of
the largest marketers, of NGLs in North America. We have significant midstream
natural gas operations in five of the largest natural gas producing regions in
North America. Our certificate of incorporation limits the scope of our business
to the midstream natural gas industry in the United States and Canada, the
marketing of NGLs in Mexico and the transportation, marketing and storage of
other petroleum products, unless otherwise approved by our Board of Directors
and
5
<PAGE> 8
Duke Energy (so long as it owns a majority of our outstanding common stock). To
take advantage of the anticipated growth in natural gas demand in North America,
we are pursuing the following strategies:
- Capitalize on the size and focus of our existing operations. We intend to
use the size, scope and concentration of our assets in our regions of
operation to take advantage of growth opportunities and to acquire
additional supplies of raw natural gas. Our significant market presence
and asset base generally provide us a competitive advantage in capturing
new supplies of raw natural gas because of our resulting lower costs of
connection to new wells and of processing additional raw natural gas. In
addition, we believe our size and geographic diversity allow us to
benefit from the growth of natural gas production in multiple regions
while mitigating the adverse effects from a downturn in any one region.
- Increase our presence in each aspect of the midstream business. We are
active in each significant aspect of the midstream natural gas value
chain, including raw natural gas gathering, processing and
transportation, NGL fractionation and NGL and residue gas transportation
and marketing. Each link in the value chain provides us with an
opportunity to earn incremental income from the raw natural gas that we
gather and from the NGLs and residue gas that we produce. We intend to
grow our significant NGL market presence by investing in additional NGL
infrastructure, including pipelines, fractionators and terminals.
- Increase our presence in high growth production areas. According to the
Energy Information Administration's report "Annual Energy Outlook 2000"
(the "EIA Report") production from areas such as Western Canada, Onshore
Gulf of Mexico, Rocky Mountains and Offshore Gulf of Mexico is expected
to increase significantly to meet anticipated increases in demand for
natural gas in North America. We intend to use our strategic asset base
in these growth areas and our leading position in the midstream natural
gas industry as a platform for future growth in these areas. We plan to
increase our operations in these areas by following a disciplined
acquisition strategy, expanding existing infrastructure and constructing
new gathering lines and processing facilities.
- Capitalize on proven acquisition skills in a consolidating industry. In
addition to pursuing internal growth by attracting new raw natural gas
supplies, we intend to use our substantial acquisition and integration
skills to continue to participate selectively in the consolidation of the
midstream natural gas industry. We have pursued a disciplined acquisition
strategy focused on acquiring complementary assets during periods of
relatively low commodity prices and integrating the acquired assets into
our operations. Since 1996, we have completed over 20 acquisitions,
increasing our raw natural gas processing capacity by over 275%. These
acquisitions demonstrate our ability to successfully identify, acquire
and integrate attractive midstream natural gas operations.
- Further streamline our low-cost structure. Our economies of scale,
operating efficiency and resulting low cost structure enhance our ability
to attract new raw natural gas supplies and generate current income. The
low-cost provider in any region can more readily attract new raw natural
gas volumes by offering more competitive terms to producers. We believe
the Combination provides us with a complementary base of assets from
which to further extract operating efficiencies and cost reductions,
while continuing to provide superior customer service.
---------------------
We were incorporated in the State of Delaware on December 8, 1999. Our
principal executive offices are located at 370 17th Street, Suite 900, Denver,
Colorado 80202, and our telephone number is (303) 595-3331.
6
<PAGE> 9
THE OFFERING
The following information does not include approximately 958,000 shares of
common stock issuable upon the exercise of employee stock options expected to be
granted concurrently with the offering but does include approximately 110,500
shares of our common stock to be issued under restricted stock awards expected
to be granted to our officers and employees concurrently with the offering.
Common stock offered....... 26,300,000 shares
Common stock to be
outstanding after the
offering................. 140,752,211 shares
Over-allotment option...... 3,945,000 shares. Unless the context otherwise
requires, the information in this prospectus
assumes that the underwriters do not exercise the
over-allotment option.
Use of proceeds............ We expect the net proceeds to us from the offering
to be approximately $521 million. We intend to use
the net proceeds from the offering to repay a
portion of the indebtedness incurred in connection
with the Combination.
Dividend policy............ We intend to declare and pay quarterly cash
dividends of $.06 per share, depending on our
financial results and action of our Board of
Directors. We expect the first dividend to be
payable with respect to the third quarter of 2000.
NYSE symbol................ "DEF"
RISK FACTORS
You should carefully read and consider all of the information included in
this prospectus. In particular, you should evaluate the specific factors
detailed under "Risk Factors" before purchasing shares of our common stock.
7
<PAGE> 10
PRESENTATION OF FINANCIAL INFORMATION AND OTHER DATA
Duke Energy Field Services Corporation is a new company that holds the
combined North American midstream natural gas businesses of Duke Energy and
Phillips.
Because our operations have only recently been combined and these
operations have grown significantly through acquisitions, our historical and pro
forma financial information and operating data may not provide an accurate
indication of:
- what our actual results would have been if the transactions presented on
a pro forma basis had actually been completed as of the dates presented;
or
- what our future results of operations are likely to be.
HISTORICAL FINANCIAL INFORMATION AND OTHER DATA
From a financial reporting perspective, we are the successor to Duke
Energy's North American midstream natural gas business. The subsidiaries of Duke
Energy that conducted this business were contributed to Duke Energy Field
Services Corporation in December 1999 in contemplation of the Combination. Duke
Energy Field Services Corporation and these former subsidiaries of Duke Energy
collectively are referred to in this prospectus as the "Predecessor Company."
The historical financial statements and related financial and other data
included in this prospectus reflect the business of the Predecessor Company.
This historical financial information and other data should be viewed in light
of the following:
- the Combination is reflected as a March 31, 2000 acquisition of the
midstream natural gas business contributed to our company by Phillips in
the Combination;
- the Predecessor Company's acquisition of Union Pacific Fuels is reflected
as a March 31, 1999 acquisition by the Predecessor Company; and
- the historical financial statements of the Predecessor Company do not
include the results of the general partner of TEPPCO.
For your additional information, we have also included the audited
financial statements of:
- the midstream natural gas business of Phillips that was transferred to us
in the Combination; and
- Union Pacific Fuels.
PRO FORMA FINANCIAL AND OTHER INFORMATION
In addition to the historical financial information and other data, this
prospectus includes:
- unaudited pro forma financial statements of our company for 1999 and the
three months ended March 31, 2000, each reflecting:
- the Combination and the sale of our common stock in the offering;
- the Predecessor Company's acquisition of Union Pacific Fuels;
- the transfer to us of additional midstream natural gas assets
acquired by Duke Energy or Phillips prior to consummation of the
Combination; and
- the transfer to us of the general partner of TEPPCO,
in each case as if the transactions had occurred on January 1, 1999 for
income statement purposes and March 31, 2000 for balance sheet purposes;
and
- additional financial and other data giving effect to the Union Pacific
Fuels acquisition and the Combination, as if each had occurred on January
1, 1995.
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SUMMARY HISTORICAL AND PRO FORMA COMBINED
FINANCIAL AND OTHER DATA
The following table sets forth summary historical financial and other data
for the Predecessor Company. The historical income statement data and cash flow
data for each of the three years ended December 31, 1999 and the historical
balance sheet data as of December 31 in each of those three years have been
derived from the Predecessor Company's audited historical financial statements.
The historical financial data for the three months ended March 31, 2000 has been
derived from unaudited financial statements. The historical data set forth below
relates only to the Predecessor Company and does not reflect the results of
operations or financial condition of the Phillips businesses transferred to us
in the Combination. In addition, the following table sets forth selected pro
forma financial and operating data, which reflect the historical results of
operations of the Predecessor Company, adjusted for:
- the acquisition of the midstream natural gas business of Phillips in the
Combination;
- the acquisition of Union Pacific Fuels;
- incurrence of indebtedness to fund the cash distributions to Duke Energy
and Phillips in connection with the Combination as described in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations;"
- the offering of our common stock and the expected application of the
estimated proceeds;
- the transfer to our company of additional midstream natural gas assets
acquired by Duke Energy or Phillips prior to consummation of the
Combination; and
- the transfer to our company of the general partner of TEPPCO;
as if all had occurred as of January 1, 1999 for income statement purposes and
March 31, 2000 for balance sheet purposes. The data should be read in
conjunction with the financial statements and related notes and other financial
information appearing elsewhere in this prospectus. The pro forma data set forth
below are not necessarily indicative of results that may occur in the future.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------ ------------
THREE MONTHS THREE MONTHS
PREDECESSOR COMPANY HISTORICAL PRO FORMA ENDED ENDED
------------------------------------ ---------- MARCH 31, MARCH 31,
1997 1998 1999(1)(2) 1999(1) 2000(3) 2000(3)
---------- ---------- ---------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
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INCOME STATEMENT DATA:
Total operating
revenues............... $1,801,832 $1,584,320 $3,458,310 $5,574,580 $1,451,211 $2,050,798
Total cost and
expenses............... 1,675,885 1,538,445 3,353,539 5,312,987 1,399,289 1,908,789
Earnings before interest
and tax................ 135,731 57,720 127,273 288,931 58,681 151,977
Interest expense......... 51,113 52,403 52,915 171,613 14,477 42,904
Net income............... 51,238 2,028 43,329 63,502 26,852 64,938
OTHER DATA:
EBITDA(4)................ $ 203,432 $ 133,293 $ 258,061 $ 556,328 $ 96,580 $ 220,247
Gas transported and/or
processed (TBtu/d)..... 3.4 3.6 5.1 7.3 6.0 7.9
NGL production (MBbl/d).. 108 110 192 400 231 415
MARKET DATA:
Average NGL price (per
gallon)(5)............. $.35 $.26 $.34 $.33 $.50 $.50
Average natural gas price
(per MMBtu)(6)......... $2.59 $2.11 $2.27 $2.27 $2.52 $2.52
BALANCE SHEET DATA (END OF
PERIOD):
Total assets............. $1,639,806 $1,770,838 $3,471,835 $6,312,292 $6,089,567
Long-term debt........... $ 101,600 $ 101,600 $ 101,600 $ --(7) $ --(7)
</TABLE>
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(1) Includes $34.0 million of hedging losses recorded in total operating
revenues. Duke Energy commenced risk management activities associated with
its midstream natural gas business at the end of 1998. Activity for periods
prior to 1999 was not significant.
(2) Includes the results of operations of Union Pacific Fuels for the nine
months ended December 31, 1999. Union Pacific Fuels was acquired by the
Predecessor Company on March 31, 1999.
(3) Includes $46.7 million of hedging losses recorded in total operating
revenues.
(4) EBITDA consists of income from continuing operations before interest
expense, income tax expense, and depreciation and amortization expense, less
interest income. EBITDA is not a measurement presented in accordance with
generally accepted accounting principles. You should not consider it in
isolation from, or as a substitute for, net income or cash flow measures
prepared in accordance with generally accepted accounting principles or as a
measure of our profitability or liquidity. EBITDA is included as a
supplemental disclosure because it may provide useful information regarding
our ability to service debt and to fund capital expenditures. However, not
all EBITDA may be available to service debt.
(5) Based on index prices from the Mont Belvieu, Texas and Conway, Kansas market
hubs that are weighted by our component and location mix for the periods
indicated.
(6) Based on the NYMEX Henry Hub prices for the periods indicated.
(7) We expect to have $2.1 billion of short-term indebtedness outstanding after
the offering and expect to convert a significant portion of this short-term
debt to long-term debt as market conditions permit. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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ADDITIONAL FINANCIAL AND OTHER DATA
The following table sets forth additional financial and other data of our
company. The additional financial and other data set forth below give effect to
the Combination and the transfer to our company of additional midstream natural
gas assets acquired by Duke Energy or Phillips immediately prior to consummation
of the Combination, which were completed on March 31, 2000, and to the
acquisition of Union Pacific Fuels, which occurred on March 31, 1999, as if each
occurred on January 1, 1995.
The additional financial and other data set forth below should not be
considered to be indicative of:
- actual results that would have been realized had the Combination and the
acquisition of Union Pacific Fuels actually occurred on January 1, 1995;
or
- results of our future operations.
The data should be read in conjunction with the financial statements and related
notes and other financial information appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- --------------------------
1995 1996 1997 1998 1999(1) 1999(2) 2000(2)
---------- ---------- ---------- ---------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating
revenues.............. $2,413,871 $3,998,273 $4,769,072 $4,302,697 $5,574,580 $959,000 $2,050,798
Costs of natural gas and
petroleum products.... 1,729,278 2,976,059 3,798,465 3,527,533 4,554,776 762,000 1,703,092
OTHER DATA:
Gas transported and/or
processed (TBtu/d).... 5.4 6.5 7.5 7.3 7.3 7.0 7.9
NGLs
production(MBbl/d).... 277 313 358 373 400 382 415
MARKET DATA:
Average NGL price (per
gallon)(3)............ $.28 $.38 $.34 $.25 $.33 $.22 $.50
Average natural gas
(price per
MMBtu)(4)............. $1.64 $2.59 $2.59 $2.11 $2.27 $1.75 $2.52
</TABLE>
- ---------------
(1) Includes $34.0 million of hedging losses recorded in total operating
revenues. Duke Energy commenced risk management activities for its midstream
natural gas business at the end of 1998. Activity for periods prior to 1999
was not significant.
(2) Includes $4.0 million of hedging gain and $46.7 million of hedging loss for
the three months ended March 31, 1999 and 2000, respectively.
(3) Based on index prices from the Mont Belvieu and Conway market hubs that are
weighted by our component and location mix for the periods indicated.
(4) Based on the NYMEX Henry Hub prices for the periods indicated.
11
<PAGE> 14
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in our company. As a stockholder, you will be subject to risks inherent
in our business. The performance of your shares will reflect the performance of
our business relative to, among other things, competition, market conditions and
general economic and industry conditions. The value of your investment may
increase or decrease and you could suffer a loss. You should carefully consider
the risks described below as well as the other information contained in this
prospectus. Additional risks currently not known to us or that we currently deem
immaterial may also impair our business operations.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the
pre-offering net tangible book value per share of our common stock. Purchasers
of our common stock in the offering will experience immediate and substantial
dilution. The dilution to new investors will be approximately $7.53 per share in
net tangible book value. See "Dilution."
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND THE PRICE
OF OUR STOCK MAY BE SUBJECT TO FLUCTUATIONS.
No market for our common stock existed prior to this offering, and although
our shares of common stock have been approved for listing, subject to official
notice of issuance, on the New York Stock Exchange, we cannot assure you that a
viable trading market for our common stock will develop or be sustained.
The initial public offering price was determined by negotiations among us,
Duke Energy and the underwriters based on numerous factors. The market price of
our common stock after this offering may vary from the initial public offering
price, and you may not be able to resell your shares at or above the initial
public offering price. The market price of our common stock is likely to be
volatile and could be subject to fluctuations in response to factors such as the
following, most of which are beyond our control:
- operating results that vary from the expectations of securities analysts
and investors;
- changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors;
- the operations, regulatory, market and other risks discussed in this
section;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- announcements by third parties of significant claims or proceedings
against us; and
- future sales of our common stock.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations. These broad market fluctuations may adversely affect
the market price of our common stock.
FUTURE SALES OF OUR COMMON STOCK BY EXISTING STOCKHOLDERS COULD DEPRESS OUR
STOCK PRICE.
Sales of a substantial number of shares of our common stock after the
offering could adversely affect the market price of our common stock by
introducing a significant increase in the supply of common stock to the market.
This increased supply could cause the market price of our common stock to
decline significantly.
After the offering, we will have outstanding 140,752,211 shares of common
stock, and we will have reserved 4,000,000 shares of common stock for issuance
under our 2000 Long-Term Incentive Plan. All the shares of common stock sold in
the offering will be freely tradable without restriction or further registration
under the federal securities laws unless purchased by one of our "affiliates,"
as that term is defined in Rule 144 under the Securities Act of 1933. The
remaining shares of outstanding common stock, including shares held
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<PAGE> 15
by Duke Energy, Phillips and their affiliates, will be "restricted securities"
under the Securities Act and will be subject to restrictions on the timing,
manner and volume of sales of restricted shares.
In connection with the offering, we and our officers and directors, as well
as Duke Energy and Phillips, have agreed not to sell any shares of common stock
for a period of 180 days after the date of this prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated. The lock-up to which we
are a party does not apply to:
- our securities issued under our existing benefit plans, including our
2000 Long-Term Incentive Plan, or under any dividend reinvestment plan;
- shares of our common stock issued in connection with the merger of the
subsidiary of Phillips that holds Phillips' interest in Field Services
LLC into our company to be completed concurrently with the completion of
the offering; or
- shares of our common stock or other securities convertible or
exchangeable into shares of our common stock issued as payment of any
part of the purchase price for businesses or assets we acquire, provided
that any shares or securities so issued may not be transferred during the
180-day lock-up period.
The lock-up to which Duke Energy, Phillips and our officers and directors
are a party does not apply to our securities acquired by them in open market
transactions after completion of the offering. Morgan Stanley & Co. Incorporated
has sole discretion to waive any of the provisions of any of these lock-up
agreements. Upon expiration of the lock-up period, the shares outstanding and
owned by Duke Energy, Phillips and their affiliates may be sold in the future
without registration under the Securities Act to the extent permitted by Rule
144 or any applicable exemption under the Securities Act. Under a registration
rights agreement between Duke Energy, Phillips and our company, Duke Energy,
Phillips and their affiliates have the right to require us to register their
shares of our common stock following the lock-up period. The possibility that
Duke Energy, Phillips or any of their or our affiliates may dispose of shares of
our common stock, or the announcement or completion of any such transaction,
could have an adverse effect on the market price of our common stock. See
"Shares Eligible for Future Sale."
RISKS RELATED TO OUR BUSINESS AND OPERATIONS
OUR BUSINESS IS DEPENDENT UPON PRICES AND MARKET DEMAND FOR OIL, NATURAL
GAS AND NGLS, WHICH ARE BEYOND OUR CONTROL AND HAVE BEEN EXTREMELY VOLATILE.
We are subject to significant risks due to fluctuations in commodity
prices, primarily with respect to the prices of NGLs that we own as a result of
our processing activities. For example, based upon our portfolio of supply
contracts in 1999, and excluding the effects of our commodities risk management
program, a decrease of $.01 per gallon in the price of NGLs and of $.10 per
million Btus in the average price of natural gas throughout 1999 would have
resulted in changes in pre-tax net income of approximately ($24) million and $1
million, respectively. In the past, the prices of residue gas and NGLs have been
extremely volatile and we expect this volatility to continue.
The markets and prices for residue gas and NGLs depend upon factors beyond
our control. These factors include demand for oil, natural gas and NGLs, which
fluctuate with changes in market and economic conditions and other factors,
including:
- the impact of weather on the demand for oil and natural gas;
- the level of domestic oil and natural gas production;
- the availability of imported oil and natural gas;
- the availability of local, intrastate and interstate transportation
systems;
- the availability and marketing of competitive fuels;
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<PAGE> 16
- the impact of energy conservation efforts; and
- the extent of governmental regulation and taxation.
WE MUST CONTINUALLY COMPETE FOR RAW NATURAL GAS SUPPLY, AND OUR SUCCESS
DEPENDS UPON THE AVAILABLE SUPPLY OF RAW NATURAL GAS.
In order to maintain or increase throughput levels in our raw natural gas
gathering systems and asset utilization rates at our processing plants, we must
continually contract for new raw natural gas supplies to offset natural declines
in connected supplies of raw natural gas. Our future growth will depend, in
part, upon whether we can contract for additional supplies at a greater rate
than the rate of natural decline in our currently connected supplies. The
primary factors affecting our ability to connect new wells to our gathering
facilities include our success in contracting for existing producing raw natural
gas supplies that are not committed to other systems and the level of drilling
activity near our gathering systems. Drilling activity generally increases (or
decreases) as oil and natural gas prices increase (or decrease). Our industry is
highly competitive, and we cannot assure you that we will be able to obtain
additional contracts for raw natural gas supplies.
Our results are materially affected by the volume of raw natural gas
processed at our facilities and asset utilization rates. Fluctuations in energy
prices can greatly affect production rates and investments by third parties in
the development of new oil and natural gas reserves. A material decrease in
natural gas production for a prolonged period in the areas where our gathering
facilities are located, as a result of depressed commodity prices or otherwise,
likely would have a material adverse effect on our results of operations and
financial position.
BECAUSE WE ARE A NEWLY COMBINED COMPANY WITH NO COMBINED OPERATING HISTORY,
NEITHER OUR HISTORICAL NOR OUR PRO FORMA FINANCIAL AND OPERATING DATA MAY BE
REPRESENTATIVE OF OUR FUTURE RESULTS.
We are a newly combined company with no combined operating history. Our
lack of a combined operating history may make it difficult to forecast our
future operating results. Our historical financial statements included in this
prospectus reflect the historical results of operations, financial position and
cash flows of the midstream natural gas businesses of Duke Energy prior to the
Combination. The unaudited pro forma financial information included in this
prospectus are based on the two separate midstream businesses of Duke Energy and
Phillips prior to the Combination, each of which were managed separately prior
to the Combination. As a result, the historical and pro forma information may
not give you an accurate indication of what our actual results would have been
if the Combination had been completed at the beginning of the periods presented
or of what our future results of operations are likely to be. In addition, our
future results will depend on our ability to integrate our operations,
efficiently manage our combined facilities and execute our business strategy.
A SIGNIFICANT COMPONENT OF OUR GROWTH STRATEGY IS ACQUISITIONS, AND WE MAY
NOT BE ABLE TO COMPLETE FUTURE ACQUISITIONS SUCCESSFULLY.
Our business strategy has emphasized growth through strategic acquisitions,
but we cannot assure you that we will be able to continue to identify attractive
or willing acquisition candidates or that we will be able to acquire these
candidates on economically acceptable terms. Competition for acquisition
opportunities in our industry exists and may increase. Any increase in the level
of competition for acquisitions may increase the cost of, or cause us to refrain
from, completing acquisitions.
Our strategy of completing acquisitions is dependent upon, among other
things, our ability to obtain debt and equity financing and regulatory
approvals. Our ability to pursue our growth strategy may be hindered if we are
not able to obtain financing or regulatory approvals, including those under
federal and state antitrust laws. Our ability to grow through acquisitions and
manage such growth will require us to continue to invest in operational,
financial and management information systems and to attract, retain, motivate
and effectively manage our employees. The inability to manage the integration of
acquisitions effectively could have a material adverse effect on our financial
condition, results of operations and business. Pursuit of our acquisition
14
<PAGE> 17
strategy may cause our financial position and results of operations to fluctuate
significantly from period to period.
GROWING OUR BUSINESS BY CONSTRUCTING NEW PIPELINES AND PROCESSING
FACILITIES SUBJECTS US TO CONSTRUCTION RISKS AND RISKS THAT RAW NATURAL GAS
SUPPLIES WILL NOT BE AVAILABLE UPON COMPLETION OF THE FACILITIES.
One of the ways we intend to grow our business is through the construction
of additions to our existing gathering systems and construction of new
processing facilities. The construction of gathering and processing facilities
requires the expenditure of significant amounts of capital, which may exceed our
expectations. Generally, we may have only limited raw natural gas supplies
committed to these facilities prior to their construction. Moreover, we may
construct facilities to capture anticipated future growth in production in a
region in which anticipated production growth does not materialize. As a result,
there is the risk that new facilities may not be able to attract enough raw
natural gas to achieve our expected investment return, which could adversely
affect our results of operations and financial condition.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS IN COMPETITION WITH A NUMBER OF
DIFFERENT COMPANIES.
We face strong competition in our geographic areas of operations. Our
competitors include major integrated oil companies, interstate and intrastate
pipelines and raw natural gas gatherers and processors. Some of our competitors
offer more services or have greater financial resources and access to larger raw
natural gas supplies than we do. We compete with integrated companies that have
greater access to raw natural gas supply and are less susceptible to
fluctuations in price or volume, and some of our competitors that have greater
financial resources may have an advantage in competing for acquisitions or other
new business opportunities.
FEDERAL, STATE OR LOCAL REGULATORY MEASURES COULD ADVERSELY AFFECT OUR
BUSINESS.
While the Federal Energy Regulatory Commission, or FERC, does not directly
regulate the major portions of our operations, federal regulation, directly or
indirectly, influences certain aspects of our business and the market for our
products. As a raw natural gas gatherer and not an operator of interstate
transmission pipelines, we generally are exempt from FERC regulation under the
Natural Gas Act of 1938, but FERC regulation still significantly affects our
business. In recent years, FERC has pursued pro-competition policies in its
regulation of interstate natural gas pipelines. However, we cannot assure you
that FERC will continue this approach as it considers proposals by pipelines to
allow negotiated rates not limited by rate ceilings, pipeline rate case
proposals and revisions to rules and policies that may affect rights of access
to natural gas transportation capacity.
While state public utility commissions do not regulate our business, state
and local regulations do affect our business. We are subject to ratable take and
common purchaser statutes in the states where we operate. Ratable take statutes
generally require gatherers to take, without undue discrimination, natural gas
production that may be tendered to the gatherer for handling. Similarly, common
purchaser statutes generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These statutes are designed
to prohibit discrimination in favor of one producer over another producer or one
source of supply over another source of supply. These statutes also have the
effect of restricting our right as an owner of gathering facilities to decide
with whom we contract to purchase or transport natural gas. Federal law leaves
any economic regulation of raw natural gas gathering to the states, and some of
the states in which we operate have adopted complaint-based or other limited
economic regulation of raw natural gas gathering activities. States in which we
operate that have adopted some form of complaint-based regulation, like
Oklahoma, Kansas and Texas, generally allow natural gas producers and shippers
to file complaints with state regulators in an effort to resolve grievances
relating to natural gas gathering access and rate discrimination. The states in
which we conduct operations administer federal pipeline safety standards under
the Pipeline Safety Act of 1968, and the "rural gathering exemption" under that
statute that our gathering facilities currently enjoy may be restricted in the
future. The "rural gathering exemption" under the Natural Gas Pipeline Safety
Act of 1968 presently exempts substantial portions of our gathering facilities
from jurisdiction under that statute, including those portions located outside
of cities, towns, or any area designated as residential or commercial, such as a
subdivision or shopping center. See "Business -- Regulation."
15
<PAGE> 18
OUR BUSINESS INVOLVES HAZARDOUS SUBSTANCES AND MAY BE ADVERSELY AFFECTED BY
ENVIRONMENTAL REGULATION.
Many of the operations and activities of our gathering systems, plants and
other facilities are subject to significant federal, state and local
environmental laws and regulations. These include, for example, laws and
regulations that impose obligations related to air emissions and discharge of
wastes from our facilities and the cleanup of hazardous substances that may have
been released at properties currently or previously owned or operated by us or
locations to which we have sent wastes for disposal. Various governmental
authorities have the power to enforce compliance with these regulations and the
permits issued under them, and violators are subject to administrative, civil
and criminal penalties, including civil fines, injunctions or both. Liability
may be incurred without regard to fault for the remediation of contaminated
areas. Private parties, including the owners of properties through which our
gathering systems pass, may also have the right to pursue legal actions to
enforce compliance as well as to seek damages for non-compliance with
environmental laws and regulations or for personal injury or property damage.
There is inherent risk of the incurrence of environmental costs and
liabilities in our business due to our handling of natural gas and other
petroleum products, air emissions related to our operations, historical industry
operations, waste disposal practices and the prior use of natural gas flow
meters containing mercury. In addition, the possibility exists that stricter
laws, regulations or enforcement policies could significantly increase our
compliance costs and the cost of any remediation that may become necessary. We
cannot assure you that we will not incur material environmental costs and
liabilities. Furthermore, we cannot assure you that our insurance will provide
sufficient coverage in the event an environmental claim is made against us.
Our business may be adversely affected by increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance with
required operating or other regulatory permits. New environmental regulations
might adversely affect our products and activities, including processing,
storage and transportation, as well as waste management and air emissions.
Federal and state agencies also could impose additional safety requirements, any
of which could affect our profitability.
OUR BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL RISKS, SOME OF WHICH MAY
NOT BE COVERED BY INSURANCE.
Our operations are subject to the many hazards inherent in the gathering,
compressing, treating and processing of raw natural gas and NGLs and storage of
residue gas, including ruptures, leaks and fires. These risks could result in
substantial losses due to personal injury and/or loss of life, severe damage to
and destruction of property and equipment and pollution or other environmental
damage and may result in curtailment or suspension of our related operations. We
are not fully insured against all risks incident to our business. If a
significant accident or event occurs that is not fully insured, it could
adversely affect our operations and financial condition.
OUR USE OF DERIVATIVE FINANCIAL INSTRUMENTS HAS IN THE PAST AND COULD IN
THE FUTURE RESULT IN FINANCIAL LOSSES OR REDUCE OUR INCOME.
We use futures and option contracts traded on the New York Mercantile
Exchange and over-the-counter options and price and basis swaps with other
natural gas merchants and financial institutions. Use of these instruments is
intended to reduce our exposure to short-term volatility in commodity prices. We
could, however, incur financial losses or fail to recognize the full value of a
market opportunity as a result of volatility in the market values of the
underlying commodities or if one of our counterparties fails to perform under a
contract.
Duke Energy has conducted our commodity risk management activities since
late 1998. Prior to that time, we did not engage in significant commodity risk
management activities. In the past, Duke Energy used crude oil price swaps to
hedge a portion of our exposure to decreasing NGL prices and generally increased
the level of hedging as prices increased. This strategy resulted in a $34.0
million hedging loss in 1999 and a $46.7 million hedging loss in the first
quarter of 2000 due to crude oil prices rising above the level at which they
were hedged. Effective with the Combination, we began conducting our commodity
risk management activities independent of Duke Energy. We anticipate that we
will generally hedge a lower percentage of our cash flows compared to the
historical hedging levels undertaken by Duke Energy on our behalf.
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<PAGE> 19
For additional information about our risk management activities, including
our use of derivative financial instruments, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quantitative and
Qualitative Disclosure about Market Risks."
OUR SUCCESS DEPENDS ON KEY MEMBERS OF OUR MANAGEMENT, THE LOSS OF WHOM
COULD DISRUPT OUR BUSINESS OPERATIONS.
We depend on the continued employment and performance of Jim W. Mogg,
Michael J. Panatier, Mark A. Borer, Michael J. Bradley, David D. Frederick,
Robert F. Martinovich, William W. Slaughter and Martha B. Wyrsch. We have
entered into an employment agreement with Mr. Panatier and a consulting
agreement with Mr. Slaughter. See "Management -- Employment and Consulting
Agreements." If our key managers resign or become unable to continue in their
present roles and are not adequately replaced, our business operations could be
materially adversely affected. We do not maintain any "key man" life insurance
for any officers. See "Management."
RISKS RELATED TO OUR RELATIONSHIP WITH DUKE ENERGY AND PHILLIPS
DUKE ENERGY AND PHILLIPS WILL CONTROL THE OUTCOME OF STOCKHOLDER VOTING AND
MAY EXERCISE THEIR VOTING POWER IN A MANNER ADVERSE TO YOU.
After the offering, Duke Energy and Phillips will together hold
approximately 81.24% of the outstanding common stock of our company. The exact
allocation of these shares between Duke Energy and Phillips will be determined
based on the average of the closing prices of our common stock on the New York
Stock Exchange Composite Tape on its first five trading days. Assuming that the
five-day average is the same as the assumed initial public offering price, after
the offering Duke Energy will indirectly own approximately 58.65% (57.05% if the
underwriters fully exercise their over-allotment option) and Phillips will
indirectly own approximately 22.59% (21.97% if the underwriters fully exercise
their over-allotment option) of our outstanding common stock. Although the exact
allocation between Duke Energy and Phillips may vary, upon completion of the
offering, Duke Energy will, in any event, control our company through its share
ownership and representation on our Board of Directors.
Accordingly, Duke Energy and Phillips are in a position to control the
outcome of matters requiring a stockholder vote, including the election of
directors, adoption of an amendment to our certificate of incorporation or
bylaws or approving transactions involving a change of control. In addition, our
certificate of incorporation grants each of Duke Energy and Phillips the right
to purchase shares of common stock in our future public offerings in an amount
sufficient to maintain its percentage ownership in our company so long as each
owns at least 20% of our common stock.
Duke Energy and Phillips have agreed to vote their shares of common stock
in a manner that ensures that seven designees of Duke Energy (two of whom are
required to be independent directors) and four designees of Phillips (one of
whom is required to be an independent director) are elected to our Board of
Directors. Our bylaws require the approval of at least eight of our 11 directors
for authorization of a variety of corporate actions, including significant
acquisitions, dispositions, capital expenditures and borrowings. As a result,
Duke Energy and Phillips have the ability to control our policies, management
and affairs, including decisions regarding the acquisition or disposition of
assets, business combinations, issuances of common stock and the declaration of
dividends. For example, Duke Energy and Phillips could prevent transactions that
would dilute their respective ownership interests in our company, including
prospective acquisitions that we would finance by issuing shares of our common
stock. The interests of Duke Energy and Phillips may differ from yours, and they
may vote their common stock in a manner that may adversely affect you.
SEVERAL OF OUR DIRECTORS AND OFFICERS MAY HAVE CONFLICTS OF INTEREST
BECAUSE THEY ARE ALSO DIRECTORS OR OFFICERS OF DUKE ENERGY, PHILLIPS OR THE
GENERAL PARTNER OF TEPPCO.
After completion of the offering, five of our directors also will be past
or current directors or officers of Duke Energy, four of our directors will be
past or current directors or officers of Phillips and four of our directors or
officers will be directors of the general partner of TEPPCO, a situation that
may create conflicts of interest. These directors and officers have dual
responsibilities. Directors and officers of Duke Energy and
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<PAGE> 20
Phillips have fiduciary duties to manage Duke Energy and Phillips, including
their investments in subsidiaries and affiliates such as us, in a manner
beneficial to Duke Energy and Phillips and their stockholders. Directors and
officers of the general partner of TEPPCO have fiduciary duties to manage the
business of TEPPCO in a manner beneficial to TEPPCO and its unitholders,
including its public unitholders. As directors and officers of our company, they
also have fiduciary duties to manage us in a manner beneficial to us and our
stockholders. Their duties as directors or officers of Duke Energy, Phillips or
the general partner of TEPPCO may conflict with their duties as directors or
officers of our company with respect to corporate opportunities, business
dealings among Duke Energy, Phillips, TEPPCO and us and other corporate matters.
For example, Duke Energy, Phillips, TEPPCO and our company are engaged in
related lines of business, and we may have similar acquisition strategies. As a
result, conflicts may arise because acquisition opportunities that may be
beneficial to more than one company may be presented to our officers or
directors who are also officers or directors of Duke Energy, Phillips or the
general partner of TEPPCO. Other conflicts of interest may arise in the future
as a result of the extensive relationships among our company, Duke Energy,
Phillips and TEPPCO. The resolution of these conflicts may not always be in our
or our stockholders' best interest.
OUR BUSINESS OPPORTUNITIES COULD BE LIMITED BECAUSE DUKE ENERGY, PHILLIPS
AND THEIR RESPECTIVE AFFILIATES MAY COMPETE WITH US IN MIDSTREAM NATURAL GAS
ACTIVITIES, AND WE MAY ONLY ENGAGE IN THE LIMITED ACTIVITIES DESCRIBED IN THIS
PROSPECTUS.
Our certificate of incorporation limits the scope of our business to the
midstream natural gas industry in the United States and Canada and the marketing
of NGLs in Mexico and the transportation, marketing and storage of other
petroleum products and does not permit us to pursue other potentially profitable
activities. Duke Energy and its affiliates are permitted to engage in the
midstream natural gas industry and related businesses, even if it has a negative
competitive effect on us. We cannot amend these provisions of our certificate of
incorporation without Duke Energy's prior consent (so long as Duke Energy owns a
majority of our outstanding common stock), which Duke Energy may withhold at its
sole discretion. Phillips also has retained midstream natural gas assets in its
exploration and production organization and is permitted to engage in the
midstream natural gas industry and related businesses, even if it has a negative
competitive effect on our company.
DUKE ENERGY'S OWNERSHIP INTEREST AND PROVISIONS CONTAINED IN OUR
CERTIFICATE OF INCORPORATION COULD DISCOURAGE A TAKEOVER ATTEMPT, WHICH MAY
REDUCE OR ELIMINATE THE LIKELIHOOD OF A CHANGE OF CONTROL TRANSACTION AND,
THEREFORE, YOUR ABILITY TO SELL YOUR SHARES FOR A PREMIUM.
In addition to Duke Energy's controlling position, provisions contained in
our certificate of incorporation, such as limitations on stockholder proposals
at meetings of stockholders and the inability of stockholders to call special
meetings, could make it more difficult for a third party to acquire control of
our Company, even if some of our stockholders considered such a change of
control to be beneficial. Our certificate of incorporation also authorizes our
Board of Directors to issue preferred stock without stockholder approval. If our
Board of Directors elects to issue preferred stock, it could make it even more
difficult for a third party to acquire us, which may reduce or eliminate your
ability to sell your shares of common stock at a premium. See "Description of
Capital Stock."
OUR COSTS RELATED TO CORPORATE SERVICES COULD INCREASE AS OUR RELATIONSHIP
WITH DUKE ENERGY OR PHILLIPS CHANGES IN THE FUTURE.
We have entered into agreements with Duke Energy and Phillips under which
Duke Energy and Phillips provide corporate support services to us. Our
agreements with Duke Energy and Phillips expire, unless extended, on December
31, 2000. Replacing such services, either internally or through third-party
providers, may cause disruptions in our operations or result in costs in excess
of our historical costs for similar services.
PHILLIPS HAS NOT YET COMPLETELY TRANSFERRED TO US RECORD TITLE TO ALL OF
ITS MIDSTREAM ASSETS THAT WERE TRANSFERRED TO US IN THE COMBINATION. IN THE
EVENT OF A BANKRUPTCY OF PHILLIPS, WE MAY NOT BE ABLE TO OBTAIN RECORD TITLE TO
THESE ASSETS.
Although Phillips has transferred to us the midstream natural gas assets it
contributed in the Combination, Phillips and its affiliates continue to hold
record title to some of the real property for our benefit.
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<PAGE> 21
Although Phillips is in the process of transferring record title to us, the
process may not be completed for some time. In the event of a Phillips
bankruptcy before record title has been conveyed to us, we may have difficulty
or be unable to obtain record title to these properties. The failure to complete
this planned record title transfer could have a material adverse effect on our
business, operations and financial results.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains statements that do not directly or exclusively
relate to historical facts. Such statements are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. You
can typically identify forward-looking statements by the use of forward-looking
words, such as "may," "could," "project," "believe," "anticipate," "expect,"
"estimate," "potential," "plan," "forecast" and other similar words.
All statements other than statements of historical facts contained in this
prospectus, including statements regarding our future financial position,
business strategy, budgets, projected costs and plans and objectives of
management for future operations, are forward-looking statements.
The forward-looking statements in this prospectus reflect our intentions,
plans, expectations, assumptions and beliefs about future events and are subject
to risks, uncertainties and other factors, many of which are outside our
control. Important factors that could cause actual results to differ materially
from the expectations expressed or implied in the forward-looking statements
include known and unknown risks. Known risks include, but are not limited to,
those listed in the "Risk Factors" section and elsewhere in this prospectus.
In light of these risks, uncertainties and assumptions, the events
described in the forward-looking statements in this prospectus might not occur
or might occur to a different extent or at a different time than described in
this prospectus. We undertake no obligation to update or revise our
forward-looking statements, whether as a result of new information, future
events or otherwise.
USE OF PROCEEDS
We expect the net proceeds to us from the offering to be approximately $521
million ($600 million if the underwriters fully exercise their over-allotment
option).
We intend to use the net proceeds that we receive from the offering to
repay a portion of our outstanding commercial paper. The proceeds of the
commercial paper were used to make one-time cash distributions of approximately
$1.5 billion to Duke Energy and approximately $1.2 billion to Phillips and for
working capital requirements. At April 30, 2000, our outstanding commercial
paper had maturity dates ranging from one day to 70 days, with annual interest
rates ranging from 6.20% to 6.45%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Combination" and
"-- Liquidity and Capital Resources."
DIVIDEND POLICY
Following consummation of the offering, we currently anticipate paying
quarterly cash dividends on our common stock. Subject to attaining earnings
sufficient to pay such dividends and meet our other cash needs, our Board of
Directors currently intends to declare and pay an initial quarterly dividend of
$.06 per share of common stock payable October 16, 2000 to holders of record on
September 29, 2000. We expect cash flow from operations to be sufficient to fund
this dividend. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The declaration, amount and payment of dividends are at the discretion of
our Board of Directors and will depend upon our results of operations, financial
condition, cash requirements for our business, future prospects and other
factors determined to be relevant by our Board of Directors, as well as the
effect of any restrictive covenants in our credit agreements and debt
instruments. We cannot assure you that dividends will be paid in the future nor
can we assure you as to the amount of any dividends.
19
<PAGE> 22
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the net tangible book value per share of our common stock after
the offering. Prior to the closing of the offering, Phillips will exchange its
member interest in Field Services LLC for our common stock. As a result, all
book value determinations reflect minority interest prior to the offering as
stockholders' equity. We calculate net book value per share by dividing the net
assets (total assets less liabilities) by the number of shares outstanding
before the offering. We calculate net tangible book value per share by dividing
the net tangible assets (total assets less liabilities and net intangible
assets) by the number of shares of common stock outstanding before the offering.
Our net book value and net tangible book value as of March 31, 2000 were
approximately $16.06 and $10.82 per share, respectively. Without taking into
account any changes in net book value or net tangible book value after March 31,
2000, other than to give effect to the offering (at an assumed initial public
offering price per share of $21.00), the application of the estimated net
proceeds from the offering and deferred tax adjustments to intangibles, the pro
forma net book value of the common stock as of March 31, 2000 would have been
approximately $2,357.4 million, or $16.76 per share, and the pro forma net
tangible book value of the common stock as of such date would have been
approximately $1,894.8 million, or $13.47 per share. Assuming the offering had
occurred at March 31, 2000, an immediate increase in net book value of $.70 per
share to the existing stockholders and an immediate pro forma dilution of $4.24
per share to new investors would have occurred. The following table shows the
effect of the offering as if the offering had occurred at March 31, 2000 and
illustrates the immediate increase in pro forma net tangible book value of $2.65
per share to the existing stockholders and an immediate pro forma dilution of
$7.53 per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $21.00
Net tangible book value per share as of March 31,
2000................................................. $10.82
Increase in net tangible book value per share
attributable to the offering......................... 2.65
------
Pro forma net tangible book value per share as of March
31, 2000 after giving effect to the offering............ 13.47
------
Pro forma dilution per share to new investors............. $ 7.53
======
</TABLE>
The foregoing table assumes the underwriters do not exercise their
overallotment option, and it does not reflect restricted stock awards for
approximately 110,500 shares of common stock expected to be issued concurrently
with the offering. Assuming all the restricted stock awards are granted, pro
forma net tangible book value per share would decrease $.01 per share to $13.46
per share.
The following table shows, on a pro forma as adjusted basis at March 31,
2000, the number of shares of common stock owned and the average price paid per
share by the existing stockholders (based on net book value) and by new
investors purchasing common stock from us in the offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ------- ------------- ------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Existing stockholders (including
anticipated restricted stock
awards).......................... 114.5 81.3% $1,836.9 76.9% $16.05
New investors...................... 26.3 18.7 552.3 23.1 21.00
----- ----- -------- ---- ------
Total......................... 140.8 100.0% $2,389.2 100% $16.97
===== ===== ======== ==== ======
</TABLE>
20
<PAGE> 23
CAPITALIZATION
The following table sets forth the total capitalization of our company as
of March 31, 2000:
- on a historical basis; and
- on a pro forma basis giving effect to:
- the financing of the Combination;
- the merger of the subsidiary of Phillips that indirectly holds
Phillips' minority interest into our company concurrently with the
offering and the resulting issuance of shares of our common stock to
Phillips; and
- the sale of 26,300,000 shares of our common stock in the offering and
the application of the estimated net proceeds from the offering.
You should read the information below in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 2000
-------------------------
HISTORICAL PRO FORMA
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Short term debt............................................. $2,744,319(1) $2,138,400(2)
========== ==========
Minority interest........................................... $ 521,705 $ --
Stockholders' equity:
Common stock, $1.00 par value per share, 1,000 shares
authorized, 1,000 shares issued and outstanding
historical, $.01 par value per share, 500,000,000
shares authorized, 140,752,211 shares issued and
outstanding pro forma.................................. 1 1,408
Paid-in capital........................................... 1,115,241 2,156,020
Retained earnings......................................... 199,943 199,943
---------- ----------
Total stockholders' equity............................. 1,315,185 2,357,371
---------- ----------
Total capitalization................................... $1,836,890 $2,357,371
========== ==========
</TABLE>
- ---------------
(1) Represents distributions payable to Duke Energy and Phillips in connection
with the Combination.
(2) Represents outstanding commercial paper issued on April 3, 2000 to pay the
distributions payable to Duke Energy and Phillips, net of reductions
resulting from the use of proceeds of the offering. Also reflects repayment
of $131,434,000 of indebtedness from working capital.
21
<PAGE> 24
SELECTED HISTORICAL AND PRO FORMA
COMBINED FINANCIAL AND OTHER DATA
The following table sets forth selected historical financial and other data
for the Predecessor Company. The historical income statement data and cash flow
data for each of the three years ended December 31, 1999 and the historical
balance sheet data as of December 31 in each of those three years have been
derived from the Predecessor Company's audited historical financial statements.
The historical financial information for 1995 and 1996 and the three months
ended March 31, 1999 and 2000 is derived from unaudited financial statements.
The historical data set forth below relates only to the Predecessor Company and
does not reflect the results of operations or financial condition of the
Phillips businesses transferred to us in the Combination. In addition, the
following table sets forth selected pro forma financial and other data, which
reflect the historical results of operations of the Predecessor Company,
adjusted for:
- the acquisition of the midstream natural gas business of Phillips in the
Combination;
- the acquisition of Union Pacific Fuels;
- incurrence of indebtedness to fund the cash distributions to Duke Energy
and Phillips in connection with the Combination as described in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations;"
- the offering and the expected application of the estimated proceeds;
- the transfer to our company of additional midstream natural gas assets
acquired by Duke Energy prior to consummation of the Combination; and
- the transfer to our company of the general partner of TEPPCO;
as if all had occurred as of January 1, 1999 for income statement purposes and
March 31, 2000 for balance sheet purposes. The data should be read in
conjunction with the financial statements and related notes and other financial
information appearing elsewhere in this prospectus. The pro forma data set forth
below are not necessarily indicative of results that may occur in the future.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY HISTORICAL PRO FORMA
------------------------------------------------------------- ----------
1995 1996 1997 1998 1999(1)(2) 1999(1)
-------- ---------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
ANNUAL INCOME STATEMENT DATA:
Operating revenues:
Sales of natural gas and petroleum
products........................ $752,880 $1,321,111 $1,700,029 $1,469,133 $ 3,310,260 $5,268,927
Transportation, storage and
processing...................... 52,308 70,577 101,803 115,187 148,050 305,653
-------- ---------- ---------- ---------- ----------- ----------
Total operating revenues... 805,188 1,391,688 1,801,832 1,584,320 3,458,310 5,574,580
Costs and expenses:
Natural gas and petroleum
products........................ 601,533 1,070,805 1,468,089 1,338,129 2,965,297 4,554,776
Operating and maintenance......... 65,458 93,838 104,308 113,556 181,392 393,134
Depreciation and amortization..... 37,281 55,500 67,701 75,573 130,788 267,397
General and administrative........ 20,576 43,871 36,023 44,946 73,685 96,210
Net (gain) loss on sale of
assets.......................... (9,029) (2,350) (236) (33,759) 2,377 1,470
-------- ---------- ---------- ---------- ----------- ----------
Total costs and expenses... 715,819 1,261,664 1,675,885 1,538,445 3,353,539 5,312,987
Operating income.................... 89,369 130,024 125,947 45,875 104,771 261,593
Equity in earnings of unconsolidated
affiliates........................ 1,660 2,997 9,784 11,845 22,502 27,338
-------- ---------- ---------- ---------- ----------- ----------
Earnings before interest and tax.... 91,029 133,021 135,731 57,720 127,273 288,931
Interest expense.................... 20,115 12,747 51,113 52,403 52,915 171,613
-------- ---------- ---------- ---------- ----------- ----------
Earnings before income tax.......... 70,914 120,274 84,618 5,317 74,358 117,318
Income tax.......................... 37,299 35,665 33,380 3,289 31,029 53,816
-------- ---------- ---------- ---------- ----------- ----------
Net income.......................... $ 33,615 $ 84,609 $ 51,238 $ 2,028 $ 43,329 $ 63,502
======== ========== ========== ========== =========== ==========
Earnings per share(3)............... $ .45
==========
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
PREDECESSOR COMPANY HISTORICAL PRO FORMA
------------------------------------------------------------- ----------
1995 1996 1997 1998 1999(1)(2) 1999(1)
-------- ---------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flow data:
Cash flow from operations......... $ 173,357 $ 40,409 $ 173,136
Cash flow from investing
activities...................... (138,021) (203,625) (1,571,446)
Cash flow from financing
activities...................... (35,061) 162,514 1,398,934
Acquisitions and other capital
expenditures...................... $183,531 $ 524,730 $ 121,978 $ 185,479 $ 1,570,083 $ 429,847
EBITDA(4)........................... $128,310 $ 188,521 $ 203,432 $ 133,293 $ 258,061 $ 556,328
Gas transported and/or processed
(TBtu/d).......................... 1.9 2.9 3.4 3.6 5.1 7.3
NGLs production(MBbl/d)............. 55 79 108 110 192 400
MARKET DATA:
Average NGLs price per gallon(5).... $.29 $.39 $.35 $.26 $.34 $.33
Average natural gas price per
MMBtu(6).......................... $1.64 $2.59 $2.59 $2.11 $2.27 $2.27
BALANCE SHEET DATA (END OF PERIOD):
Total assets........................ $917,831 $1,459,416 $1,649,213 $1,770,838 $ 3,471,835
Long-term debt...................... $101,600 $ 101,600 $ 101,600 $ 101,600 $ 101,600
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
PREDECESSOR COMPANY HISTORICAL PRO FORMA
------------------------------- ----------
1999(8) 2000(8) 2000(8)
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
QUARTERLY INCOME STATEMENT DATA:
Operating revenues:
Sales of natural gas and petroleum products....... $ 305,152 $1,415,465 $2,005,449
Transportation, storage and processing............ 29,845 35,746 45,349
----------- ---------- ----------
Total operating revenues................... 334,997 1,451,211 2,050,798
Costs and expenses:
Natural gas and petroleum products................ 272,530 1,278,511 1,703,092
Operating and maintenance......................... 29,096 49,039 99,424
Depreciation and amortization..................... 20,029 37,899 68,270
General and administrative........................ 16,112 29,701 33,952
Net (gain) loss on sale of assets................. (42) 4,139 4,051
----------- ---------- ----------
Total costs and expenses................... 337,725 1,399,289 1,908,789
----------- ---------- ----------
Operating income.................................... (2,728) 51,922 142,009
Equity in earnings of unconsolidated affiliates..... 3,286 6,759 9,968
----------- ---------- ----------
Earnings before interest and tax.................... 558 58,681 151,977
Interest expense.................................... (12,445) (14,477) (42,904)
----------- ---------- ----------
Earnings before income tax.......................... (11,887) 44,204 109,073
Income tax.......................................... (3,366) 17,352 44,135
----------- ---------- ----------
Net income (loss)................................... $ (8,521) $ 26,852 $ 64,938
=========== ========== ==========
Earnings per share(3)............................... $ .46
==========
OTHER DATA:
EBITDA(4)........................................... $ 20,587 $ 96,580 $ 220,247
Gas transported and/or processed (TBtu/d)........... 3.4 6.0 7.9
NGLs production(MBbl/d)............................. 108 231 415
MARKET DATA:
Average NGLs price per gallon(5).................... $ .23 $ .50 $ .50
Average natural gas price per MMBtu(6).............. $ 1.75 $ 2.52 $ 2.52
BALANCE SHEET DATA (END OF PERIOD):
Total assets........................................ $6,312,292 $6,089,567
Long-term debt...................................... $ --(7) $ --(7)
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1997 1998 1999(1)(2) 1999(8) 2000(8)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HISTORICAL SEGMENT INFORMATION:
Operating revenues:
Natural gas.............................. $1,683,483 $1,497,901 $2,483,197 $ 308,326 $ 899,214
NGLs..................................... 423,680 309,380 1,365,577 72,582 798,816
Intersegment............................. (305,331) (222,961) (390,464) (45,911) (246,819)
---------- ---------- ---------- ---------- ----------
Total operating revenues.......... $1,801,832 $1,584,320 $3,458,310 $ 334,997 $1,451,211
========== ========== ========== ========== ==========
Margin:
Natural gas.............................. $ 334,129 $ 243,787 $ 459,843 $ 61,711 $ 147,856
NGLs..................................... (386) 2,404 33,170 756 24,844
---------- ---------- ---------- ---------- ----------
Total margin...................... $ 333,743 $ 246,191 $ 493,013 $ 62,467 $ 172,700
========== ========== ========== ========== ==========
EBITDA(4):
Natural gas.............................. $ 239,841 $ 175,835 $ 298,698 $ 35,957 $ 101,741
NGLs..................................... (386) 2,404 33,048 742 24,540
Corporate................................ (36,023) (44,946) (73,685) (16,112) (29,701)
---------- ---------- ---------- ---------- ----------
Total EBITDA...................... $ 203,432 $ 133,293 $ 258,061 $ 20,587 $ 96,580
========== ========== ========== ========== ==========
EBIT(4):
Natural gas.............................. $ 174,248 $ 102,365 $ 179,273 $ 16,501 $ 67,711
NGLs..................................... (386) 2,404 23,975 742 21,513
Corporate................................ (38,131) (47,049) (75,975) (16,685) (30,543)
---------- ---------- ---------- ---------- ----------
Total EBIT........................ $ 135,731 $ 57,720 $ 127,273 $ 558 $ 58,681
========== ========== ========== ========== ==========
Total assets:
Natural gas.............................. $1,505,111 $2,754,447 $5,329,520
NGLs..................................... 5,137 225,702 191,337
Corporate................................ 260,590 491,686 791,435
---------- ---------- ----------
Total assets...................... $1,770,838 $3,471,835 $6,312,292
========== ========== ==========
</TABLE>
- ---------------
(1) Includes $34.0 million of hedging losses recorded in total operating
revenues. Duke Energy commenced risk management activities associated with
its midstream natural gas business at the end of 1998. Activity for periods
prior to 1999 was not significant.
(2) Includes the results of operations of Union Pacific Fuels for the nine
months ended December 31, 1999. Union Pacific Fuels was acquired by the
Predecessor Company on March 31, 1999.
(3) Earnings per share is not presented for historical periods since the
Predecessor Company was an indirect wholly owned subsidiary of Duke Energy.
Pro forma earnings per share reflects outstanding shares after the
Combination and the anticipated issuance of common stock from the offering.
(4) EBITDA consists of income from continuing operations before interest
expense, income tax expense, and depreciation and amortization expense, less
interest income. EBIT consists of income from continuing operations before
interest expense and income tax expense, less interest income. Neither
EBITDA nor EBIT is a measurement presented in accordance with generally
accepted accounting principles. You should not consider either measure in
isolation from or as a substitute for net income or cash flow measures
prepared in accordance with generally accepted accounting principles or as a
measure of our profitability or liquidity. EBITDA is included as a
supplemental disclosure because it may provide useful information regarding
our ability to service debt and to fund capital expenditures. However, not
all EBITDA may be available to service debt.
(5) Based on index prices from the Mont Belvieu and Conway market hubs that are
weighted by our component and location mix for the periods indicated.
(6) Based on the NYMEX Henry Hub prices for the periods indicated.
(7) We expect to have $2.1 billion of short-term indebtedness outstanding after
the offering and expect to convert a significant portion of this short-term
debt to long-term debt as market conditions permit. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(8) Includes $4.0 million of hedging gain and $46.7 million of hedging loss for
the three months ended March 31, 1999 and 2000, respectively.
24
<PAGE> 27
ADDITIONAL FINANCIAL AND OTHER DATA
The following table sets forth additional financial and other data of our
company. The additional financial and other data set forth in the table below
give effect to the Combination and the transfer to our company of additional
midstream natural gas assets acquired by Duke Energy or Phillips prior to
consummation of the Combination, which were completed on March 31, 2000 and to
the acquisition of Union Pacific Fuels, which occurred on March 31, 1999, as if
each occurred on January 1, 1995.
The additional financial and other data set forth in the table below should
not be considered to be indicative of:
- actual results that would have been realized had the Combination and the
acquisition of Union Pacific Fuels actually occurred on January 1, 1995;
or
- results of our future operations.
The data should be read in conjunction with the financial statements and related
notes and other financial information appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999(1) 1999(2) 2000(2)
---------- ---------- ---------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues... $2,413,871 $3,998,273 $4,769,072 $4,302,697 $5,574,580 $959,028 $2,050,798
Costs of natural gas and
petroleum products....... 1,729,278 2,976,059 3,798,465 3,527,533 4,554,776 761,753 1,703,092
OTHER DATA:
Gas transported and/or
processed (TBtu/d)....... 5.4 6.5 7.5 7.3 7.3 7.0 7.9
NGLs production(MBbl/d).... 277 313 358 373 400 382 415
MARKET DATA:
Average NGLs (price per
gallon)(3)............... $.28 $.38 $.34 $.25 $.33 $.22 $.50
Average natural gas (price
per MMBtu)(4)............ $1.64 $2.59 $2.59 $2.11 $2.27 $1.75 $2.52
</TABLE>
- ---------------
(1) Includes $34.0 million of losses from risk management activities recorded in
total operating revenues. Duke Energy commenced risk management activities
for its midstream natural gas business at the end of 1998. Activity for
periods prior to 1999 was not significant.
(2) Includes $4.0 million of hedging gain and $46.7 million of hedging loss for
the three months ended March 31, 1999 and 2000, respectively.
(3) Based on index prices from the Mont Belvieu and Conway market hubs that are
weighted by our component mix and location mix for the periods indicated.
(4) Based on the NYMEX Henry Hub prices for the periods indicated.
25
<PAGE> 28
The following table presents certain summary historical financial data of
the Predecessor Company, the midstream natural gas business of Phillips'
transferred to our company in connection with the Combination and Union Pacific
Fuels acquired by the Predecessor Company on March 31, 1999.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
--------- ---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Gross Margin................................. $ 203,655 $ 320,883 $ 333,743 $ 246,191 $ 493,013
Operating, maintenance and general and
administrative............................. 86,034 137,709 140,331 158,502 255,077
Other income................................. 10,689 5,347 10,020 45,604 20,125
--------- ---------- --------- --------- ---------
EBITDA(1).................................... $ 128,310 $ 188,521 $ 203,432 $ 133,293 $ 258,061
========= ========== ========= ========= =========
PHILLIPS GAS COMPANY
Gross Margin................................. $ 340,751 $ 486,534 $ 444,727 $ 355,479 $ 440,547
Operating, maintenance and general and
administrative............................. 254,973 186,499 205,375 199,862 192,424
Other income................................. 1,443 4,527 2,858 10,665 1,955
--------- ---------- --------- --------- ---------
EBITDA(1).................................... $ 87,221 $ 304,562 $ 242,210 $ 166,282 $ 250,078
========= ========== ========= ========= =========
UNION PACIFIC FUELS
Gross Margin................................. $ 140,187 $ 214,797 $ 192,137 $ 173,494 $ 45,044
Operating, maintenance and general and
administrative............................. 54,655 65,538 77,621 102,626 29,443
Other income................................. 15,507 24,207 19,535 17,785 4,821
--------- ---------- --------- --------- ---------
EBITDA(1).................................... $ 101,039 $ 173,466 $ 134,051 $ 88,653 $ 20,422
========= ========== ========= ========= =========
</TABLE>
- ---------------
(1) EBITDA consists of income from continuing operations before interest
expense, income tax expense, and depreciation and amortization expense, less
interest income. EBITDA is not a measurement presented in accordance with
generally accepted accounting principles. You should not consider it in
isolation from or as a substitute for net income or cash flow measures
prepared in accordance with generally accepted accounting principles or as a
measure of our profitability or liquidity. EBITDA is included as a
supplemental disclosure because it may provide useful information regarding
our ability to service debt and to fund capital expenditures. However, not
all EBITDA may be available to service debt.
26
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion details the material factors that affected our
historical and pro forma financial condition and results of operations in 1997,
1998 and 1999 and the three months ended March 31, 1999 and 2000. This
discussion should be read in conjunction with "Selected Historical and Pro Forma
Combined Financial and Other Data," "Additional Financial and Other Data" and
the historical and pro forma financial statements, and, in each case, the notes
related thereto, included elsewhere in this prospectus.
Unless the context otherwise requires, the discussion of our business
contained in this section relates to the Predecessor Company on an historical
basis without giving effect to the Combination, the transfer to our company of
additional midstream natural gas assets acquired by Duke Energy or Phillips
prior to consummation of the Combination or the transfer to our company of the
general partner of TEPPCO from Duke Energy.
OVERVIEW
We operate in the two principal business segments of the midstream natural
gas industry:
- natural gas gathering, processing, transportation and storage, from which
we generate revenues primarily by providing services such as compression,
treating and gathering, processing, local fractionation, transportation
of residue gas, storage and marketing. In 1999, approximately 72% of the
Predecessor Company's operating revenues and approximately 93% of the
Predecessor Company's gross margin were derived from this segment.
- NGLs fractionation, transportation, marketing and trading, from which we
generate revenues from transportation fees, market center fractionation
and the marketing and trading of NGLs. In 1999, approximately 28% of the
Predecessor Company's operating revenues and approximately 7% of the
Predecessor Company's gross margin were from this segment.
Our certificate of incorporation limits the scope of our business to the
midstream natural gas industry in the United States and Canada, the marketing of
NGLs in Mexico and the transportation, marketing and storage of other petroleum
products, unless otherwise approved by our Board of Directors and Duke Energy
(so long as it owns a majority of our outstanding common stock). This limitation
in scope is not currently expected to materially impact the results of our
operations.
EFFECTS OF COMMODITY PRICES
In 1999, approximately 59% of the Predecessor Company's gross margin was
generated by arrangements that are commodity price sensitive and 41% of the
Predecessor Company's gross margin was generated by fee-based arrangements.
Because the gross margin of Phillips' midstream gas business is more heavily
weighted towards arrangements that are commodity price sensitive, as a result of
the Combination the portion of our gross margin generated by fee-based
arrangements has decreased. For example, in January 2000, after giving effect to
the Combination, approximately 28% of our gross margin was generated by
fee-based arrangements.
The midstream natural gas industry has been cyclical, with the operating
results of companies in the industry significantly affected by the prevailing
price of NGLs, which in turn generally is correlated to the price of crude oil.
Although the prevailing price of natural gas has less short-term significance to
our operating results than the price of NGLs, in the long term the growth of our
business depends on natural gas prices being at levels sufficient to provide
incentives and capital for producers to increase natural gas exploration and
production. In the past, the prices of NGLs and natural gas have been extremely
volatile.
27
<PAGE> 30
The following chart sets forth financial data for the Predecessor Company
and the weighted average price of NGLs for each of the five years ended December
31, 1999 and demonstrates the relationship of our EBITDA to NGL prices. The
chart below should not be viewed as indicating that the level of NGL prices is
the only factor affecting our results of operations. In addition to NGL prices,
our results of operations reflected in the chart below were primarily affected
by:
- fluctuations in raw natural gas volumes processed, including increases
resulting from our acquisitions and additions;
- the Predecessor Company's historical risk management activities; and
- gain/(loss) on the sale of assets.
[GRAPH]
Note: The weighted average NGL prices set forth in the chart above are
based on index prices from the Mont Belvieu and Conway market hubs
that are weighted by our component and location mix for the years
indicated.
The gas gathering and processing price environment deteriorated between
1996 and 1997 as prices for NGLs decreased and prices for natural gas increased
from 1996 levels. Increases in worldwide crude oil supply and production in 1998
drove a steep decline in crude oil prices. NGL prices also declined sharply in
1998 as a result of the correlation between crude oil and NGL pricing. Natural
gas prices also declined during 1998 principally due to mild weather.
The lower NGL and natural gas price environment experienced in 1998
prevailed during the first quarter of 1999. However, during the last three
quarters of 1999, NGL prices increased sharply as major crude oil exporting
countries agreed to maintain crude oil production at predetermined levels and
world demand for crude oil and NGLs increased. The lower crude oil and natural
gas prices in 1998 and early 1999 caused a significant reduction in the
exploration activities of U.S. producers, which in turn had a significant
negative effect on natural gas volumes gathered and processed in 1999.
During the first quarter of 2000, the weighted average NGL price (based on
index prices from the Mont Belvieu and Conway market hubs that are weighted by
our component and location mix) was approximately $.50 per gallon. In the
near-term, we expect NGL prices to follow changes in crude oil prices generally,
which we believe will in large part be determined by the level of production
from major crude oil exporting countries and the demand generated by growth in
the world economy. In contrast, we believe that future natural gas prices will
be influenced by supply deliverability, the severity of winter weather and the
level of U.S. economic growth. We believe that weather will be the strongest
determinant of near-term natural gas prices. The price increases in crude oil,
NGLs and natural gas have spurred increased natural gas drilling activity. For
example, the number of actively drilling rigs in North America has increased by
approximately 65% from approximately
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<PAGE> 31
760 in February 1999 to more than 1,270 in February 2000. This drilling activity
increase is expected to have a positive effect on natural gas volumes gathered
and processed in the near term.
EFFECTS OF OUR RAW NATURAL GAS SUPPLY ARRANGEMENTS
Our results are affected by the types of arrangements we use to purchase
raw natural gas. We obtain access to raw natural gas and provide our midstream
natural gas services principally under three types of contracts:
- Percentage-of-Proceeds Contracts -- Under these contracts (which also
include percentage-of-index contracts), we receive as our fee a
negotiated percentage of the residue natural gas and NGLs value derived
from our gathering and processing activities, with the producer retaining
the remainder of the value. These type of contracts permit us and the
producers to share proportionately in price changes. Under these
contracts, we share in both the increases and decreases in natural gas
prices and NGL prices. In December 1999, after giving effect to the
Combination, approximately 57% of our gross margin was generated from
percentage-of-proceeds or percentage-of-index contracts.
- Fee-Based Contracts -- Under these contracts we receive a set fee for
gathering, processing and/or treating raw natural gas. Our revenue stream
from these contracts is correlated with our level of gathering and
processing activity and is not directly dependent on commodity prices. In
December 1999, after giving effect to the Combination, approximately 25%
of our gross margin was generated from fee-based contracts.
- Keep-Whole Contracts -- Under these contracts we gather raw natural gas
from the producer for processing. After we process the raw natural gas,
we are obligated to return to the producer residue gas with a Btu content
equivalent to the Btu content of the raw natural gas gathered. As a
result of our processing, NGLs are extracted from the raw natural gas
resulting in a shrinkage in the Btu content of the natural gas. We market
the NGLs and purchase natural gas at market prices in order to return to
the producer residue gas with a Btu content equivalent to the Btu content
of the raw natural gas gathered. Accordingly, under these contracts, we
are exposed to increases in the price of natural gas and decreases in the
price of NGLs. In December 1999, after giving effect to the Combination,
approximately 15% of our gross margin was generated from keep-whole
contracts.
Our current mix of percentage-of-proceeds and percentage-of-index contracts
(where we are exposed to decreases in natural gas prices) and keep-whole
contracts (where we are exposed to increases in natural gas prices)
significantly mitigates our exposure to increases in natural gas prices, while
retaining our exposure to changes in NGL prices.
We prefer to enter into percentage-of-proceeds type supply contracts
(including percentage-of-index contracts). We believe this type of contract
provides the best alignment with our producers and represents the best
risk/reward profile for the capital we employ. Notwithstanding this preference,
we also recognize from a competitive viewpoint that we will need to offer
keep-whole contracts to attract certain supply to our systems. We also employ a
fee-type contract, particularly where there is treating and/or transportation
involved. Our contract mix and, accordingly, our exposure to natural gas and NGL
prices may change as a result of changes in producer preferences, our expansion
in regions where some types of contracts are more common and other market
factors.
Based upon the combined company's portfolio of supply contracts in 1999,
and excluding the effect of our commodities risk management program, an increase
of $.01 per gallon in the price of NGLs and $.10 per million Btus in the average
price of natural gas throughout such period would have resulted in changes in
pre-tax net income of approximately $24 million and ($1) million, respectively.
See "-- Quantitative and Qualitative Disclosure About Market Risks."
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<PAGE> 32
OTHER FACTORS THAT HAVE SIGNIFICANTLY AFFECTED OUR RESULTS
Our results of operations also are correlated with increases and decreases
in the volume of raw natural gas that we put through our system, which we refer
to as throughput volume, and the percentage of capacity at which our processing
facilities operate, which we refer to as our asset utilization rate. Throughput
volumes and asset utilization rates generally are driven by production on a
regional basis and more broadly by demand for residue natural gas and NGLs.
Risk management, which has been directed by Duke Energy's centralized
program for controlling, managing and coordinating its management of risks, also
has affected our results of operations, particularly in 1999 and the first
quarter of 2000. Our 1999 and first quarter 2000 results of operations include
hedging losses of $34.0 million and $46.7 million, respectively. After the
Combination, we will direct our risk management activities independently of Duke
Energy, with goals, policies and procedures that are different from those of
Duke Energy. See " -- Quantitative and Qualitative Disclosure about Market
Risks."
In addition to market factors and production, our results have been
affected by our acquisition strategy, including the timing of acquisitions and
our ability to integrate acquired operations and achieve operating synergies.
THE COMBINATION
On March 31, 2000, we combined the gas gathering, processing, marketing and
NGLs businesses of Duke Energy and Phillips. In connection with the Combination,
Phillips transferred all of its interest in its subsidiaries that conducted its
midstream natural gas business to Field Services LLC, our subsidiary formed in
December of 1999 to hold all of Duke Energy's gas gathering and processing
business. In connection with the Combination, Duke Energy and Phillips also
transferred to Field Services LLC additional midstream natural gas assets
acquired by Duke Energy or Phillips prior to consummation of the Combination,
including Mid-Continent gathering and processing assets of Conoco and Mitchell
Energy. The acquisition of the Conoco/Mitchell assets is significant in that the
assets acquired lie adjacent to and between our current assets, providing future
integration opportunities. In addition, concurrently with the Combination, we
obtained by transfer from Duke Energy the general partner of TEPPCO. In exchange
for the asset contribution, Phillips received 30.3% of the member interests in
Field Services LLC, with Duke Energy indirectly, through us, holding the
remaining 69.7% of the outstanding member interests. In connection with the
closing of the Combination, Field Services LLC borrowed approximately $2.8
billion in the commercial paper market and made one-time cash distributions
(including reimbursements for acquisitions) of approximately $1.5 billion to
Duke Energy and approximately $1.2 billion to Phillips. See "-- Liquidity and
Capital Resources." The Combination is accounted for as a purchase of the
Phillips midstream natural gas business.
Concurrently with the completion of the offering of our common stock, the
subsidiary of Phillips that indirectly holds Phillips' interest in Field
Services LLC will be merged into our company, and we will issue shares of our
common stock to Phillips. After the merger and completion of the offering of our
common stock, Duke Energy and Phillips together will own approximately 81.24% of
our outstanding common stock. The exact allocation between Duke Energy and
Phillips of shares of our common stock will be determined by the average of the
closing prices of our common stock on its first five trading days on the New
York Stock Exchange Composite Tape. Assuming that the five-day average price is
the same as the assumed initial public offering price, following the offering,
Duke Energy will own approximately 58.65% and Phillips will own approximately
22.59% of our outstanding common stock. Although the exact allocation may vary,
Duke Energy will, in all events, continue to control our company through its
share ownership and representation on our Board of Directors.
The Combination was accounted for as a purchase business combination in
accordance with Accounting Principles Board Opinion (APB) No. 16, "Accounting
for Business Combinations". The Predecessor Company was the acquiror of
Phillips' midstream natural gas business in the Combination. The purchase price
allocation associated with the Phillips assets is preliminary. Currently there
are no pre-acquisition contingent liabilities reflected in the purchase price
allocation. The final purchase price allocation is subject to adjustment pending
gathering of additional information regarding certain pre-acquisition contingent
liabilities and
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<PAGE> 33
obtaining appraisals. The effect of any pre-acquisition contingencies is not
expected to have a material effect on our operating results, liquidity or
financial condition.
COMBINED RESULTS OF OPERATIONS
The following is a discussion of the combined operating revenues and cost
of sales of our company giving effect to the Combination, the transfer to our
company of the midstream natural gas businesses acquired by Duke Energy and
Phillips prior to the consummation of the Combination and the acquisition of
Union Pacific Fuels as if each transaction occurred on January 1, 1995.
This discussion should be read in conjunction with the historical and pro
forma financial statements and related notes and other financial information
appearing elsewhere in this prospectus. The data on which this discussion is
based should not be considered indicative of:
- the actual results that would have been realized had the Combination and
the acquisition of Union Pacific Fuels actually occurred on January 1,
1995; or
- the results of our future operations.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH
31, 1999
Operating Revenues. Operating revenues increased $1,091.8 million, or 114%,
from $959.0 million to $2,050.8 million. Of this increase, approximately $1,000
million was due to increases in commodity prices, as weighted average NGL
prices, based on our component product mix, were approximately $.28 per gallon
higher and natural gas prices were approximately $.77 per million Btus higher.
Acquisitions and plant expansions contributed approximately $90 million to the
revenue increase. NGL production during the first quarter increased 33,000
barrels per day, or 9%, from 382,000 barrels per day to 415,000 barrels per day,
and natural gas transported and/or processed increased 0.9 trillion Btus per
day, or 13%, from 7.0 trillion Btus per day to 7.9 trillion Btus per day.
Included in first quarter 2000 operating revenues is a $46.7 million loss on
hedging activity compared to a $4.0 million gain in first quarter 1999.
Cost of Sales. Costs of natural gas and petroleum products increased $941.3
million, or 124%, from $761.8 million to $1,703.1 million. This increase was
primarily due to the interaction of our gas and NGL purchase contracts with
higher commodity prices. Higher natural gas and NGLs throughput associated with
our acquisitions and plant expansions also increased product purchase costs.
1999 COMPARED WITH 1998
Operating Revenues. Operating revenues increased $1,271.9 million, or 30%,
from $4,302.7 million to $5,574.6 million. Of this increase, approximately
$1,100 million was due to increases in commodity prices, as weighted average NGL
prices, based on our component product mix, were approximately $.08 per gallon
higher and natural gas prices were approximately $.16 per million Btus higher.
Our acquisitions and plant expansions also contributed to this increase. NGLs
production during 1999 increased 27,000 barrels per day, or 7%, from 373,000
barrels per day to 400,000 barrels per day, and natural gas transported and/or
processed remained essentially unchanged at 7.3 trillion Btus per day. The
recovery of commodity prices during the last three quarters of 1999 encouraged
exploration and production activity, which positively affected existing
throughput volumes. Included in 1999 operating revenues is approximately $34.0
million of loss on hedging activity. There were no significant hedging
activities in 1998. See "-- Quantitative and Qualitative Disclosure About Market
Risks."
Cost of Sales. Costs of natural gas and petroleum products increased
$1,027.3 million, or 29%, from $3,527.5 million to $4,554.8 million. This
increase primarily was due to the interaction of our gas and NGL purchase
contracts with higher commodity prices.
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<PAGE> 34
1998 COMPARED WITH 1997
Operating Revenues. Operating revenues decreased $466.4 million, or 10%,
from $4,769.1 million to $4,302.7 million. Lower commodity prices resulted in an
approximately $800 million reduction of operating revenues, as weighted average
NGL prices, based on our component product mix, were approximately $.09 per
gallon lower and natural gas prices were unchanged. Partially offsetting this
decrease was approximately $22 million additional revenues attributable to our
fourth quarter 1997 acquisition of Highlands Gas Partners and approximately $300
million additional revenues attributable to our increased NGL trading and
marketing activities. Natural gas transported and/or processed decreased .2
trillion Btus per day, or 3%, from 7.5 trillion Btus per day to 7.3 trillion
Btus per day. This decrease was primarily the result of reduced exploration and
production activity caused by depressed commodity prices. This decrease was
offset by an increase in NGLs production of 15,000 barrels per day, or 4%, from
358,000 barrels per day to 373,000 barrels per day. NGLs production growth
primarily was the result of the Highlands Gas Partners acquisition and the
restart of a processing facility in the fourth quarter of 1997.
Cost of Sales. Cost of natural gas and petroleum products decreased $271.0
million, or 7%, from $3,798.5 million to $3,527.5 million. This decrease
primarily was due to declining NGL prices. Increased NGL trading and marketing
activity partially offset this decrease.
QUARTERLY COMBINED RESULTS
The following table sets forth unaudited combined financial and operating
data for our company on a quarterly basis for each of 1998, 1999 and the three
months ended March 31, 2000.
<TABLE>
<CAPTION>
COMBINED
---------------------------------------------------------------------------------------
1998 1999 2000
------------------------------------- ------------------------------------- -------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating
revenues................. $1,113 $1,143 $1,095 $952 $959 $1,158 $1,597 $1,861 $2,051
Costs of natural gas and
petroleum products..... 902 951 900 775 762 923 1,313 1,557 1,703
Average NGL price (per
gallon)(1)............. .28 .26 .20 .22 .22 .30 .39 .41 .50
</TABLE>
- ---------------
(1) Based on index prices from the Mont Belvieu and Conway market hubs that are
weighted by our component and location mix for the periods indicated.
HISTORICAL RESULTS OF OPERATIONS
The following is a discussion of the historical results of operations of
the Predecessor Company.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
Operating Revenues. Operating revenues increased $1,116.2 million, or 333%,
from $335.0 million to $1,451.2 million. Operating revenues from the sale of
natural gas and petroleum products accounted for $1,415.5 million of the total
and $1,110.3 million of the increase. Of this increase, approximately $425
million is related to the March 31, 1999 acquisition of Union Pacific Fuels.
Increased NGL trading and marketing activity also contributed to the increase.
NGL production during the first quarter increased 123,600 barrels per day, or
115%, from 107,600 barrels per day to 231,200 barrels per day, and natural gas
transported and/or processed increased 2.6 trillion Btus per day, or 76%, from
3.4 trillion Btus per day to 6.0 trillion Btus per day. Of the 123,600 barrels
per day increase, the Union Pacific Fuels acquisition contributed 100,600
barrels per day, with the combination of our Wilcox plant expansion, completion
of our Mobile Bay Plant and the acquisition of Koch's South Texas assets
accounting for the remainder of the increase. Of the 2.6 trillion Btus per day
increase, the Union Pacific Fuels acquisition contributed 2.0 trillion Btus per
day, with the
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combination of other acquisitions, plant expansions and completions accounting
for the balance of the increase.
Commodity prices also contributed to higher revenues. Weighted average NGL
prices, based on our component product mix, were approximately $.27 per gallon
higher and natural gas prices were approximately $.77 per million Btus higher
for the first quarter. These price increases yielded average prices of $.50 per
gallon and $2.52 per million Btus, respectively, as compared with $.23 per
gallon and $1.75 per million Btus for the first quarter of 1999. Revenues
associated with gathering, transportation, storage, processing fees and other
increased $5.9 million, or 20%, from $29.8 million to $35.7 million, mainly as a
result of the Union Pacific Fuels acquisition. A $46.7 million hedging loss in
the first quarter of 2000 offset total operating revenue increases. See
"-- Quantitative and Qualitative Disclosure About Market Risks."
Costs and Expenses. Costs of natural gas and petroleum products increased
$1,006 million, or 369%, from $272.5 million to $1,278.5 million. This increase
was due to the Union Pacific Fuels acquisition (approximately $340 million), the
interaction of our natural gas and NGL purchase contracts with higher commodity
prices and increased trading and marketing activity.
Operating and maintenance expenses increased $19.9 million, or 68%, from
$29.1 million to $49.0 million. Of this increase, approximately $13 million was
due to the Union Pacific Fuels acquisition. General and administrative expenses
increased $13.6 million, or 84%, from $16.1 million to $29.7 million. Of this
increase, $5.1 million was due to increased allocated corporate overhead from
our parent, Duke Energy. The remainder was associated with increased activity
resulting from the Union Pacific Fuels acquisition and increased fiscal year
2000 incentive compensation accruals.
Depreciation and amortization increased $17.9 million, or 90%, from $20
million to $37.9 million. Of this increase, $15.2 million was due to the Union
Pacific Fuels acquisition. The remainder was due to ongoing capital expenditures
for well connections, facility maintenance/enhancements and acquisitions.
Sale of Assets. Net (gain) loss on sales of assets decreased $4.1 million
from zero activity to a loss of $4.1 million. The loss was primarily the result
of the sale of the Westana joint venture investment.
Equity Earnings. Equity earnings of unconsolidated affiliates increased
$3.5 million, or 106%, from $3.3 million to $6.8 million. This increase was
largely due to interests in joint ventures and partnerships acquired from Union
Pacific Fuels.
Interest. Interest expense increased $2.1 million, or 17%, from $12.4
million to $14.5 million. This increase is primarily related to interest on
notes due to Duke Energy.
Net Income. Net income increased $35.4 million from a loss of $8.5 million
to $26.9 million. This increase was largely the result of the acquisition of
Union Pacific Fuels and higher average NGL prices. The benefit of higher NGL
prices was partially offset by higher natural gas prices. A $46.7 million
pre-tax loss from hedging activities experienced during the first quarter of
2000 partially offset the increase.
EBITDA. In addition to the GAAP measures described above, we also use the
non-GAAP measure of EBITDA. EBITDA is a measure used to provide information
regarding our ability to cover fixed charges such as interest, taxes, dividends
and capital expenditures. In addition, EBITDA provides a comparable measure to
evaluate our performance relative to that of our competitors by eliminating the
capitalization structure and depreciation charges, which may vary significantly
within our industry. Although the GAAP financial statement measure of net income
or loss, in total and by segment, is indicative of our profitability, net income
does not necessarily reflect our ability to fund our fixed charges on a periodic
basis. We therefore use GAAP and non-GAAP measures in evaluating our overall
performance as well as that of our related segments. In addition, we use both
types of measures to evaluate our performance relative to other companies within
our industry.
EBITDA for the natural gas gathering, processing, transportation and
storage segment increased $65.7 million from $36.0 million to $101.7 million. Of
this increase, approximately $56 million was due to the acquisition of Union
Pacific Fuels and approximately $60 million was due to a $.27 per gallon
increase in average NGL prices. Additional increases were attributable to the
combination of our Wilcox plant expansion,
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<PAGE> 36
completion of our Mobile Bay plant and the acquisition of Koch's South Texas
assets. These benefits were offset by a $50.7 million decrease from hedging
activities ($46.7 million loss in 2000 compared to a $4.0 million gain in 1999)
and approximately $6 million due to a $.77 per million Btu increase in natural
gas prices.
EBITDA for the NGLs fractionation, transportation, marketing and trading
segment increased $23.8 million from $.7 million to $24.5 million due primarily
to NGL trading and marketing activity and the acquisition of Union Pacific
Fuels.
1999 COMPARED WITH 1998
Operating Revenues. Operating revenues increased $1,874.0 million, or 118%,
from $1,584.3 million to $3,458.3 million. Operating revenues from the sale of
natural gas and petroleum products accounted for $3,310.3 million of the total
and $1,841.2 million of the increase. Of this increase, approximately $1.0
billion was attributable to the March 31, 1999 acquisition of Union Pacific
Fuels. Increased NGL trading and marketing activity associated with the Union
Pacific Fuels acquisition also contributed to the increase. NGL production
during 1999 increased 82,000 barrels per day, or 75%, from 110,000 barrels per
day to 192,000 barrels per day. Of the 82,000 barrels per day increase, the
Union Pacific Fuels acquisition contributed 71,000 barrels per day, with the
combination of our Wilcox plant expansion, completion of our Mobile Bay Plant
and the acquisition of Koch's South Texas assets accounting for the remainder of
the increase. Raw natural gas transported and/or processed increased 1.5
trillion Btus per day, or 42%, from 3.6 trillion Btus per day to 5.1 trillion
Btus per day. The Union Pacific Fuels acquisition accounted for 1.4 trillion
Btus per day of the natural gas increase.
Commodity prices also contributed to higher revenues. Weighted average NGL
prices, based on our component product mix, were approximately $.08 per gallon
higher and natural gas prices were approximately $.16 per million Btus higher
for 1999, yielding prices of $.34 and $2.27, respectively, as compared with $.26
and $2.11 in 1998. Revenues associated with gathering, transportation, storage,
processing fees and other increased $32.8 million, or 28%, from $115.2 million
to $148.0 million principally as a result of the Union Pacific Fuels
acquisition. Total operating revenue increases were offset by a $34.0 million
hedging loss in 1999. See "-- Quantitative and Qualitative Disclosure About
Market Risks."
Costs and Expenses. Costs of natural gas and petroleum products increased
$1,627.2 million, or 122%, from $1,338.1 million to $2,965.3 million. This
increase was due primarily to the Union Pacific Fuels acquisition ($800
million), increased NGL trading and marketing activity and the interaction of
our natural gas and NGL purchase contracts with higher commodity prices.
Operating and maintenance expenses increased $67.8 million, or 60%, from
$113.6 million to $181.4 million. Of this increase, approximately $65.0 million
was due to the Union Pacific Fuels acquisition. General and administrative
expenses increased $28.7 million, or 64%, from $45.0 million to $73.7 million.
This increase was due to a $7.0 million increase in allocated corporate overhead
from our parent, Duke Energy, and increases resulting from the Union Pacific
Fuels acquisition.
Depreciation and amortization increased $55.2 million, or 73%, from $75.6
million to $130.8 million. Of this increase, $45.2 million was due to the Union
Pacific Fuels acquisition and the remainder was due to ongoing capital
expenditures for well connections, facility maintenance/enhancements and
acquisitions.
Sale of Assets. Net (gain) loss on sales of assets decreased $36.2 million,
from a $33.8 million gain to a $2.4 million loss from 1998 to 1999. This
decrease was primarily the result of a $38.0 million gain recognized in 1998 on
the sale of two fractionators in Weld County, Colorado.
Equity Earnings. Equity earnings of unconsolidated affiliates increased
$10.7 million, or 91%, from $11.8 million to $22.5 million. This increase was
largely due to interests in joint ventures and partnerships acquired from Union
Pacific Fuels in 1999.
Interest. Interest expense of $52.9 million for 1999 remained almost
unchanged from 1998 and was principally related to interest on notes due to Duke
Energy.
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<PAGE> 37
Net Income. Net income increased $41.3 million from $2.0 million to $43.3
million. This increase was largely the result of the acquisition of Union
Pacific Fuels and higher average NGL prices experienced during 1999. The benefit
of higher NGL prices was partially offset by higher natural gas prices. The
increase in net income was largely offset by a pre-tax gain of approximately
$38.0 million recognized on the sale of our Weld County fractionators in 1998
and a $34.0 million loss on hedging activity in 1999.
EBITDA. EBITDA for the natural gas gathering, processing, transportation
and storage segment increased $122.9 million from $175.8 million to $298.7
million. Of the increase, approximately $110 million was due to the acquisition
of Union Pacific Fuels and $80.0 million was due to $.08 per gallon higher NGL
prices. Additional increases were recognized with the combination of our Wilcox
plant expansion, completion of our Mobile Bay Plant and the acquisition of
Koch's South Texas assets. These increases were offset by a $38.0 million gain
recognized in 1998 on the sale of the Weld County fractionators, hedging losses
in 1999 of $34.0 million, an approximately $5 million decrease due to $.16 per
million BTU increase in gas prices and a $7.0 million increase in allocated
corporate overhead from our parent, Duke Energy.
EBITDA for the NGLs fractionation, transportation, marketing and trading
segment increased $30.6 million from $2.4 million to $33.0 million due primarily
to the acquisition of Union Pacific Fuels.
1998 COMPARED WITH 1997
Operating Revenues. Operating revenues decreased $217.5 million, or 12%,
from $1,801.8 million to $1,584.3 million. Operating revenues from the sale of
natural gas and petroleum products decreased $230.9 million, or 14%, from
$1,700.0 million to $1,469.1 million. This decrease was largely due to commodity
prices, as weighted average NGLs prices, based on our component product mix,
were approximately $.09 per gallon lower and natural gas prices were
approximately $.48 per MMBtu lower for 1998, yielding prices of $.26 and $2.11,
respectively, as compared with $.35 and $2.59 in 1997. This NGL price decline
was partially offset by an increase in NGL production during 1998 of 2,000
barrels per day, or 2%, from 108,000 barrels per day to 110,000 barrels per day,
and by an increase in natural gas gathered, transported and/or processed of .2
trillion Btus per day, or 6%, from 3.4 trillion Btus per day to 3.6 trillion
Btus per day, due to increased production on existing facilities. Revenues
associated with gathering, transportation, storage, processing fees and other
increased $13.4 million, or 13%, from $101.8 million to $115.2 million. This
increase was principally the result of increased volumes.
Costs and Expenses. Costs of natural gas and petroleum products decreased
$130.0 million, or 9%, from $1,468.1 million to $1,338.1 million. This decrease
was primarily due to declining NGL prices. The NGL price decline was partially
offset by increases in system throughput volumes.
Operating and maintenance expenses increased $9.3 million, or 9%, from
$104.3 million to $113.6 million. This increase was primarily due to higher
property tax accruals associated with property additions and other inflationary
factors. General and administrative expenses increased $8.9 million, or 25%,
from $36.0 million to $44.9 million. This increase was due primarily to an
increase in the incentive bonus accrual and internal growth.
Depreciation and amortization increased $7.9 million, or 12%, from $67.7
million to $75.6 million. This increase was primarily due to ongoing capital
expenditures for well connections, facility maintenance/enhancements and
acquisitions.
Sales of Assets. Net (gain) loss on sales of assets increased $33.6
million, from a $.2 million gain to a $33.8 million gain from 1997 to 1998. This
increase was primarily due to a $38.0 million gain recognized in March 1998 on
the sale of the Weld County fractionators.
Equity Earnings. Equity earnings of unconsolidated affiliates increased
$2.0 million, or 20%, from $9.8 million to $11.8 million. This increase was
largely due to increased earnings from Dauphin Island Gathering and Main Pass
Oil in the offshore region.
Interest. Interest expense increased $1.3 million, or 3%, from $51.1
million to $52.4 million. Interest expense reflects interest on notes due to
affiliated companies.
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Net Income. Net income decreased $49.2 million, or 96%, from $51.2 million
to $2.0 million. This decrease was largely the result of substantially lower
commodity prices. A pre-tax gain of approximately $38.0 million recognized on
the sale of our Weld County fractionators in March 1998 partially offset the
impact of the sharp NGL price decline.
EBITDA. EBITDA for the natural gas gathering, processing, transportation
and storage segment decreased $64.0 million from $239.8 million to $175.8
million. Of the decrease, approximately $80 million was due to $.09 per gallon
lower NGL prices and approximately $18 million was due to increased operating
and general and administrative expenses resulting from higher property tax
accruals associated with property additions, an increase in the incentive bonus
accrual and internal growth. These decreases were partially offset by a $38.0
million gain recognized in March 1998 on the sale of the Weld County
fractionators.
EBITDA for the NGLs fractionation, transportation, marketing and trading
segment increased $2.8 million from $(.4) million to $2.4 million due to
increased trading and marketing activity.
ENVIRONMENTAL CONSIDERATIONS
Environmental expenditures are expensed or capitalized as appropriate,
depending upon the future economic benefit. Historically these expenditures have
been between $5 million and $15 million annually except for those environmental
liabilities identified with the acquisition of Union Pacific Fuels of
approximately $63 million. The Union Pacific Fuels environmental liabilities
associated with soil and groundwater contamination were transferred to a third
party at a cost of approximately $48 million.
The outlook for environmental spending, both capitalized and expensed, is
not expected to change materially from historical levels of $5 to $15 million
annually.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY PRIOR TO THE COMBINATION
The Predecessor Company's capital investments and acquisitions have been
financed by cash flow from operations and non-interest bearing advances from
Duke Energy or its subsidiaries under various arrangements. Under Duke Energy's
centralized cash management system, Duke Energy deposited sufficient funds in
our bank accounts for us to meet our daily obligations and withdrew excess funds
from those accounts. Advances were offset by cash provided by operations to
yield net advances from Duke Energy which were included in the historical
consolidated balance sheets and statements of cash flows of the Predecessor
Company. In 1999, the Predecessor Company had notes to and advances from Duke
Energy which were terminated in connection with the Combination.
FINANCING TRANSACTIONS IN CONNECTION WITH THE COMBINATION
In connection with the Combination, all advances from Duke Energy were
capitalized to equity and all advances from Phillips were capitalized.
On March 31, 2000, Field Services LLC entered into a $2.8 billion credit
facility with several financial institutions. The credit facility will be used
as the liquidity backstop to support a commercial paper program. On April 3,
2000 Field Services LLC borrowed approximately $2.8 billion in the commercial
paper market to fund the one-time cash distributions (including reimbursements
for acquisitions) of approximately $1.5 billion to Duke Energy and approximately
$1.2 billion to Phillips and to cover working capital requirements. At April 30,
2000 our outstanding commercial paper had maturities ranging from one day to 70
days and had annual interest rates between 6.20% and 6.45%. At no time will the
amount of our outstanding commercial paper exceed the available amount under the
credit facility. The credit facility matures on March 30, 2001 and borrowings
bear interest at a rate equal to, at our option, either (1) LIBOR plus .50% per
year for the first 90 days following the closing of the credit facility and
LIBOR plus .625% per year thereafter or (2) the higher of (a) the Bank of
America prime rate and (b) the Federal Funds rate plus .50% per year. Upon
completion of the offering, Duke Energy Field Services Corporation will assume
Field Services LLC's obligations under the facility.
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Effective April 4, 2000, Field Services LLC entered into a $100 million
revolving credit agreement with Duke Capital Corporation, an indirect,
wholly-owned subsidiary of Duke Energy. The revolving credit agreement will be
used for short-term financing requirements. At April 30, 2000, there were no
amounts outstanding under this facility. The agreement terminates on May 31,
2000, and bears interest at the Bank of America prime rate.
Proceeds of the offering will be used to repay a portion of our outstanding
commercial paper, and the bank credit facility will be permanently reduced by
the amount of such proceeds. The amount available under the bank credit facility
and corresponding commercial paper program will be further reduced by the
amount, if any, of long-term debt we may issue, but in no event will the credit
facility be reduced to below $1.0 billion. Upon completion of the offering and
application of the net proceeds, we expect to have outstanding $2.1 billion of
indebtedness. The debt levels reflected in the pro forma combined financial
statements are based upon the indebtedness we anticipate having outstanding upon
consummation of the financing transactions described above and the offering. In
the future, our debt levels will vary depending on our liquidity needs, capital
expenditures and cash flow.
Based on current and anticipated levels of operations, we believe that our
cash on hand and cash flow from operations, combined with borrowings available
under the commercial paper program and credit facilities, will be sufficient to
enable us to meet our current and anticipated cash operating requirements and
working capital needs for the next year. Actual capital requirements, however,
may change, particularly as a result of any acquisitions that we may make. Our
ability to meet current and anticipated operating requirements will depend on
our future performance.
CAPITAL EXPENDITURES
Our capital expenditures consist of expenditures for acquisitions and
construction of additional gathering systems, processing plants, fractionators
and other facilities and infrastructure in addition to well connections and
repairs and maintenance of our existing facilities. Our capital expenditure
budget for well connections and repair and maintenance of our existing
facilities in 2000 is approximately $175 million, of which approximately $25
million was spent in the three months ended March 31, 2000.
On March 31, 2000, Field Services LLC acquired gathering and processing
assets located in central Oklahoma from Conoco and Mitchell Energy. Field
Services LLC paid cash of $99.5 million and exchanged its interest in certain
gathering and marketing joint ventures located in southeast Texas having a total
net book value of approximately $42 million as consideration for these assets.
Our level of capital expenditures for acquisitions and construction depends
on many factors, including industry conditions, the availability of attractive
acquisition candidates and construction projects, the level of commodity prices
and competition. We expect to finance our capital expenditures with our cash on
hand, cash flow from operations and borrowings available under our commercial
paper program, our credit facilities or other available sources of financing.
CASH FLOWS
Net cash provided by operating activities for the Predecessor Company for
the three months ended March 31, 2000 improved to $186.2 million from $24.4
million for the same period in 1999, primarily due to higher commodity prices
and acquisitions. Net cash used in investing activities by the Predecessor
Company was $111.4 million for the three months ended March 31, 2000 compared to
$1,458.2 million for the same period in 1999. Acquisitions of the Conoco and
Mitchell Energy assets in 2000 and the Union Pacific Fuels assets in 1999 were
the primary uses of the invested cash. The net cash used in investing activities
was financed through operating activities, advances from Duke Energy and
proceeds from the issuance of short-term debt.
Net cash provided by operating activities for the Predecessor Company in
1999 improved to $173.1 million from $40.4 million in 1998, primarily due to
higher commodity prices and acquisitions. Net cash used in investing activities
by the Predecessor Company was $1,571.4 million for 1999 compared to $203.6
million for
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1998, of which $1,456.5 million was used for acquisitions and the remainder was
used principally for capital expenditures. The net cash used in investing
activities was financed through operating activities, advances from Duke Energy
and proceeds from the issuance of short-term debt.
Net cash provided by operating activities for the Predecessor Company was
$40.4 million for 1998 compared to $173.4 million for 1997. This decrease was
primarily due to the reduction of trade accounts payable to producers for the
purchase of raw natural gas at purchase prices lower than those in 1997. Net
cash used in investing activities by the Predecessor Company in 1998 increased
to $203.6 million from $138.0 million in 1997. In 1998, $185.5 million was used
for capital expenditures and $84.9 million was used for investments in
affiliates. The net cash used in investing activities was provided by operating
activities and advances from Duke Energy.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
COMMODITY PRICE RISK
We are subject to significant risks due to fluctuations in commodity
prices, primarily with respect to the prices of NGLs that we own as a result of
our processing activities. Based upon the Predecessor Company's portfolio of
supply contracts in 1999, without giving effect to hedging activities that would
reduce the impact of commodity price decreases, a decrease of $.01 per gallon in
the price of NGLs and $.10 per million Btus in the average price of natural gas
throughout 1999 would have resulted in changes in pre-tax net income of
approximately $(15) million and $5 million, respectively. Based upon the
combined company's portfolio of supply contracts in 1999, and excluding the
effects of our commodities risk management program, similar commodities price
changes in 1999 would have resulted in changes in pre-tax net income of
approximately $(24) million and $1 million, respectively.
Commodity derivatives such as futures and swaps are available to reduce
such exposure to fluctuations in commodity prices. Gains and losses related to
commodity derivatives are recognized in income when the underlying hedged
physical transaction closes, and such gains and losses are included in sales of
natural gas and petroleum products in our statement of income.
Natural gas and crude oil futures, which are used to hedge NGLs prices,
involve the buying and selling of natural gas and crude oil for future delivery
at a fixed price. Over-the-counter swap agreements require us to receive or make
payments on the difference between a specified price and the actual price of
natural gas or crude oil.
Historically, the Predecessor Company's commodity price risk was managed by
Duke Energy's centralized program for controlling, managing and coordinating its
risk management activities. Under this program, the Predecessor Company used
futures and swaps to manage margins on offsetting fixed-price purchase or sale
commitments for physical quantities of natural gas and NGLs. Historically,
futures and swaps conducted through Duke Energy were handled through Duke Energy
Trading and Marketing, LLC, a partnership in which Duke Energy owns a 60%
interest. Under this arrangement, the Predecessor Company did not experience
margin requirements.
At December 31, 1998 and 1999 the Predecessor Company (through Duke Energy)
had outstanding futures and swaps for an absolute notional contract quantity of
10.92 and 7.8 Bcf of natural gas and an absolute notional contract quantity of
59,000 and 32,764,000 barrels of crude oil, respectively, both of which were
intended to offset the risk of price fluctuations under fixed-price commitments
for delivering and purchasing natural gas and NGLs, respectively. The gains,
losses and costs related to those financial instruments that qualify as a hedge
are not recognized until the underlying physical transaction occurs. At December
31, 1998 and 1999, the Predecessor Company had current unrecognized net gains
(losses) of $1.8 million and $(63.5) million, respectively, related to commodity
instruments. All unrecognized gains and losses at March 31, 2000, the date of
the Combination, remain with Duke Energy and will not have an impact on our
company's future earnings.
Losses relating to hedging with commodity derivatives included in the
Predecessor Company's statement of income equaled $34.0 million for 1999. There
were no corresponding losses in 1997 or 1998. For the three
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months ended March 31, 1999 and 2000, the Predecessor Company recorded a hedging
gain of $4.0 million and a hedging loss of $46.7 million, respectively.
After the Combination, we began directing our risk management activities
independently of Duke Energy.
We intend to use commodity-based derivative contracts to reduce the risk in
our overall earnings and cash flow with the primary goals of:
- maintaining minimum cash flow to fund debt service, dividends, and
maintenance type capital projects;
- avoiding disruption of our growth capital and value creation process; and
- retaining a high percentage of the potential upside relating to commodity
price increases.
We implemented a risk management policy that provides guidelines for
entering into contractual arrangements to manage our commodity price exposure.
Our risk management committee has ongoing responsibility for the content of this
policy and has principal oversight responsibility for compliance with the policy
framework by ensuring proper procedures and controls are in place.
In general, we will look to provide downside protection to our business
activities while retaining most of the upside potential by using floors and
other similar hedging structures. These structures will typically require the
payment of a premium to protect the downside while retaining exposure to the
upside. Historically, NGLs and related commodity products have shown a mean
reverting tendency to long term average prices, which implies that supply and
demand for products balance over cycles. Therefore, we may choose to forego
price upside in favor of a known, hedged cash flow position as prices rise
significantly above historical levels and depending upon existing market
drivers.
An active forward market for hedging of NGL products is not normally
available for hedging a significant amount of our NGL production beyond a one to
three month time horizon. With an anticipated hedging horizon of up to 12
months, crude oil derivatives, which historically have had a high correlation
with NGL prices, will typically be the mechanism used for longer-term price risk
management.
As of March 31, 2000, the existing commodity positions under the Duke
Energy centralized program were transferred to Duke Energy. In establishing its
initial independent commodity risk management position on April 1, 2000, the
Company acquired a portion of Duke Energy's existing commodity derivatives held
for non-trading purposes. The absolute notional contract quantity of the
positions acquired was 4,607,000 barrels of crude oil. Such positions were
acquired at market value.
INTEREST RATE RISK
Prior to the Combination, our subsidiaries had no material interest rate
risk associated with debt used to finance our operations due to limited third
party borrowings. After completion of the offering, we expect to have
approximately $2.1 billion outstanding under a commercial paper program. As a
result, we are exposed to market risks related to changes in interest rates. In
the future, we intend to manage our interest rate exposure using a mix of fixed
and floating interest rate debt. Following the application of the net proceeds
of the offering, and assuming none of our outstanding commercial paper is
refinanced with long-term fixed rate debt, an increase of .5% in interest rates
would result in an increase in annual interest expense of approximately $10.5
million.
FOREIGN CURRENCY RISK
Currently we have no material foreign currency exposure.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133
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establishes standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as:
- a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment;
- a hedge of the exposure to variable cash flows of a forecasted
transaction; or
- a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction.
The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and the resulting
designation. We are required to adopt SFAS 133 on January 1, 2001. We have not
completed the process of evaluating the impact that will result from adopting
SFAS 133.
YEAR 2000
We did not experience any disruption to our operations resulting from the
transition to the year 2000. We completed our year 2000 readiness program in
November 1999. Our systems will continue to be monitored throughout the year.
The total cost of the program, including costs such as consulting and contract
costs, was approximately $2.2 million. These costs exclude replacement systems
that, in addition to being year 2000 ready, provided significantly enhanced
capabilities that benefit operations in future periods.
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BUSINESS
OUR BUSINESS
The midstream natural gas industry is the link between exploration and
production of raw natural gas and the delivery of its components to end-use
markets. We operate in the two principal segments of the midstream natural gas
industry:
- natural gas gathering, processing, transportation, marketing and storage;
and
- NGL fractionation, transportation, marketing and trading.
We believe that we are one of the largest gatherers of raw natural gas,
based on wellhead volume, in North America. We are the largest producer, and we
believe that we are one of the largest marketers, of NGLs in North America. In
1999:
- we gathered and/or transported an average of approximately 7.3 billion
cubic feet per day of raw natural gas;
- we produced an average of approximately 400,000 barrels per day of NGLs;
and
- we marketed and traded an average of approximately 486,000 barrels per
day of NGLs.
During 1999, our natural gas gathering, processing, transportation,
marketing and storage segment produced $981.5 million of gross margin and $583.1
million of EBITDA, excluding general and administrative expenses, and our NGL
fractionation, transportation, marketing and trading segment produced $38.3
million of gross margin and $38.1 million of EBITDA, excluding general and
administrative expenses.
We gather raw natural gas through gathering systems located in seven major
natural gas producing regions: Permian Basin, Mid-Continent, East Texas-Austin
Chalk-North Louisiana, Onshore Gulf of Mexico, Rocky Mountains, Offshore Gulf of
Mexico and Western Canada. Our gathering systems consist of approximately 57,000
miles of gathering pipe, with approximately 38,000 active connections to
producing wells.
Our natural gas processing operations involve the separation of raw natural
gas gathered both by our gathering systems and by third-party systems into NGLs
and residue gas. We process the raw natural gas at our 70 owned and operated
plants and at 13 third-party operated facilities in which we hold an equity
interest.
The NGLs separated from the raw natural gas by our processing operations
are either sold and transported as NGL raw mix or further separated through a
process known as fractionation into their individual components (ethane,
propane, butanes and natural gasoline) and then sold as components. We
fractionate NGL raw mix at our 12 owned and operated processing facilities and
at two third-party operated fractionators located on the Gulf Coast in which we
hold an equity interest.
We sell NGLs to a variety of customers ranging from large, multi-national
petrochemical and refining companies to small regional retail propane
distributors. Substantially all of our NGL sales are made at market-based
prices, including approximately 40% of our NGL production that is committed to
Phillips under an existing 15-year contract. We market approximately 370,000
barrels per day of NGLs processed at our owned and operated plants and 40,000
barrels per day of NGLs processed at third-party operated facilities and trade
approximately 75,000 barrels per day of NGLs at market centers.
The residue gas that results from our processing is sold at market-based
prices to marketers or end-users, including large industrial customers and
natural gas and electric utilities serving individual consumers. We market
residue gas through our wholly owned gas marketing company. We also store
residue gas at our 8.5 billion cubic foot natural gas storage facility.
On March 31, 2000, we obtained by transfer from Duke Energy the general
partner of TEPPCO. The general partner is responsible for the management and
operations of TEPPCO. We believe that our ownership of the general partner of
TEPPCO improves our business position in the transportation sector of the
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midstream natural gas industry and provides additional flexibility in pursuing
our disciplined acquisition strategy by providing an alternative acquisition
vehicle. It also provides us with an opportunity to sell appropriate assets
currently held by our company to TEPPCO. Through our ownership of the general
partner of TEPPCO we have the right to receive from TEPPCO incentive cash
distributions in addition to a 2% share of distributions based on our general
partner interest. At TEPPCO's 1999 per unit distribution level, the general
partner:
- receives approximately 14% of the cash distributed by TEPPCO to its
partners, which consists of 12% from the incentive cash distribution
and 2% from the general partner interest; and
- under the incentive cash distribution provisions, receives 50% of
any increase in TEPPCO's per unit cash distributions.
TEPPCO has agreed to acquire from Atlantic Richfield Company, for $318.5
million, its ownership interests in a 500-mile crude oil pipeline that extends
from a marine terminal at Freeport, Texas to Cushing, Oklahoma, a 416-mile crude
oil pipeline that extends from Jal, New Mexico to Cushing, a 400-mile crude oil
pipeline that extends from West Texas to Houston, crude oil terminal facilities
in Midland, Cushing and the Houston area and receipt and delivery pipelines
centered around Midland. The transaction is contingent upon satisfaction of
regulatory requirements.
INDUSTRY OVERVIEW
The midstream natural gas industry in North America is comprised of
approximately 150 companies that process approximately 45 billion cubic feet per
day of raw natural gas and produce approximately 1.9 million barrels per day of
NGLs. The industry generally is characterized by regional competition based on
the proximity of gathering systems and processing plants to natural gas
producing wells.
Demand for natural gas in North America has grown significantly in recent
years. We believe that demand will continue to increase and will be driven
primarily by the growth of natural gas-fired electric generation. According to
the EIA Report, U.S. demand for natural gas is expected to increase from 22
trillion cubic feet in 1999 to 32 trillion cubic feet in 2020. We believe that
oil and natural gas producers in North America will respond to increased demand
by focusing their exploration and drilling efforts on basins where pipeline and
processing capacity has been, or is being, built and where there is sufficient
capacity to meet the needs of high demand markets. We have a strong presence and
significant capacity in several of these areas (including Onshore Gulf of Mexico
and Rocky Mountains, where, according to the Oil and Gas Journal's "1999
Worldwide Gas Processing Report," we are among the three largest midstream
natural gas companies based on volumes of natural gas gathered and processed or
volumes of NGLs produced) that, according to the EIA Report, are forecasted to
have significant growth in production between now and 2020. This growth in
production, which is expected to be 2.31 trillion cubic feet in Rocky Mountain
region and 1.71 trillion cubic feet in Onshore Gulf of Mexico region by 2020,
should provide us with opportunities to increase our throughput volumes and
asset utilization.
The midstream natural gas industry has experienced significant
consolidation since the mid-1990s. We believe the following factors have
contributed to this consolidation:
- significant economies of scale resulting from improved operating
efficiencies, throughput volumes and asset utilization rates that can be
achieved by strategically growing operations;
- decisions by transmission pipelines and by exploration and production
companies to divest their gathering, processing and marketing activities
and concentrate their businesses on gas transmission and on exploration
and production; and
- technological improvements.
OUR BUSINESS STRATEGY
We believe that we are one of the largest gatherers of raw natural gas,
based on wellhead volume, in North America. We are the largest producer, and we
believe that we are one of the largest marketers, of
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NGLs in North America. Our certificate of incorporation limits the scope of our
business to the midstream natural gas industry in the United States and Canada,
the marketing of NGLs in Mexico, and the transportation, marketing and storage
of other petroleum products, unless otherwise approved by our Board of Directors
and Duke Energy (so long as it owns at least a majority of our outstanding
common stock). We have significant midstream natural gas operations in five of
the largest natural gas producing regions in North America. To take advantage of
the anticipated growth in natural gas demand in North America, we are pursuing
the following strategies:
- Capitalize on the size and focus of our existing operations. We intend to
use the size, scope and concentration of our assets in our regions of
operation to take advantage of growth opportunities and to acquire
additional supplies of raw natural gas. Our significant market presence
and asset base generally provide us with a competitive advantage in
capturing new supplies of raw natural gas because of our resulting lower
costs of connection to new wells and of processing additional raw natural
gas. In addition, we believe our size and geographic diversity allow us
to benefit from the growth of natural gas production in multiple regions
while mitigating the adverse effects from a downturn in any one region.
- Increase our presence in each aspect of the midstream business. We are
active in each significant aspect of the midstream natural gas value
chain, including raw natural gas gathering, processing, and
transportation, NGL fractionation and NGL and residue gas transportation
and marketing. Each link in the value chain provides us with an
opportunity to earn incremental income from the raw natural gas that we
gather and from the NGLs and residue gas that we produce. We intend to
grow our significant NGL market presence by investing in additional NGL
infrastructure, including pipelines, fractionators and terminals.
- Increase our presence in high growth production areas. According to the
EIA Report, production from areas such as Western Canada, Onshore Gulf of
Mexico, Rocky Mountains and Offshore Gulf of Mexico is expected to
increase significantly to meet anticipated increases in demand for
natural gas in North America. We intend to use our strategic asset base
in these growth areas and our leading position in the midstream natural
gas industry as a platform for future growth in these areas. We plan to
increase our operations in these areas by following a disciplined
acquisition strategy, and by expanding existing infrastructure and
constructing new gathering lines and processing facilities.
- Capitalize on proven acquisition skills in a consolidating industry. In
addition to pursuing internal growth by attracting new raw natural gas
supplies, we intend to use our substantial acquisition and integration
skills to continue to participate selectively in the consolidation of the
midstream natural gas industry. We have pursued a disciplined acquisition
strategy focused on acquiring complementary assets during periods of
relatively low commodity prices and integrating the acquired assets into
our operations. Since 1996, we have completed over 20 acquisitions,
increasing our raw natural gas processing capacity by over 275%. These
acquisitions demonstrate our ability to successfully identify, acquire
and integrate attractive midstream natural gas operations.
- Further streamline our low-cost structure. Our economies of scale,
operating efficiency and resulting low cost structure enhance our ability
to attract new raw natural gas supplies and generate current income. The
low-cost provider in any region can more readily attract new raw natural
gas volumes by offering more competitive terms to producers. We believe
the Combination provides us with a complementary base of assets from
which to further extract operating efficiencies and cost reductions,
while continuing to provide superior customer service.
NATURAL GAS GATHERING, PROCESSING, TRANSPORTATION, MARKETING AND STORAGE
OVERVIEW
Our raw natural gas gathering and processing operations consist of:
- approximately 57,000 miles of gathering pipe, with connections to
approximately 38,000 active producing wells; and
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- 70 owned and operated processing plants and ownership interests in 13
additional third-party operated plants, with a combined processing
capacity of approximately 7.9 billion cubic feet per day.
In 1999, we gathered, processed and/or transported approximately 7.3
billion cubic feet per day of raw natural gas. During 1999, our natural gas
gathering, processing, transportation, marketing and storage activities produced
$981.5 million of gross margin and $583.1 million of EBITDA, excluding general
and administrative expenses.
Our raw natural gas gathering and processing operations are located in 11
contiguous states in the United States and two provinces in Western Canada. We
provide services in the following key North American natural gas and oil
producing regions; Permian Basin, Mid-Continent, East Texas-Austin Chalk-North
Louisiana, Onshore Gulf of Mexico, Rocky Mountains, Offshore Gulf of Mexico and
Western Canada. We have a significant presence in the first five of these
producing regions where, according to the Oil and Gas Journal's "1999 Worldwide
Gas Processing Report," we are among the three largest midstream natural gas
companies based on volumes of natural gas gathered and processed or volumes of
NGLs produced.
Raw Natural Gas Supply Arrangements. Typically, we take ownership of raw
natural gas at the wellhead. Each producer generally dedicates to us the raw
natural gas produced from designated oil and natural gas leases for a specific
term. The term will typically extend for three to seven years. We currently have
more than 15,000 active contracts with over 5,000 producers. We obtain access to
raw natural gas and provide our midstream natural gas service principally under
three types of contracts: percentage-of-proceeds contracts, fee-based contracts
and keep-whole contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Effects of Our Raw Natural
Gas Supply Arrangements" for a description of these types of contracts.
Raw Natural Gas Gathering. As of December 31, 1999, we had approximately 17
trillion cubic feet of raw natural gas supplies attached to our systems. We
receive raw natural gas from a diverse group of producers under contracts with
varying durations to provide a stable supply of raw natural gas through our
processing plants. A significant portion of the raw natural gas that is
processed by us is produced by large producers, including ExxonMobil, Union
Pacific Resources, BP Amoco and Phillips, which together account for
approximately 20% of our processed raw natural gas.
We continually seek new supplies of raw natural gas, both to offset natural
declines in production from connected wells and to increase throughput volume.
Historically, we have been successful in connecting additional supplies to more
than offset natural declines in production.
We obtain new well connections in our operating areas by contracting for
production from new wells or by obtaining raw natural gas that has been released
from other gathering systems. Producers may switch raw natural gas from one
gathering system to another to obtain better commercial terms, conditions and
service levels.
We believe our significant asset base and scope of our operations provides
us with significant opportunities to add released raw natural gas to our
systems. In addition, we have significant processing capacity in the Onshore
Gulf of Mexico, Offshore Gulf of Mexico and Rocky Mountain regions, which,
according to the EIA Report contain significant quantities of proved natural gas
reserves. We also have a presence in other potential high-growth areas such as
the Western Canadian Sedimentary Basin. As a result of new connections resulting
from both increased drilling and released raw natural gas, we connected
approximately 1,300 additional wells in 1998 and 1,500 additional wells in 1999.
Gathering systems are operated at design pressures that will maximize the
total throughput from all connected wells. On gathering systems where it is
economically feasible, we operate at a relatively low pressure, which can allow
us to offer a significant benefit to raw natural gas producers. Specifically,
lower pressure gathering systems allow wells, which produce at progressively
lower field pressures as they age, to remain connected to gathering systems and
continue to produce for longer periods of time. As the pressure of a well
declines, it becomes increasingly more difficult to deliver the remaining
production in the ground against
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a higher pressure that exists in the connecting gathering system. Field
compression is typically used to lower the pressure of a gathering system. If
field compression is not installed, then the remaining production in the ground
will not be produced because it cannot overcome the higher gathering system
pressure. In contrast, if field compression is installed, then a well can
continue delivering production that otherwise would not be produced. Our field
compression systems provide the flexibility of connecting a high pressure well
to the downstream side of the compressor even though the well is producing at a
pressure greater than the upstream side. As the well ages and the pressure
naturally declines, the well can be reconnected to the upstream, low pressure
side of the compressor and continue to produce. By maintaining low pressure
systems with field compression units, we believe that the wells connected to our
systems are able to produce longer and at higher volumes before disconnection is
required.
Raw Natural Gas Processing. Most of our natural gas gathering systems feed
into our natural gas processing plants. Our processing plants produced an
average of approximately 4.7 billion cubic feet per day of residue gas and an
average of approximately 400,000 barrels per day of NGLs during 1999.
Our natural gas processing operations involve the extraction of NGLs from
raw natural gas, and, at certain facilities, the fractionation of NGLs into
their individual components (ethane, propane, butanes and natural gasoline). We
sell NGLs produced by our processing operations to a variety of customers
ranging from large, multi-national petrochemical and refining companies,
including Phillips, to small, regional retail propane distributors.
At three plants, we also extract helium from the residue gas stream. Helium
is used for medical diagnostics, in arc welding and other metallurgical and
chemical processes, in the space exploration program and other scientific
applications, for diluting oxygen for breathing (by patients with respiratory
ailments and by deep-sea divers) and for inflating lighter-than-air aircraft and
balloons. These plants are among the few helium extraction facilities in the
United States. We extracted approximately 1.3 billion cubic feet of helium
during 1999, producing revenues of approximately $33 million.
Hydrogen sulfide also is separated in the treating and processing cycle.
During 1999, we produced and sold approximately 93,000 long tons of sulfur,
producing revenues of approximately $1.1 million.
We also remove off-quality crude oil, nitrogen, carbon dioxide and brine
from the raw natural gas stream. The nitrogen and carbon dioxide are released
into the atmosphere, and the crude oil and brine are accumulated and stored
temporarily at field compressors or the various plants. The brine is transported
to licensed disposal wells owned either by us or by third parties. The crude oil
is sold in the off-quality crude oil market.
Residue Gas Marketing. In addition to our gathering and processing
activities discussed above, we are involved in the purchase and sale of residue
gas, directly or through our wholly owned gas marketing company. Our gas
marketing efforts primarily involve supplying the residue gas demands of
end-user customers that are physically attached to our pipeline systems and
supplying the gas processing requirements associated with our keep-whole
processing agreements.
We are focused on extracting the highest possible value for the residue gas
that results from our processing and transportation operations. Of the residue
gas that we market, we currently sell approximately 25% to various on-system
users and approximately 75% to industrial end-users, national wholesale gas
marketing companies (including Duke Energy Trading and Marketing, a subsidiary
of Duke Energy and one of the largest gas marketers in the United States) and
electric utilities.
Our Spindletop storage facility plays an important role in our ability to
act as a full-service natural gas marketer. We lease approximately two-thirds of
the facility's capacity to our customers, and we use the balance to manage
relatively constant natural gas supply volumes with uneven demand levels and
provide "backup" service to our customers.
The natural gas marketing industry is a highly competitive commodity
business with a significant degree of price transparency. We provide a full
range of natural gas marketing services in conjunction with the
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gathering, processing, and transportation services we offer on our facilities,
which allows us to use our asset infrastructure to enhance our revenues across
each aspect of the natural gas value chain.
Financial Services. We provide mezzanine financing to producers seeking
capital for production enhancement in our core physical and marketing asset
areas. We provide financing to operators as part of our efforts to increase
utilization of our existing assets, gain access to incremental supplies and
generate opportunities for us to expand existing infrastructure and/or construct
new gathering lines and processing facilities. The majority of the financing
plans we offer are asset-based and we require that our producers satisfy
risk/reward tolerances. This program has created significant gathering and
processing opportunities for us. At December 31, 1999, we had $21.9 million in
financing outstanding under this program.
REGIONS OF OPERATIONS
Our operations cover substantially all of the major natural gas producing
regions in the United States, as well as portions of Western Canada. In
addition, our geographic diversity reduces the impact of regional price
fluctuations and regional changes in drilling activity.
Our raw natural gas gathering and processing assets are managed in line
with the seven geographic regions in which we operate. The following table
provides information concerning the raw natural gas gathering systems and
processing plants currently owned or operated by us.
<TABLE>
<CAPTION>
COMPANY PLANTS
GAS GATHERING OPERATED OPERATED NET PLANT
REGION SYSTEM(MILES) PLANTS BY OTHERS CAPACITY(MMCF/D)
- ------ ------------- -------- --------- ----------------
<S> <C> <C> <C> <C>
Permian Basin........ 12,890 19 2 1,417
Mid-Continent........ 30,820 19 2 2,273
East Texas-Austin
Chalk-North
Louisiana.......... 5,869 10 1 1,555
Onshore Gulf of
Mexico............. 3,008 7 1 1,083
Rocky Mountains...... 3,765 10 1 600
Offshore Gulf of
Mexico............. 490 2 6 909
Western Canada....... 144 3 0 109
------ -- -- -----
Total................ 56,986 70 13 7,946
====== == == =====
<CAPTION>
1999 OPERATING DATA
--------------------------------------------------------
PLANT INLET RESIDUE GAS NGLS
REGION VOLUME(MMCF/D) PRODUCTION(MMCF/D) PRODUCTION(BBLS/D)
- ------ -------------- ------------------ ------------------
<S> <C> <C> <C>
Permian Basin........ 1,123 816 124,507
Mid-Continent........ 1,459 1,223 120,551
East Texas-Austin
Chalk-North
Louisiana.......... 1,033 937 69,420
Onshore Gulf of
Mexico............. 757 675 37,944
Rocky Mountains...... 387 319 24,708
Offshore Gulf of
Mexico............. 736 691 15,148
Western Canada....... 76 72 278
----- ----- -------
Total................ 5,571 4,733 392,556(1)
===== ===== =======
</TABLE>
- ---------------
(1) Excludes approximately 7,500 barrels per day processed at third party plants
on our behalf.
Our key suppliers of raw natural gas in these seven regions include major
integrated oil companies, independent oil and gas producers, intrastate pipeline
companies and natural gas marketing companies. Our principal competitors in this
segment of our business consist of major integrated oil companies, independent
oil and gas gathers, and interstate and intrastate pipeline companies.
Regional Growth Strategies. Growth of our gas gathering and processing
operations is key to our success. Increased raw natural gas supply enables us to
increase throughput volumes and asset utilization throughout our entire
midstream natural gas value chain. As we develop our regional growth strategies,
we evaluate the nature of the opportunity that a particular region presents. The
attributes that we evaluate include the nature of the gas reserves and
production profile, existing midstream infrastructure including capacity and
capabilities, the regulatory environment, the characteristics of the
competition, and the competitive position of our assets and capabilities. In a
general sense, we employ one or more of the strategies described below:
- Growth -- in regions where production is expected to grow significantly
and/or there is a need for additional gathering and processing
infrastructure, we plan to expand our gathering and processing assets by
following a disciplined acquisition strategy, by expanding existing
infrastructure, and by constructing new gathering lines and processing
facilities.
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- Consolidation -- in regions that include mature producing basins with
flat to declining production or that have excess gathering and processing
capacity, we seek opportunities to efficiently consolidate the existing
asset base in order to increase utilization and operating efficiencies
and realize economies of scale.
- Opportunistic -- in regions where production growth is not primarily
generated by new exploration drilling activity we intend to optimize our
existing assets and selectively expand certain facilities or construct
new facilities to seize opportunities to increase our throughput. These
regions are generally experiencing stable to increasing production
through the application of new drilling technologies like 3-D seismic,
horizontal drilling and improved well completion techniques. The
application of new technologies is causing the drilling of additional
wells in areas of existing production and recompletions of existing wells
which create additional opportunities to add new gas supplies.
In each region, we plan to apply both our broad overall business strategy
and the strategy uniquely suited to each region. We believe this plan will yield
balanced growth initiatives, including new construction in certain high growth
areas, expansion of existing systems and complementary acquisitions, combined
with efficiency improvements and/or asset consolidation. We also plan to
rationalize assets and redeploy capital to higher value opportunities.
A description of our operations, key suppliers and principal competitors in
each region is set forth below:
Permian Basin. Our facilities in this region are located in West Texas and
Southeast New Mexico. We own majority interests in and are the operator of 19
natural gas processing plants in this region. In addition, we own minority
interests in two other natural gas processing plants that are operated by
others. Our natural gas processing plants are strategically located to access
production of the Permian Basin. Our plants have processing capacity net to our
interest of 1.4 billion cubic feet of raw natural gas per day. Operations in
this region are primarily focused on gathering and processing, but we also are
positioned for marketing residue gas and NGLs. We offer low, intermediate, and
high pressure gathering and processing and both high and low NGLs content
treating. Three of our processing facilities provide fractionation services.
Residue gas sales are enhanced by access to the Waha Hub where multiple pipeline
interconnects source gas for virtually every market in the United States. Our
older facilities have been modernized to improve product recoveries, and most of
our plants offer sulfur removal. During 1999, these plants operated at an
overall 79% capacity utilization rate. On average, the raw natural gas from West
Texas contains approximately 5.2 gallons of NGLs per thousand cubic feet, while
raw natural gas from New Mexico contains approximately 4.6 gallons of NGLs per
thousand cubic feet.
As we generally pursue a consolidation strategy in this region, our assets
will allow us to compete for new gas supplies in most major fields and benefit
from the expected increase in drilling and production from technological
advances. In addition, our ability to redirect gas between several processing
plants allows us to maximize utilization of our processing capacity in this
region.
Our key suppliers in this region include ExxonMobil, Union Pacific
Resources and Yates Petroleum. Our principal competitors in this region include
Dynegy, Koch and Texaco.
Mid-Continent. Our facilities in this region are located in Oklahoma,
Kansas and the Texas Panhandle. In this region, we own and are the operator of
19 natural gas processing plants, 18 in which we own a 100% interest and one in
which we own a 50% interest. We also own minority interests in two other natural
gas processing plants that are operated by others. We gather and process raw
natural gas primarily from the Arkoma, Ardmore, and Anadarko basins, including
the prolific Hugoton and Panhandle fields. Our plants have processing capacity
net to our interest of 2.3 billion cubic feet of raw natural gas per day. During
1999, our plants operated at an overall 65% capacity utilization rate. On
average, the raw natural gas from this region contains from 3 to 5 gallons of
NGLs per thousand cubic feet.
We also produce approximately 28% of the United States domestic supply of
helium from our Mid-Continent facilities. Annual growth in demand for helium
over the past 15 years has been approximately
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8.5% per year. Because of its unique characteristics and use as an industrial
gas, we expect demand for helium to grow well into the future.
Existing production in the Mid-Continent region is typically from mature
fields with shallow decline profiles that will provide our plants with a
dependable source of raw natural gas over a long term. With the development of
improved exploration and production techniques such as 3-D seismic and
horizontal drilling over the past several years, additional reserves have become
economically producible in this region. We hold large acreage dedication
positions with various producers who have developed programs to add
substantially to their reserve base. The infrastructure of our plants and
gathering facilities are uniquely positioned to pursue our consolidation
strategy.
Our key suppliers in this region include Phillips, OXY USA and Anadarko
Petroleum. Our principal competitors in this region include Coastal Field
Services, Oneok Field Services and Enogex Inc.
East Texas-Austin Chalk-North Louisiana. Our facilities in this region are
located in East Texas, North Louisiana and the Austin Chalk formation of East
Central Texas and Central Louisiana. We own majority interests in and are the
operator of 10 natural gas processing plants in this region. In addition, we own
a minority interest in one natural gas processing plant that is operated by
another entity. Our plants have processing capacity net to our interest of 1.6
billion cubic feet of raw natural gas per day. During 1999, these plants
operated at an overall 66% capacity utilization rate. In this region we also own
three intrastate gathering systems, which, in the aggregate, can gather and
transport approximately 480 million cubic feet of raw natural gas per day.
Our East Texas operations are centered around our East Texas Complex,
located near Carthage, Texas. This plant complex is the second largest raw
natural gas processing facility in the continental United States, based on
liquids recovery, and currently produces approximately 40,000 barrels per day of
NGLs. Our 165-mile gathering network aggregates production to the East Texas
Complex, which currently gathers approximately 130 million cubic feet of raw
natural gas per day. In addition, the plant is connected to and processes raw
natural gas from several other gathering systems, including those owned by Koch,
Union Pacific Resources and American Central. Substantially all of the raw
natural gas processed at the complex is contracted under percent-of-proceeds
agreements with an average remaining term of approximately six years. This plant
is adjacent to our Carthage Hub, which delivers residue gas to interconnects
with 14 interstate and intrastate pipelines. The Carthage Hub, with an aggregate
delivery capacity of two billion cubic feet per day, acts as a key exchange
point for the purchase and sale of residue gas. We also operate Panola pipeline,
with throughput capacity of up to 40,000 barrels per day, which carries NGLs
from our East Texas Complex to markets in Mont Belvieu, Texas. In this region,
we also own and operate the Fuels Cotton Valley Gathering System, which consists
of 76 miles of pipeline and which gathers approximately 30 million cubic feet of
raw natural gas per day.
As we pursue a combination of opportunistic and consolidation strategies in
this diverse region, we intend to leverage our modern processing capacity,
intrastate gas pipeline and NGL assets.
Our key suppliers in this region include Union Pacific Resources, Devon and
Phillips. Our principal competitors in this region include Koch, El Paso Field
Services and Southwest Pipeline Corporation.
Onshore Gulf of Mexico. Our facilities in this region are located in South
Texas and the Southeastern portions of the Texas Gulf Coast. We own a 100%
interest in and are the operator of seven natural gas processing plants and the
Spindletop gas storage facility in this region. In addition, we own a minority
interest in one natural gas processing plant that is operated by another entity.
Our plants have processing capacity net to our interest of 1.1 billion cubic
feet of raw natural gas per day. During 1999, the plants in this region ran at
an overall 70% capacity utilization rate.
Our Spindletop natural gas storage facility is located near Beaumont, Texas
and has current working natural gas capacity of 8.5 billion cubic feet, plus
expansion potential of up to an additional 10 billion cubic feet. We currently
have approximately 5.6 billion cubic feet of the available storage capacity
under lease with expiration terms out to July 2004. This high deliverability
storage facility is positioned to meet the needs of the natural gas-fired
electric generation marketplace, currently the fastest growing demand segment of
the natural
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gas industry. The facility interconnects with 12 interstate and intrastate
pipelines and is designed to handle the hourly demand needs of power generators.
To achieve growth in our Onshore Gulf of Mexico region, we intend to fully
integrate our recently acquired assets and use the diversity of our current
asset base to provide value-added services to our broad customer base. We will
also seek additional opportunities to participate in the anticipated growth in
supply from this region.
Our key suppliers in this region include Collins & Ware, United Oil and
Minerals and TransTexas. Our principal competitors in this region include PG&E
Texas Transmission, Tejas Gas Corp. and Houston Pipe Line Company.
Rocky Mountains. Our facilities in this region are located in the DJ Basin
of Northern Colorado, the Ladder Creek area of Southeast Colorado and the
Greater Green River Basin and Overthrust Belt areas of Southwest Wyoming and
Northeast Utah. We own a 100% interest in and are the operator of 10 natural gas
processing plants in this region. In addition, we own a minority interest in one
natural gas processing plant that is operated by another entity. Our plants have
processing capacity net to our interest of 600 million cubic feet of raw natural
gas per day. During 1999, our plants in this region operated at an overall 65%
capacity utilization rate. These assets provide for the gathering and processing
of raw natural gas, the transportation and fractionation of NGLs, nitrogen
rejection, and helium extraction and liquification services.
The Rocky Mountains region has well placed assets with strong competitive
positions in areas that are expected to benefit from increased drilling
activity, providing us with a platform for growth. In this region, we expect to
achieve growth through our existing assets, strategic acquisitions and
development of new facilities. In addition, we intend to pursue an opportunistic
strategy in areas where new technologies and recovery methods are being
employed.
Our key suppliers in the region include Patina Oil & Gas, HS Resources and
Union Pacific Resources. Our principal competitors in this region include HS
Resources, Williams Field Services and Western Gas Resources.
Offshore Gulf of Mexico. Our facilities in this region are located along
the Gulf Coast areas of Louisiana, Mississippi and Alabama. We own minority
interests in and are the operator of two natural gas processing plants in this
region. In addition, we own a 50% interest in one natural gas processing plant
and minority interests in five other natural gas processing plants, all of which
are operated by other entities. The plants have processing capacity net to our
interest of 909 million cubic feet of raw natural gas per day. During 1999, our
plants in this region operated at an overall 81% capacity utilization rate. Each
of these plants straddle offshore pipeline systems delivering a relatively lower
NGLs content gas stream than that of our onshore gathering systems, as
approximately 50% of the produced NGLs content consists of ethane. As a result,
the offshore region's revenues are concentrated in fee-based business
arrangements and are less dependent on fluctuating commodity prices.
In addition, we own a 37% interest in the Dauphin Island Gathering
Partnership, an offshore gathering and transmission system. Dauphin Island has
attractive market outlets, including deliveries to Texas Eastern Transmission
Corporation, Transco, Koch, Gateway and Florida Gas Transmission for re-delivery
to the Southeast, Mid-Atlantic, Northeast and New England natural gas markets.
Dauphin Island's leased capacity on Texas Eastern Transmission Corporation's
pipeline provides us with a means to cross the Mississippi River to deliver or
receive production from the Venice, Louisiana natural gas hub area. Further, the
Main Pass Oil Gathering Company system, in which we own a 33% interest, also has
access to a variety of markets through existing shallow-water and deep-water
interconnections and dual market outlets into Shell's Delta terminal as well as
Chevron's Cypress terminal.
We believe that the Offshore Gulf of Mexico production area will be one of
the most active regions for new drilling in the United States. Our strategic
growth plan for this region is to add new facilities to our existing base so
that we can capture new offshore development opportunities. Our existing assets
in the eastern Gulf of Mexico are positioned to access new and ongoing
production developments. Based on our broad range of assets in the region, we
intend to capture incremental margins along the natural gas value chain.
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Our key suppliers in the Offshore Gulf of Mexico region include Coastal,
ExxonMobil and CNG Producing Company. Our principal competitors in this region
include El Paso Energy, Coral Energy and Williams.
Western Canada. We own a majority interest in and are the operator of three
natural gas processing plants in Western Canada that are strategically located
in the Peace River Arch area of Northwestern Alberta. Our facilities in this
region have processing capacity net to our interest of 109 million cubic feet of
raw natural gas per day. Our 144-mile gathering system located in this region
supports these processing facilities. During 1999, our processing plants in this
area operated at an overall 70% capacity utilization rate. Our processing
facilities in this area are new, with the majority having been constructed since
1995. Our processing arrangements are primarily fee-based, providing an income
stream that is not subject to fluctuations in commodity prices.
The Peace River Arch area continues to be an active drilling area with land
widely held among several large and small producers. Multiple residue gas market
outlets can be accessed from our facilities through connections to TransCanada's
NOVA system, the Westcoast system into British Columbia and the Alliance
Pipeline, scheduled to be operational in October 2000.
According to the EIA Report, less than 20% of the gathering and processing
assets in the area are owned by midstream gathering and processing companies. As
a result, we believe that significant growth opportunities exist in this region.
We anticipate that producers in this area may follow the lead of U.S. producers
and divest their midstream assets over the next few years. We are positioned to
capitalize on this fundamental shift in the Canadian natural gas processing
industry and plan to expand our position in Alberta and British Columbia through
additional acquisitions and greenfield projects.
Our key suppliers in this region include Star Oil & Gas Ltd., Talisman
Energy Inc. and Anderson Exploration Ltd. Our principal competitors in the area
include TransCanada Midstream, Talisman Energy Inc. and Westcoast Energy, Inc.
NATURAL GAS LIQUIDS TRANSPORTATION, FRACTIONATION AND MARKETING
OVERVIEW
We market our NGLs and provide marketing services to third party NGL
producers and sales customers in significant NGL production and market centers
in the United States. During 1999, our NGL transportation, fractionation and
marketing activities produced $38.3 million of gross margin and $38.1 million of
EBITDA, excluding general and administrative expenses. In 1999, we marketed and
traded approximately 486,000 barrels of NGLs per day, of which approximately 85%
was production for our own account, ranking us as one of the largest NGLs
marketers in the country.
Our NGL services include plant tailgate purchases, transportation,
fractionation, flexible pricing options, price risk management and
product-in-kind agreements. Our primary NGL operations are located in close
proximity to our gathering and processing assets in each of the regions in which
we operate, other than Western Canada. We own interests in two NGLs
fractionators at the Mont Belvieu, Texas market center, the Mont Belvieu I
fractionation facility and the Enterprise Products fractionation facility. In
addition, we own interests in two major NGLs pipelines serving the Mont Belvieu
facilities, the wholly owned Panola Pipeline in East Texas and an interest in
the Black Lake Pipeline in Louisiana and East Texas. We also own several
regional fractionation plants and NGLs pipelines.
We possess a large asset base of NGL fractionators and pipelines that are
used to provide value-added services to our refining, chemical, industrial,
retail and wholesale propane-marketing customers. We intend to capture premium
value in local markets while maintaining a low cost structure by maximizing
facility utilization at our 12 regional fractionators and 12 pipeline systems.
Our current fractionation capacity is approximately 152,000 barrels per day.
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STRATEGY
Our strategy is to exploit the size, scope and reliability of supply from
our raw natural gas processing operations and apply our knowledge of NGL market
dynamics to make additional investments in NGL infrastructure. Our
interconnected natural gas processing operations provide us with an opportunity
to capture fee-based investment opportunities in certain NGL assets, including
pipelines, fractionators and terminals. In conjunction with this investment
strategy and as an enhancement to the margin generation from our NGL assets, we
also intend to focus on the following areas: producer services, local sales and
fractionation, market hub fractionation, transportation and market center
trading and storage, each of which briefly is discussed below.
Producer Services. We plan to expand our services to producers principally
in the areas of price risk management and handling the marketing of their
products. Over the last several years, we have expanded our supply base
significantly beyond our own equity production by providing a long-term market
for third-party NGLs at competitive prices.
Local Sales and Fractionation. We will seek opportunities to maximize value
of our product by expanding local sales. We have fractionation capabilities at
14 of our raw natural gas processing plants. Our ability to fractionate NGLs at
regional processing plants provides us with direct access to local NGLs markets.
Market Hub Fractionation. We will focus on optimizing our product slate
from our two Gulf Coast fractionators, the Mont Belvieu I and Enterprise
Products fractionators, where we have a combined owned capacity of 57,000
barrels per day. The control of products from these fractionators complements
our market center trading activity.
Transportation. We will seek additional opportunities to invest in NGL
pipelines and secure favorable third party transportation arrangements. We use
company-owned NGL pipelines to transport approximately 94,500 barrels per day of
our total NGL pipeline volumes, providing transportation to market center
fractionation hubs or to end use markets. We also are a significant shipper on
third party pipelines in the Rocky Mountains, Mid-Continent and Permian Basin
producing regions and, as a result, receive the benefit of incentive rates on
many of our NGLs shipments.
Market Center Trading and Storage. We use trading and storage at the Mont
Belvieu, Texas and Conway, Kansas NGL market centers to manage our price risk
and provide additional services to our customers. We undertake these activities
through the use of fixed forward sales, basis and spread trades, storage
opportunities, put/call options, term contracts and spot market trading. We
believe there are additional opportunities to grow our price risk management
services with our industrial customer base.
KEY SUPPLIERS AND COMPETITION
The marketing of NGLs is a highly competitive business that involves
integrated oil and natural gas companies, mid-stream gathering and processing
companies, trading houses, international liquid propane gas producers and
refining and chemical companies. There is competition to source NGLs from plant
operators for movement through pipeline networks and fractionation facilities as
well as to supply large consumers such as multi-state propane, refining and
chemical companies with their NGLs needs. Our three largest suppliers are our
own plants, Union Pacific Resources and Pacific Gas & Electric. Our largest
sales customers are Phillips, Dow Chemical and ExxonMobil, which accounted for
12%, 2% and 1%, respectively, of our total revenues in 1999. Our three principal
competitors in the marketing of NGLs are Dynegy, Koch and Enterprise. In 1999,
we marketed and traded an average of approximately 486,000 barrels per day, or
approximately 19% of the available domestic supply, which includes gas plant
production, refinery plant production and imports.
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TEPPCO
On March 31, 2000, we obtained by transfer from Duke Energy, the general
partner of TEPPCO, a publicly traded limited partnership. TEPPCO operates in two
principal areas:
- refined products and liquefied petroleum gases transportation; and
- crude oil and NGLs transportation and marketing.
TEPPCO is one of the largest pipeline common carriers of refined petroleum
products and liquefied petroleum gases in the United States. Its operations in
this line of business consist of:
- interstate transportation, storage and terminaling of petroleum products;
- short-haul shuttle transportation of liquefied petroleum gas at the Mont
Belvieu, Texas complex;
- sale of product inventory;
- fractionation of NGLs; and
- ancillary services.
TEPPCO's refined products and liquefied petroleum gas pipeline system includes
approximately 4,300 miles of pipeline which extend from southeast Texas through
the central and midwestern United States to the northeastern United States.
TEPPCO's refined products and liquefied petroleum gas pipeline system has
storage capacity of 13 million barrels of refined petroleum products and 38
million barrels of liquefied petroleum gas.
Through its crude oil and NGLs transportation and marketing business,
TEPPCO gathers, stores, transports and markets crude oil, NGLs, lube oil and
specialty chemicals, principally in Oklahoma, Texas and the Rocky Mountain
region. TEPPCO's crude oil and NGLs assets include approximately 1,950 miles of
crude oil pipeline and 1.7 million barrels of crude oil storage and
approximately 425 miles of NGL pipeline with an aggregate capacity of 25,000
barrels per day.
We believe that our ownership of the general partnership interest of TEPPCO
improves our business position in the transportation sector of the midstream
natural gas industry and provides us additional flexibility in pursuing our
disciplined acquisition strategy by providing an alternative acquisition
vehicle. It also provides us with an opportunity to sell appropriate assets
currently held by our company to TEPPCO.
The general partner of TEPPCO manages and directs TEPPCO under the TEPPCO
partnership agreement and the partnership agreements of its operating
partnerships. Under the partnership agreements, the general partner of TEPPCO is
reimbursed for all direct and indirect expenses it incurs or payments it makes
on behalf of TEPPCO.
TEPPCO makes quarterly cash distributions of its available cash, which
consists generally of all cash receipts less disbursements and cash reserves
necessary for working capital, anticipated capital expenditures and
contingencies, the amounts of which are determined by the general partner of
TEPPCO.
The partnership agreements provide for incentive distributions payable to
the general partner of TEPPCO out of TEPPCO's available cash in the event
quarterly distributions to its unitholders exceed certain specified targets. In
general, subject to certain limitations, if a quarterly distribution exceeds a
target of $.275 per limited partner unit, the general partner of TEPPCO will
receive incentive distributions equal to:
- 15% of that portion of the distribution per limited partner unit which
exceeds the minimum quarterly distribution amount of $.275 but is not
more than $.325, plus
- 25% of that portion of the quarterly distribution per limited partner
unit which exceeds $.325 but is not more than $.45, plus
- 50% of that portion of the quarterly distribution per limited partner
unit which exceeds $.45.
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At TEPPCO's 1999 per unit distribution level, the general partner:
- receives approximately 14% of the cash distributed by TEPPCO to its
partners, which consists of 12% from the incentive cash distribution and
2% from the general partner interest; and
- under the incentive cash distribution provisions, receives 50% of any
increase in TEPPCO's per unit cash distributions.
During 1999, total cash distributions to the general partner of TEPPCO were
$8.3 million.
TEPPCO has agreed to acquire from Atlantic Richfield Company, for $318.5
million, its ownership interests in a 500-mile crude oil pipeline that extends
from a marine terminal at Freeport, Texas to Cushing, Oklahoma, a 416-mile crude
oil pipeline that extends from Jal, New Mexico to Cushing, a 400-mile crude oil
pipeline that extends from West Texas to Houston, crude oil terminal facilities
in Midland, Cushing and the Houston area and receipt and delivery pipelines
centered around Midland. The transaction is contingent upon satisfaction of
regulatory requirements.
NATURAL GAS SUPPLIERS
We purchase substantially all of our raw natural gas from producers under
varying term contracts. Typically, we take ownership of raw natural gas at the
wellhead, settling payments with producers on terms set forth in the applicable
contracts. These producers range in size from small independent owners and
operators to large integrated oil companies, such as Phillips, our largest
single supplier. No single producer accounted for more than 10% of our natural
gas throughput in 1999. Each producer generally dedicates to us the raw natural
gas produced from designated oil and natural gas leases for a specific term. The
term will typically extend for three to seven years and in some cases for the
life of the lease. We currently have over 15,000 active contracts with over
5,000 producers. We consider our relations with our producers to be good. For a
description of the types of contracts we have entered into with our suppliers,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Effects of Our Raw Natural Gas Supply Arrangements."
COMPETITION
We face strong competition in acquiring raw natural gas supplies. Our
competitors in obtaining additional gas supplies and in gathering and processing
raw natural gas include:
- major integrated oil companies;
- major interstate and intrastate pipelines or their affiliates;
- other large raw natural gas gatherers that gather, process and market
natural gas and/or NGLs; and
- a relatively large number of smaller raw natural gas gatherers of varying
financial resources and experience.
Competition for raw natural gas supplies is concentrated in geographic
regions based upon the location of gathering systems and natural gas processing
plants. Although we are one of the largest gatherers and processors in most of
the geographic regions in which we operate, most producers in these areas have
alternate gathering and processing facilities available to them. In addition,
producers have other alternatives, such as building their own gathering
facilities or in some cases selling their raw natural gas supplies without
processing. Competition for raw natural gas supplies in these regions is
primarily based on:
- the reputation, efficiency and reliability of the gatherer/processor,
including the operating pressure of the gathering system;
- the availability of gathering and transportation;
- the pricing arrangement offered by the gatherer/processor; and
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- the ability of the gatherer/processor to obtain a satisfactory price for
the producers' residue gas and extracted NGLs.
In addition to competition in raw natural gas gathering and processing,
there is vigorous competition in the marketing of residue gas. Competition for
customers is based primarily upon the price of the delivered gas, the services
offered by the seller, and the reliability of the seller in making deliveries.
Residue gas also competes on a price basis with alternative fuels such as oil
and coal, especially for customers that have the capability of using these
alternative fuels and on the basis of local environmental considerations. Also,
to foster competition in the natural gas industry, certain regulatory actions of
FERC and some states have allowed buying and selling to occur at more points
along transmission and distribution systems.
Competition in the NGLs marketing area comes from other midstream NGLs
marketing companies, international producers/traders, chemical companies and
other asset owners. Along with numerous marketing competitors, we offer price
risk management and other services. We believe it is important that we tailor
our services to the end-use customer to remain competitive.
REGULATION
Transportation. Historically, the transportation and sale for resale of
natural gas in interstate commerce have been regulated under the Natural Gas Act
of 1938, the Natural Gas Policy Act of 1978, and the regulations promulgated
thereunder by FERC. In the past, the federal government regulated the prices at
which natural gas could be sold. In 1989, Congress enacted the Natural Gas
Wellhead Decontrol Act, which removed all Natural Gas Act and Natural Gas Policy
Act price and non-price controls affecting wellhead sales of natural gas.
Congress could, however, reenact field natural gas price controls in the future,
though we know of no current initiative to do so.
As a gatherer, processor and marketer of raw natural gas, we depend on the
natural gas transportation and storage services offered by various interstate
and intrastate pipeline companies to enable the delivery and sale of our residue
gas supplies. In accordance with methods required by FERC for allocating the
system capacity of "open access" interstate pipelines, at times other system
users can preempt the availability of interstate natural gas transportation and
storage service necessary to enable us to make deliveries and sales of residue
gas. Moreover, shippers and pipelines may negotiate the rates charged by
pipelines for such services within certain allowed parameters. These rates will
also periodically vary depending upon individual system usage and other factors.
An inability to obtain transportation and storage services at competitive rates
can hinder our processing and marketing operations and affect our sales margins.
The intrastate pipelines that we own are subject to state regulation and,
to the extent they provide interstate services under Section 311 of the Natural
Gas Policy Act of 1978, also are subject to FERC regulation. We also own an
interest in a natural gas gathering system and interstate transmission system
located in offshore waters south of Louisiana and Alabama. The offshore
gathering system is not a jurisdictional entity under the Natural Gas Act; the
interstate offshore transmission system is regulated by FERC.
Commencing in April 1992, FERC issued Order No. 636 and a series of related
orders that require interstate pipelines to provide open-access transportation
on a basis that is equal for all marketers of natural gas. FERC has stated that
it intends for Order No. 636 to foster increased competition within all phases
of the natural gas industry. Order No. 636 applies to our activities in Dauphin
Island Gathering Partners and how we conduct gathering, processing and marketing
activities in the market place serviced by Dauphin Island Gathering Partners.
The courts have largely affirmed the significant features of Order No. 636 and
the numerous related orders pertaining to individual pipelines, although certain
appeals remain pending and FERC continues to review and modify its regulations.
For example, the FERC recently issued Order No. 637 which, among other things:
- lifts the cost-based cap on pipeline transportation rates in the capacity
release market until September 30, 2002 for short-term releases of
pipeline capacity of less than one year;
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- permits pipelines to charge different maximum cost-based rates for peak
and off-peak periods;
- encourages, but does not mandate, auctions for pipeline capacity;
- requires pipelines to implement imbalance management services;
- restricts the ability of pipelines to impose penalties for imbalances,
overruns and non-compliance with operational flow orders; and
- implements a number of new pipeline reporting requirements.
Order No. 637 also requires the FERC to analyze whether the FERC should
implement additional fundamental policy changes, including, among other things,
whether to pursue performance-based ratemaking or other non-cost based
ratemaking techniques and whether the FERC should mandate greater
standardization in terms and conditions of service across the interstate
pipeline grid. In addition, the FERC recently implemented new regulations
governing the procedure for obtaining authorization to construct new pipeline
facilities and has issued a policy statement, which it largely affirmed in a
recent order on rehearing, establishing a presumption in favor of requiring
owners of new pipeline facilities to charge rates based solely on the costs
associated with such new pipeline facilities. We cannot predict what further
action FERC will take on these matters. However, we do not believe that we will
be affected by any action taken previously or in the future on these matters
materially differently than other natural gas gatherers, processors and
marketers with which we compete.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, FERC and the courts. The natural gas
industry historically has been heavily regulated; therefore, there is no
assurance that the less stringent and pro-competition regulatory approach
recently pursued by FERC and Congress will continue.
Gathering. The Natural Gas Act exempts natural gas gathering facilities
from the jurisdiction of FERC. Interstate natural gas transmission facilities,
on the other hand, remain subject to FERC jurisdiction. FERC has historically
distinguished between these two types of facilities on a fact-specific basis. We
believe that our gathering facilities and operations meet the current tests that
FERC uses to grant non-jurisdictional gathering facility status. However, there
is no assurance that FERC will not modify such tests or that all of our
facilities will remain classified as natural gas gathering facilities.
Some states in which we own gathering facilities have adopted laws and
regulations that require gatherers either to purchase without undue
discrimination as to source or supplier or to take ratably without undue
discrimination natural gas production that may be tendered to the gatherer for
handling. For example, the states of Oklahoma and Kansas also have adopted
complaint-based statutes that allow the Oklahoma Corporation Commission and the
Kansas Corporation Commission, respectively, to remedy discriminatory rates for
providing gathering service where the parties are unable to agree. In a similar
way, the Railroad Commission of Texas sponsors a complaint procedure for
resolving grievances about natural gas gathering access and rate discrimination.
The FERC recently issued Order No. 639, requiring that virtually all
non-proprietary pipeline transporters of natural gas on the outer-continental
shelf report information on their affiliations, rates and conditions of service.
Among FERC's purposes in issuing these rules was the desire to provide shippers
on the outer-continental shelf with greater assurance of open-access services on
pipelines located on the outer-continental shelf and non-discriminatory rates
and conditions of service on these pipelines. The FERC exempted Natural Gas
Act-regulated pipelines, like Dauphin Island Gathering Partners, from the new
reporting requirements, reasoning that the information that these pipelines were
already reporting was sufficient to monitor conformity with existing
non-discrimination mandates. However, pipelines not regulated under the Natural
Gas Act, like our gathering lines located on the outer-continental shelf, must
comply with the new rules. This could increase our cost of regulatory compliance
and place us at a disadvantage in comparison to companies that are not required
to satisfy the reporting requirements. Order No. 639 may be altered on rehearing
or on appeal, and it is not known at this time what effect these new rules, as
they may be altered, will have on our business. We
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currently believe that Order No. 639 and the related reporting requirements will
not have a material adverse effect on our existing business activities.
Processing. The primary function of our natural gas processing plants is
the extraction of NGLs and the conditioning of natural gas for marketing. FERC
has traditionally maintained that a processing plant that primarily extracts
NGLs is not a facility for transportation or sale of natural gas for resale in
interstate commerce and therefore is not subject to its jurisdiction under the
Natural Gas Act. We believe that our natural gas processing plants are primarily
involved in removing NGLs and, therefore, are exempt from the jurisdiction of
FERC.
Transportation and Sales of Natural Gas Liquids. We have non-operating
interests in two pipelines that transport NGLs in interstate commerce. The
rates, terms and conditions of service on these pipelines are subject to
regulation by the FERC under the Interstate Commerce Act. The Interstate
Commerce Act requires, among other things, that petroleum products (including
NGLs) pipeline rates be just and reasonable and non-discriminatory. The FERC
allows petroleum pipeline rates to be set on at least three bases, including
historic cost, historic cost plus an index or market factors.
Sales of Natural Gas Liquids. Our sales of NGLs are not currently regulated
and are made at market prices. In a number of instances, however, the ability to
transport and sell such NGLs are dependent on liquids pipelines whose rates,
terms and conditions or service are subject to the Interstate Commerce Act.
Although certain regulations implemented by the FERC in recent years could
result in an increase in the cost of transporting NGLs on certain petroleum
products pipelines, we do not believe that these regulations affect us any
differently than other marketers of NGLs with whom we compete.
U.S. Department of Transportation. Some of our pipelines are subject to
regulation by the U.S. Department of Transportation with respect to their
design, installation, testing, construction, operation, replacement and
management. Comparable regulations exist in some states where we do business.
These regulations provide for safe pipeline operations and include potential
fines and penalties for violations.
Safety and Health. Certain federal statutes impose significant liability
upon the owner or operator of natural gas pipeline facilities for failure to
meet certain safety standards. The most significant of these is the Natural Gas
Pipeline Safety Act, which regulates safety requirements in the design,
construction, operation and maintenance of gas pipeline facilities. In addition,
we are subject to a number of federal and state laws and regulations, including
the federal Occupational Safety and Health Act and comparable state statutes,
whose purpose is to maintain the safety of workers, both generally and within
the pipeline industry. We have an internal program of inspection designed to
monitor and enforce compliance with pipeline and worker safety requirements. We
believe we are in substantial compliance with the requirements of these laws,
including general industry standards, recordkeeping requirements, and monitoring
of occupational exposure to hazardous substances.
Canadian Regulation. Our Canadian assets in the province of Alberta are
regulated by the Alberta Energy and Utilities Board. Our West Doe natural gas
gathering pipeline, which crosses the Alberta/British Columbia border, falls
under the jurisdiction of the National Energy Board.
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ENVIRONMENTAL MATTERS
The operation of pipelines, plants and other facilities for gathering,
transporting, processing, treating, or storing natural gas, NGLs and other
products is subject to stringent and complex laws and regulations pertaining to
health, safety and the environment. As an owner or operator of these facilities,
we must comply with these laws and regulations at the federal, state, and local
levels. These laws and regulations can restrict or prohibit our business
activities that affect the environment in many ways, such as:
- restricting the way we can release materials or waste products into the
air, water, or soils;
- limiting or prohibiting construction activities in sensitive areas such
as wetlands or areas of endangered species habitat, or otherwise
constraining how or when construction is conducted;
- requiring remedial action to mitigate pollution from former operations,
or requiring plans and activities to prevent pollution from ongoing
operations; and
- imposing substantial liabilities on us for pollution resulting from our
operations, including, for example, potentially enjoining the operations
of facilities if it were determined that they were not in compliance with
permit terms.
In most instances, the environmental laws and regulations affecting our
operations relate to the potential release of substances or waste products into
the air, water or soils, and include measures to control or prevent the release
of substances or waste products to the environment. Costs of planning,
designing, constructing and operating pipelines, plants, and other facilities
must incorporate compliance with environmental laws and regulation and safety
standards. Failure to comply with these laws and regulations may trigger a
variety of administrative, civil and criminal enforcement measures, which can
include the assessment of monetary penalties, the imposition of remedial
requirements, the issuance of injunctions and federally authorized citizen
suits. Moreover, it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused
by the release of substances or other waste products to the environment. The
following is a discussion of certain environmental and safety concerns that
relate to the midstream natural gas and NGLs industry. It is not intended to
constitute a complete discussion of all applicable federal, state and local laws
and regulations, or specific matters, to which we may be subject.
Our operations are regulated by the Clean Air Act, as amended, and
comparable state laws and regulations. These laws and regulations govern
emissions into the air from our activities, for example in relation to our
processing plants and our compressor stations, and also impose procedural
requirements on how we conduct our operations. Due to the nature or our
business, we have numerous permits related to air emissions issued by state
governments or the United States Environmental Protection Agency ("EPA"). For
example, we have a large number of federal Operating Permits, known as Title V
permits, for our facilities that can impart specific emissions limitations as
well as specific operational practices with which we must comply. There are also
other state and federal requirements that might relate to our operations,
including the federal Prevention of Significant Deterioration permitting
requirements for major sources of emissions, and specific New Source Performance
Standards or Maximum Achievable Control Technology ("MACT") Standards issued by
the EPA that apply specifically to our industry or activities. Our failure to
comply with these requirements exposes us to civil enforcement actions from the
state agencies and perhaps the EPA, including monetary penalties, injunctions,
conditions or restrictions on operations, and, potentially, criminal enforcement
actions or federally authorized citizen suits.
On June 17, 1999, the EPA published in the Federal Register a final MACT
standard under Section 112 of the Clean Air Act to limit emissions of Hazardous
Air Pollutants ("HAPs") from oil and natural gas production as well as from
natural gas transmission and storage facilities. The MACT standard requires that
affected facilities reduce their emissions of HAPs by 95%, and this will affect
our various large dehydration units and potentially some of our storage vessels.
This new standard will require that we achieve this reduction by either process
modifications or installing new emissions control technology. The MACT standard
will affect us and our competitors in a like manner. The rule allows most
affected sources until at least June 2002 to comply with the requirements. While
additional capital costs are likely to result from this rule or other
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potential air regulations, we believe that these changes will not have a
material adverse effect on our business, financial position or results of
operations.
Our operations generate wastes, including some hazardous wastes, that are
subject to the Resource Conservation and Recovery Act ("RCRA"), as amended and
comparable state laws. However, RCRA currently exempts many natural gas
gathering and processing plant wastes from being subject to hazardous waste
requirements. Specifically, RCRA excludes from the definition of hazardous waste
produced waters and other wastes associated with the exploration, development,
or production of crude oil, natural gas or geothermal energy. Unrecovered
petroleum product wastes, however, may still be regulated under RCRA as solid
waste. Moreover, ordinary industrial wastes, such as paint wastes, waste
solvents, laboratory wastes, and waste compressor oils, may be regulated as
hazardous waste. Natural gas and NGLs transported in pipelines may also generate
some hazardous wastes. Although we believe it is unlikely that the RCRA
exemption will be repealed in the near future, repeal would increase costs for
waste disposal and environmental remediation at our facilities. Past operations
are identified from time to time as having used polychlorinated biphenyls
("PCBs"), for example, in plant air compressor systems, and when identified we
are required to address or remediate such a system that might contain PCBs in
compliance with the Toxic Substances Control Act, including any contamination
that might be associated with a release from that system.
Our operations could incur liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), also
known as "Superfund," and comparable state laws or other federal laws regardless
of our fault, in connection with the disposal or other release of hazardous
substances or wastes, including those arising out of historical operations
conducted by our predecessors. If we were to incur liability under CERCLA, we
could be subject to joint and several liability for the costs of cleaning up
hazardous substances, for damages to natural resources and for the costs of
certain health studies.
We currently own or lease, and have in the past owned or leased, numerous
properties that for many years have been used for the measurement, gathering,
field compression and processing of natural gas and NGLs. Although we used
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or wastes may have been disposed of or released on or under the
properties owned or leased by us or on or under other locations where such
wastes have been taken for disposal. In addition, some of these properties have
been operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under our control. These properties and the
wastes disposed on them may be subject to CERCLA, RCRA and analogous state laws.
Under such laws, we could be required to remove or remediate previously disposed
wastes (including waste disposed of or released by prior owners or operators) or
property contamination (including groundwater contamination, whether from prior
owners or operators or other historic activities or spills) or to perform
remedial plugging or pit closure operations to prevent future contamination, in
some instances regardless of fault or the amount of waste we sent to the site.
EPA Region VIII issued a RCRA administrative cleanup order in 1995 with
respect to the operation of the Weld County Waste Disposal, Inc. site near Fort
Lupton Colorado, and in 1997 one of our predecessors was identified along with
other entities as a potentially responsible party for this site. We are not
aware of administrative activity at this site in the last two years. We have
various ongoing remedial matters related to historical operations similar to
others in the industry, for the reasons generally described above. These are
typically managed in conjunction with the relevant state or federal agencies to
address specific conditions, and in some cases are the responsibility of other
entities based upon contractual obligations related to the assets. In April
1999, we acquired the midstream natural gas gathering and processing assets of
Union Pacific Resources located in several states, which include 18 natural gas
plants and 365 gathering facility sites. We have entered into an agreement to
transfer liability for pre-April 1999 soil and ground water conditions
identified as part of this transaction to a third party environmental/insurance
partnership for a one-time premium payment subject to certain deductibles. With
respect to these identified environmental conditions, the environmental partner
has assumed liability and management responsibility for environmental
remediation, and the insurance partner is providing financial management,
program oversight, remediation cost cap insurance coverage for a 30 year term,
and pollution legal liability coverage for a 20 year term. This innovative
approach promotes pro-active site cleanup and closure, reduces internal resource
needs for managing remediation, and may improve the marketability of assets
based on transferability of this insurance coverage. In August 1996, we acquired
certain
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gas gathering and processing assets in three states from Mobil Corporation.
Under the terms of the asset purchase agreement, Mobil has retained the
liabilities and costs related to various pre-August 1996 environmental
conditions that were identified with respect to those assets. Mobil has
formulated or is in the process of developing plans to address certain of these
conditions, which we will review and monitor as clean-up activities proceed.
Our operations can result in discharges of pollutants to waters. The
Federal Water Pollution Control Act of 1972, as amended ("FWPCA"), also known as
the Clean Water Act, and analogous state laws impose restrictions and strict
controls regarding the discharge of pollutants, including NGLs or unpermitted
wastes, into state waters or waters of the United States. The unpermitted
discharge of pollutants such as from spill or leak incidents are prohibited. The
FWPCA and regulations implemented thereunder also prohibit discharges of fill
material and certain other activities in wetlands unless authorized by an
appropriately issued permit. Any unexpected release of NGLs or condensates from
our systems or facilities could result in significant remedial obligations as
well as FWPCA-related fines or penalties.
We make expenditures in connection with environmental matters as part of
our normal operations and capital expenses. For each of 2000 and 2001, we
estimate that our expensed and capital-related costs will be approximately $13
million. It should be noted, however, that stricter laws and regulations, new
interpretations of existing laws and regulations, or new information or
developments could significantly increase our compliance costs and remediation
obligations.
We are subject to inherent environmental and safety risks related to our
handling of natural gas and NGL products and historical industry waste disposal
practices. We cannot assure you that we will not incur material environmental
costs and liabilities. We believe, based on our current knowledge, that we are
generally in substantial compliance with all of our necessary and material
permits, and that we are in substantial compliance with applicable material
environmental and safety regulations. We also use contractual measures, such as
the environmental/insurance partnership discussed above, where appropriate to
mitigate environmental claims or losses but, in the event of a default, we could
be exposed to these claims. Based on current information and taking into account
protective mechanisms mentioned here, we do not believe that compliance with
federal, state or local environmental laws and regulations will have a material
adverse effect on our business, financial position or results of operations. In
addition, we believe that the various environmental activities in which we are
presently engaged are not expected to materially interrupt or diminish our
operational ability to gather, process, and transport natural gas and NGLs. We
cannot assure you, however, that future events, such as changes in existing
laws, the promulgation of new laws, or the development or discovery of new facts
or conditions will not cause us to incur significant costs.
Our natural gas gathering pipelines and processing plants in Alberta,
Canada operate under permits from and are regulated by Alberta Environment. Our
West Doe natural gas gathering pipeline, which crosses the Alberta/British
Columbia border, is regulated by the National Energy Board in consultation with
the Canadian Environmental Assessment Agency.
LEGAL PROCEEDINGS
In November 1997, Chevron U.S.A. sued GPM Gas Corporation, one of our
subsidiaries, in the United States District Court for the Western District of
Texas, Midland Division, for alleged breach by GPM Gas Corporation of favored
nations clauses in several 1961 gas supply contracts. The case was tried in
October 1998, and in September 1999, the trial court issued an opinion and final
judgment against GPM for $13.8 million through July 1998, plus attorneys' fees
and interest for the period after July 1998. GPM Gas Corporation has appealed
the judgment to the U.S. Court of Appeals for the Fifth Circuit.
In recent years, the midstream natural gas industry has seen an increase in
the number of class actions in suits involving royalty disputes, mismeasurement
and mispayment. Although the industry has seen these types of cases before, they
were previously typically brought by a single plaintiff or small group of
plaintiffs. Many of these cases are now being brought as class actions or under
the Civil False Claims Act. We are currently named defendants in a number of
these types of cases. Although we believe we have meritorious defenses to
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these cases and will continue to vigorously defend against them, these class
actions are expected to be costly and time consuming to defend.
In addition to the foregoing, from time to time, we are named as parties in
legal proceedings arising in the ordinary course of our business. We believe we
have meritorious defenses to all of these lawsuits and legal proceedings and
will vigorously defend against them. Based on our evaluation of pending matters
and after consideration of reserves established, we believe that the resolution
of these proceedings will not have a material adverse effect on our business,
financial position or results of operations.
EMPLOYEES
As of May 15, 2000, we had approximately 2,600 employees. We are a party to
two collective bargaining agreements which cover an aggregate of approximately
180 of our employees and are bound to negotiate in good faith toward collective
bargaining agreements with two other collective bargaining units which cover an
aggregate of approximately 80 employees. We believe our relations with our
employees are good.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information regarding our executive officers,
directors and nominees for director:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jim W. Mogg(1)........................ 51 Director and Chairman of the Board,
President and Chief Executive
Officer
Michael J. Panatier(2)................ 51 Nominee for Director and Vice Chairman
of the Board
Mark A. Borer......................... 45 Senior Vice President, Southern Region
Michael J. Bradley.................... 45 Senior Vice President, Northern Region
David D. Frederick.................... 40 Senior Vice President and Chief
Financial Officer
Robert F. Martinovich................. 42 Senior Vice President, Western Region
William W. Slaughter.................. 52 Executive Vice President
Martha B. Wyrsch...................... 42 Senior Vice President, General Counsel
and Secretary
Fred J. Fowler(1)..................... 54 Director
Richard B. Priory(1).................. 53 Director
Milton Carroll(1)..................... 50 Nominee for Director
William H. Grigg(1)................... 67 Nominee for Director
John E. Lowe(2)....................... 41 Nominee for Director
J.J. Mulva(2)......................... 53 Nominee for Director
Wayne W. Murdy(1)..................... 55 Nominee for Director
Ruth G. Shaw(1)....................... 52 Nominee for Director
C.J. Silas(2)......................... 68 Nominee for Director
</TABLE>
- ---------------
(1) Duke Energy designee
(2) Phillips designee
Jim W. Mogg is Chairman of the Board, President and Chief Executive Officer
of our company. Mr. Mogg also serves as Senior Vice President--Field Services
for Duke Energy. Mr. Mogg was President and Chief Executive Officer of the
Predecessor Company from 1994 until the Combination. Mr. Mogg is also a director
of the general partner of TEPPCO. Mr. Mogg has been in the energy industry since
1973.
Michael J. Panatier is a nominee for Director and Vice Chairman of our
company. Mr. Panatier served as Senior Vice President of Gas Processing and
Marketing for Phillips from 1998 until the Combination. From 1994 until the
Combination, he also served as President and Chief Executive Officer of GPM Gas
Corporation, a subsidiary of Phillips. Mr. Panatier has been in the energy
industry since 1975.
Mark A. Borer is Senior Vice President, Southern Region of our company. Mr.
Borer held the same position with the Predecessor Company from 1999 until the
Combination. From 1992 until 1999, Mr. Borer served as Vice President of Natural
Gas Marketing for Union Pacific Fuels, Inc. Mr. Borer is also a director of the
general partner of TEPPCO. Mr. Borer has been in the energy industry since 1978.
Michael J. Bradley is Senior Vice President, Northern Region of our
company. Mr. Bradley held the same position with the Predecessor Company from
1994 until the Combination. Mr. Bradley has been in the energy industry since
1979.
David D. Frederick is Senior Vice President and Chief Financial Officer of
our company. Mr. Frederick held the same position with the Predecessor Company
from 1998 until the Combination. From 1996 until 1998, Mr. Frederick served as
Vice President and Controller of Panhandle Eastern Pipe Line Company and
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Trunkline Gas Company. From 1993 until 1996, Mr. Frederick served as Controller
of Panhandle Eastern Pipe Line Company. Mr. Frederick has been in the energy
industry since 1988.
Robert F. Martinovich is Senior Vice President, Western Region of our
company. Mr. Martinovich was Senior Vice President of GPM Gas Corporation, a
subsidiary of Phillips, from 1999 until the Combination. From 1996 until 1999,
Mr. Martinovich was Vice President for the Oklahoma Region for GPM Gas
Corporation, and from 1994 until 1996, he was Business Development Manager for
GPM Gas Services Company. Mr. Martinovich has been in the energy industry since
1980.
William W. Slaughter is Executive Vice President of our company. Mr.
Slaughter held the position of Advisor to the Chief Executive Officer of the
Predecessor Company from 1998 until his appointment as Executive Vice President
in 2000. From 1997 until 1998, Mr. Slaughter was Vice President of Energy
Services for Duke Energy. From 1994 until 1997, Mr. Slaughter served as Vice
President of Corporate Strategic Planning for Pan Energy and President of Pan
Energy International Development Corporation. Mr. Slaughter is also a director
of the general partner of TEPPCO. Mr. Slaughter has been in the energy industry
since 1970.
Martha B. Wyrsch is Senior Vice President, General Counsel and Secretary of
our company. Ms. Wyrsch held the same position with the Predecessor Company from
1999 until the Combination. Ms. Wyrsch also currently serves as Vice President
and General Counsel -- Energy Transmission for Duke Energy. From 1997 until
1999, Ms. Wyrsch served as Vice President, General Counsel and Secretary of K N
Energy, Inc. From 1996 until 1997, Ms. Wyrsch served as Vice President, Deputy
General Counsel and Secretary of K N Energy, Inc. Ms. Wyrsch served K N Energy,
Inc. in a variety of positions from 1991 to 1996, including Assistant General
Counsel, Senior Counsel and Assistant Secretary. Ms. Wyrsch has been in the
energy industry since 1991.
Fred J. Fowler, a Director of our company, is Group President -- Energy
Transmission of Duke Energy and has held that position since 1997. Mr. Fowler
served as Group Vice President of Pan Energy from 1996 until 1997. From 1994
until 1996, Mr. Fowler served as President of Texas Eastern Transmission
Company. Mr. Fowler is also a director of the general partner of TEPPCO. Mr.
Fowler has been in the energy industry since 1968.
Richard B. Priory, a Director of our company, is the Chairman, President
and Chief Executive Officer of Duke Energy and has held that position since
1998. Mr. Priory served as Chairman and CEO of Duke Energy from 1997 to 1998.
From 1994 until 1997, Mr. Priory served as President and Chief Operating Officer
of Duke Energy. Mr. Priory is also a director of Dana Corporation and US Airways
Group, Inc. Mr. Priory has been in the energy industry since 1976.
Milton Carroll, a nominee for Director of our company, founded and has been
President and Chief Executive Officer of Instrument Products, Inc., a
manufacturer of oil field equipment and other precision products, since 1977.
Mr. Carroll is also a director of Reliant Energy, Incorporated, Ocean Energy
Inc. and Health Care Service Corporation. Mr. Carroll has been in the energy
industry since 1974.
William H. Grigg, a nominee for Director of our company, is Chairman
Emeritus of Duke Energy. Mr. Grigg previously was the Chairman and Chief
Executive Officer of Duke Energy from 1994 to 1997. Mr. Grigg is also a director
and trustee of The Nations Funds, a family of mutual funds, and a director of
Associated Electric and Gas Insurance Services, Ltd., The Shaw Group Inc. and
Kuhlman Electric Corporation. Mr. Grigg has been in the energy industry since
1963.
John E. Lowe, a nominee for Director of our company, is the Senior Vice
President of Planning and Strategic Transactions of Phillips Petroleum Company,
and has held that position since 2000. Mr. Lowe served as Vice President of
Planning and Strategic Transactions of Phillips from 1999 to 2000. From 1997 to
1999, Mr. Lowe served as Supply Chain Manager for Refining, Marketing and
Transportation of Phillips. From 1993 to 1997 he served as Manager of Finance
for Phillips. Mr. Lowe has been in the energy industry since 1981.
J.J. Mulva, a nominee for Director of our company, is Chairman of the
Board, President and Chief Executive Officer of Phillips Petroleum Company and
has held these positions since 1999. From 1994 to 1999,
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Mr. Mulva served as President and Chief Operating Officer of Phillips. Mr. Mulva
has been in the energy industry since 1973.
Wayne W. Murdy, a nominee for Director of our company, is the President of
Newmont Mining Corporation, and has held that position since 1999. Mr. Murdy
served as Executive Vice President and Chief Financial Officer of Newmont Mining
Corporation from 1996 to 1999. From 1992 to 1996, Mr. Murdy served as Senior
Vice President and Chief Financial Officer of Newmont Mining Corporation. Mr.
Murdy is also a director of Newmont Mining Corporation. Prior to joining Newmont
Mining Corporation in 1992, Mr. Murdy had been in the energy industry since
1978.
Ruth G. Shaw, a nominee for Director of our company, is Executive Vice
President and Chief Administrative Officer of Duke Energy and has held those
positions since 1997. From 1994 to 1997, Dr. Shaw served as Senior Vice
President, Corporate Resources of Duke Energy. From 1992 to 1994, Dr. Shaw
served as Vice President of Corporate Communications of Duke Energy. Dr. Shaw is
also a director of First Union Corporation and Avado Brands, Inc. Dr. Shaw has
been in the energy industry since 1992.
C. J. Silas, a nominee for Director of our company, retired as Chairman and
Chief Executive Officer of Phillips Petroleum Company in 1994. Mr. Silas served
as the Chairman and Chief Executive Officer of Phillips from 1985 to 1994. Mr.
Silas is also a director of Halliburton Company and The Reader's Digest
Association, Inc. Mr. Silas has been in the energy industry since 1953.
We currently have three directors and eight nominees for director. After
this offering is completed, we will have a total of 11 directors. Duke Energy
and Phillips have entered into an agreement that provides that they will vote
their shares of common stock to elect a Board of Directors of 11 members
comprised of seven individuals designated by Duke Energy, at least two of whom
must be independent, and four individuals designated by Phillips, at least one
of whom must be independent. Under the terms of the agreement, the number of
designees of each of Duke Energy and Phillips is subject to reallocation
depending on the relative interests in our company held by Duke Energy and
Phillips. For a more detailed discussion of certain voting and other corporate
governance provisions, see "Relationship with Duke Energy and
Phillips -- Shareholders Agreement" and "Description of Capital
Stock -- Supermajority Requirements." Each director is elected annually by our
stockholders for a one-year term.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of this offering, our Board of Directors will establish an
Audit Committee and a Compensation Committee.
The functions of the Audit Committee will be to:
- recommend annually to our Board of Directors the appointment of our
independent auditors;
- discuss and review in advance the scope and the fees of our annual audit
and review the results of the annual audit with our independent auditors;
- review and approve non-audit services of our independent auditors;
- review the adequacy of major accounting and financial reporting policies;
- review compliance with our major accounting and financial reporting
policies;
- review our management's procedures and policies relating to the adequacy
of our internal accounting controls and compliance with applicable laws
relating to accounting practices; and
- review our risk management policies and activities.
The Audit Committee will consist solely of independent directors.
The functions of the Compensation Committee will be to review and approve
annual salaries, bonuses, and grants of restricted stock and stock options under
our 2000 Long-Term Incentive Plan and other stock incentive plans adopted from
time to time for all executive officers and key members of our management staff,
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and to review and approve the terms and conditions of all employee benefit plans
or changes to these plans. Following the offering, the Compensation Committee
will consist solely of independent directors.
BOARD COMPENSATION
Directors who are also our employees do not receive a retainer or fees for
service on our Board of Directors or any committees. Directors who are not
employees receive an annual fee of $25,000, an annual restricted stock grant
with a value of $10,000 and a fee of $1,000 for attendance at each meeting of
our Board of Directors and for attendance at each meeting of a committee of our
Board of Directors on which they serve. In addition, the chairperson for each
committee of the Board of Directors receives an annual fee of $3,000. All of our
directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings of our Board of Directors or committees and for other
reasonable expenses related to the performance of their duties as directors.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the year ended
December 31, 1999 for the Chief Executive Officer and each of our next five most
highly compensated executive officers. These six individuals are referred to in
this prospectus as the "Named Executive Officers."
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- ------------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS STOCK OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($)(4) ($) (#) ($) ($)(12)
- --------------------------- ------- ------- ------------ ---------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jim W. Mogg(1)............ 256,883 104,019 -- 947,250(5) 41,300(10) 51,964 106,761
Chairman of the Board,
President and Chief
Executive Officer
Michael J. Panatier(2).... 333,000 351,445 -- 82,971(6) 24,200(11) -- 15,266
Director and Vice
Chairman of the Board
David D. Frederick(1)..... 163,542 56,683 -- 257,025(7) 15,100(10) 19,262 173,997
Senior Vice President and
Chief Financial Officer
Mark A. Borer(1)(3)....... 139,604 49,187 -- 167,063(8) 16,800(10) -- 241,959
Senior Vice President,
Southern Region
Michael J. Bradley(1)..... 192,317 68,200 -- 296,138(9) 17,200(10) 19,503 257,300
Senior Vice President,
Northern Region
Robert F. Martinovich(2)... 169,740 107,749 -- -- 8,400(11) -- 12,305
Senior Vice President,
Western Region
</TABLE>
- ---------------
(1) Prior to the offering all compensation paid to Messrs. Mogg, Frederick,
Borer and Bradley was paid by Duke Energy and was attributable to services
provided to the Predecessor Company.
(2) Prior to the offering all compensation paid to Messrs. Panatier and
Martinovich was paid by Phillips.
(3) Mr. Borer joined the Predecessor Company in April 1999. Amounts shown
relate to the period from April 1999 to December 31, 1999.
(4) Perquisites and other personal benefits received by each Named Executive
Officer did not exceed the lesser of $50,000 or 10% of any such officer's
salary and bonus disclosed in the table.
(5) At December 31, 1999, Mr. Mogg held an aggregate of 18,000 restricted
shares of Duke Energy common stock having a value of $902,250. Dividends
are paid on such shares. The vesting of these shares is determined by,
among other things, the performance of Duke Energy.
(6) At December 31, 1999, Mr. Panatier held an aggregate of 14,564 restricted
shares of Phillips common stock having a value of $684,508.
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(7) At December 31, 1999, Mr. Frederick held an aggregate of 4,600 restricted
shares of Duke Energy common stock having a value of $230,575. Dividends
are paid on such shares. The vesting of these shares is determined by,
among other things, our performance.
(8) At December 31, 1999, Mr. Borer held an aggregate of 3,000 restricted
shares of Duke Energy common stock having a value of $150,375. Dividends
are paid on such shares. One third of the restricted stock award will vest
each year on April 1, beginning on April 1, 2000.
(9) At December 31, 1999, Mr. Bradley held an aggregate of 5,300 restricted
shares of Duke Energy common stock having a value of $265,663. Dividends
are paid on such shares. The vesting of these shares is determined by,
among other things, our performance.
(10) Represents options granted by Duke Energy to purchase shares of Duke Energy
common stock.
(11) Represents options granted by Phillips to purchase shares of Phillips
common stock.
(12) Represents the following:
- Matching contributions under the Duke Energy Retirement Savings Plan as
follows: J. Mogg, $9,600; D. Frederick, $9,434; M. Borer, $5,550; M.
Bradley, $9,600.
- Make-whole matching contribution credits under the Duke Energy Executive
Savings Plan as follows: J. Mogg, $10,111; D. Frederick, $2,220; M.
Borer, $2,775; M. Bradley, $3,977.
- Matching contributions under the Phillips Thrift Plan as follows: M.
Panatier, $2,000; R. Martinovich, $2,000.
- Matching contributions under the Phillips Long-Term Stock Savings Plan as
follows: M. Panatier, $12,580; R. Martinovich, $10,143.
- Early payment of banked vacation time benefit earned under Duke Energy
benefits program as follows: J. Mogg, $67,624; M. Bradley, $28,757.
- Supplemental relocation payments made under Duke Energy's relocation
policy as follows: M. Borer, $33,634.
- Retention bonuses paid by Duke Energy as follows: D. Frederick, $162,500;
M. Borer, $200,000; M. Bradley, $209,000.
- Mortgage rate differential payments paid by Duke Energy to account for
increased mortgage payments due to employee relocation as follows: M.
Bradley, $2,353.
- Payment of taxes owed by employee as follows: J. Mogg, $19,426; D.
Frederick, $43; M. Bradley, $3,613.
- Life insurance premiums paid by Phillips as follows: M. Panatier, $686;
R. Martinovich, $162.
EMPLOYMENT AND CONSULTING AGREEMENTS
We have entered into an employment agreement with Mr. Panatier which
provides for a term of two years from the closing of the Combination. During the
term of this employment agreement, Mr. Panatier will receive a monthly salary of
$32,000, which may be increased upon the recommendation of our Compensation
Committee. The agreement also provides for a target bonus of 60% of Mr.
Panatier's annual base salary. Mr. Panatier is entitled to participate in all
our benefit plans on the same basis as other similarly-situated executives of
our company.
Mr. Panatier will also receive annual long-term incentive awards in the
form of stock option grants with a value equal to 150% of his annual base salary
and restricted stock awards with a value equal to 70% of his annual base salary.
While the specific terms of these awards will generally be determined by our
Compensation Committee, any awards made during the initial term of this
agreement will vest on the second anniversary of the completion of the offering.
The employment agreement also provides for a restricted stock retention award,
to be valued at 250% of his annual base salary, to be granted on the completion
of the offering. This restricted stock award vests 50% on the first anniversary
of the effective date of the employment agreement and 50% on the second
anniversary if Mr. Panatier is employed on the scheduled vesting date.
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If we terminate Mr. Panatier's employment for any reason other than death,
disability or cause or if Mr. Panatier terminates his employment for cause, all
long-term incentive awards and his restricted stock awards will immediately
vest. In addition, if a change of control of our company occurs during the term
of the employment agreement and Mr. Panatier is terminated without cause or Mr.
Panatier terminates his employment with cause, Mr. Panatier will also be
entitled to a lump sum severance payment equal to 200% of his annual salary in
effect at the time, plus his target bonus and to participate in our group
medical plan (unless Mr. Panatier is eligible for coverage by a subsequent
employer) for a period of two years following such termination.
We have entered into a contract for consulting services with Mr. Slaughter
which terminates in June 2002. During the term of this contract, Mr. Slaughter
will receive a quarterly retainer of $46,860, in exchange for which Mr.
Slaughter has agreed to perform services for us for up to 30 days per quarter.
If Mr. Slaughter works more than 30 days per quarter, he is entitled to
additional compensation at the rate of $1,562 for each additional day. The
contract also provides for compensation of $360,000 to Mr. Slaughter in the form
of stock options and/or restricted stock upon the completion of the offering.
2000 LONG-TERM INCENTIVE PLAN
General. We have adopted a Long-Term Incentive Plan. The plan allows us to
grant incentive awards to our employees, consultants and independent directors
(including employees and consultants of our subsidiaries). The plan provides for
the grant of:
- stock options (including both incentive stock options and nonqualified
stock options);
- stock appreciation rights;
- restricted stock;
- performance awards;
- phantom stock awards (i.e., awards that give the recipient the right to
receive payment, whether in stock or cash, at the end of a fixed vesting
period based on the difference between the value of our common stock at
the time of grant and the time of vesting); and
- dividend equivalents.
The purpose of the plan is to strengthen our ability to attract, motivate
and retain employees and directors and to provide an additional incentive for
employees.
Reservation of Shares. We have reserved 4,000,000 shares of common stock
for issuance under the plan, provided that no more than 400,000 shares of common
stock may be issued in connection with all awards of restricted stock,
performance awards or phantom stock under the plan. The shares of common stock
to be issued under the plan will be made available from authorized but unissued
shares of common stock. If any shares of common stock that are the subject of an
award are not issued and cease to be issuable for any reason, such shares will
no longer be charged against such maximum share limitation and may again be made
subject to awards under the plan. In the event of certain corporate
reorganizations, recapitalizations, or other specified corporate transactions
affecting us or our common stock, proportionate adjustments may be made to the
number of shares available for grant under the plan, the applicable maximum
share limitations under the plan, and the number of shares and prices under
outstanding awards at the time of the event.
Administration. The plan will be administered by the Compensation
Committee, or such other committee or subcommittee of the Board of Directors as
it designates. Subject to certain limitations, the committee has the authority
to determine the persons (other than nonemployee directors) to whom awards are
granted, the types of awards to be granted, the time at which awards will be
granted, the number of shares, units or other rights subject to each award, the
exercise, base or purchase price of an award (if any), the time or times at
which the award will become vested, exercisable or payable, and the duration of
the award. The committee also has the power to interpret the plan and make
factual determinations and may provide for the
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acceleration of the vesting or exercise period of an award at any time prior to
its termination or upon the occurrence of specified events.
Change in Control. The committee may provide in an individual award
agreement for the effect of a "change in control" (as defined in the plan) upon
an award granted under the plan. Such provisions may include:
- the acceleration, limitation, or extension of time periods for purposes
of exercising, vesting in, or realizing gain from an award;
- the waiver or modification of performance or other conditions related to
payment or other rights under an award;
- providing for the cash settlement of an award; or
- such other modification or adjustment to an award as the committee deems
appropriate.
Term and Amendment. The plan has a term of ten years, subject to earlier
termination or amendment by our Board of Directors. The Board of Directors may
amend the plan at any time, except that stockholder approval is required for
amendments that would change the persons eligible to participate in the plan and
increase the number of shares of common stock reserved for issuance under the
plan.
2000 Plan Benefits. Currently, all employees are expected to be considered
by the committee for participation in the plan. The number of persons eligible
to participate in the plan and the number of grantees may vary from year to
year.
Concurrently with the offering, options to purchase approximately 958,000
shares of our common stock at the initial public offering price are expected to
be granted to our officers and employees. Of these options, approximately
211,500 shares are expected to be granted to our Named Executive Officers. Also
concurrently with the offering, restricted stock awards of approximately 110,500
shares are expected to be granted to our officers and employees, of which
approximately 33,000 are expected to be granted to our Named Executive Officers.
In addition, an initial grant of a restricted stock award for 10,000 shares is
expected to be granted to each non-employee director upon his or her election.
OPTION GRANTS IN LAST FISCAL YEAR
In the fiscal year ended December 31, 1999, none of the Named Executive
Officers received options to purchase our common stock, nor were they entitled
to exercise any such stock options. None of the Named Executive Officers held
options to purchase our common stock at December 31, 1999.
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RELATIONSHIP WITH DUKE ENERGY AND PHILLIPS
On March 31, 2000, we combined the midstream natural gas businesses of Duke
Energy and Phillips. In connection with the Combination, Phillips transferred
all of its interest in its subsidiaries that conducted its midstream natural gas
business to Field Services LLC, our subsidiary that was formed in December 1999
to hold all of Duke Energy's gas gathering and processing business. In
connection with the Combination, Duke Energy and Phillips also transferred to
Field Services LLC the midstream natural gas assets acquired by Duke Energy or
Phillips prior to consummation of the Combination, including Mid-Continent
gathering and processing assets of Conoco and Mitchell Energy. The acquisition
of the Conoco/Mitchell assets is significant in that the assets acquired lie
adjacent to and between our current assets, providing future integration
opportunities. In addition, concurrently with the Combination, we obtained by
transfer from Duke Energy the general partner of TEPPCO. In exchange for the
asset contribution, Phillips received 30.3% of the member interests in Field
Services LLC, with Duke Energy indirectly, through us, holding the remaining
69.7% of the outstanding member interests. In connection with the closing of the
Combination, Field Services LLC borrowed approximately $2.8 billion and made
one-time cash distributions (including reimbursements for acquisitions) of
approximately $1.5 billion to Duke Energy and approximately $1.2 billion to
Phillips.
Concurrently with the consummation of the offering of common stock, the
subsidiary of Phillips that indirectly holds Phillips' interests in Field
Services LLC will be merged into us, and we will issue shares of our common
stock to Phillips. After the merger and completion of the offering of common
stock, Duke Energy and Phillips together will own approximately 81.24% of our
outstanding common stock (assuming the underwriters do not exercise their
over-allotment option). The exact allocation between Duke Energy and Phillips of
shares of our common stock will be determined by the average of the closing
prices of our common stock on its first five trading days on the New York Stock
Exchange Composite Tape. Assuming that the five-day average price is the same as
the assumed initial public offering price, following the offering, Duke Energy
will own approximately 58.65% and Phillips will own approximately 22.59% of our
outstanding common stock (assuming the underwriters do not exercise their
over-allotment option). Although the exact allocation may vary, Duke Energy
will, in all events, continue to control our company through its share ownership
and representation on our Board of Directors.
There are significant transactions and relationships between us, Duke
Energy and Phillips. For purposes of governing these ongoing relationships and
transactions, we will enter into, or continue in effect, the agreements
described below. We intend that the terms of any future transactions and
agreements between us and Duke Energy or Phillips will be at least as favorable
to us as could be obtained from third parties. We will advise our Board of
Directors in advance of any such proposed transactions or agreements with Duke
Energy or Phillips that are material to us. In evaluating these terms and
provisions, our Board of Directors will use appropriate procedures in light of
the Board's fiduciary duties. Depending on the nature and size of the particular
transaction, in any such reviews, our Board of Directors may rely on our
management's knowledge, use outside experts or consultants, secure appropriate
appraisals, refer to industry statistics or prices, or take other actions as are
appropriate under the circumstances.
TRANSACTIONS WITH DUKE ENERGY
SERVICES AGREEMENT
We have entered into a Services Agreement with Duke Energy and some of its
subsidiaries, dated as of March 14, 2000. Under this agreement, Duke Energy and
those subsidiaries will provide us with various staff and support services,
including information technology products and services, payroll, employee
benefits, corporate insurance, cash management, ad valorem taxes and shareholder
services. The above services are priced on the basis of a monthly charge.
Additionally, we may use other Duke Energy services subject to hourly rates,
including legal, internal audit, tax planning, human resources and security
departments. This agreement expires on December 31, 2000. We believe that
overall charges under this agreement will not exceed charges we would have
incurred had we obtained similar services from outside sources.
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LICENSE AGREEMENT
Duke Energy has licensed to us a non-exclusive right to use the phrase
"Duke Energy" and its logo and certain other trademarks in identifying our
businesses. This right may be terminated by Duke Energy at its sole option any
time after:
- Duke Energy's direct or indirect ownership interest in our company is
less than or equal to 35%; or
- Duke Energy no longer controls, directly or indirectly, the management
and policies of our company.
Following the receipt of Duke Energy's notice of termination, we have
agreed to amend our organizational documents and those of our subsidiaries to
remove the "Duke" name and to phase out within 180 days of the date of the
notice the use of existing signage, printed literature, sales and other
materials bearing a name, phrase or logo incorporating "Duke."
DUKE CAPITAL CORPORATION CREDIT AGREEMENT
Effective April 4, 2000, Field Services LLC entered into a $100 million
revolving credit agreement with Duke Capital Corporation, an indirect,
wholly-owned subsidiary of Duke Energy. The revolving credit agreement will be
used for short-term financing requirements. At April 30, 2000, there were no
amounts outstanding under this facility. The agreement terminates on May 31,
2000, and bears interest at the Bank of America prime rate.
TRANSACTIONS PRIOR TO THE COMBINATION
Transactions between Duke Energy and Phillips' midstream natural gas
business. Prior to the Combination, Duke Energy and its subsidiaries engaged in
a number of transactions with the subsidiaries of Phillips that were transferred
to us in the Combination, including GPM Gas Corporation (the "Phillips Combined
Subsidiaries"). These transactions were entered into in the ordinary course of
Duke Energy's and the Phillips Combined Subsidiaries' business and were related
to the purchase and sale of raw natural gas, residue gas and NGLs at market
prices.
Transactions between Duke Energy and the Predecessor Company. Prior to the
Combination, Duke Energy and its subsidiaries engaged in a number of
transactions with the Predecessor Company. The following is a description of
those transactions.
The Predecessor Company historically sold a portion of its residue gas and
NGLs to Duke Energy and its subsidiaries, including Duke Energy Trading and
Marketing, at contractual prices that approximated market prices. The
Predecessor Company's revenues from such sales were approximately $567.8 million
in 1997, $536.3 million in 1998 and $696.7 million in 1999. We anticipate that
we will continue to sell residue gas and NGLs to Duke Energy and its
subsidiaries (including Duke Energy Trading and Marketing) at market prices in
the ordinary course of our business.
The Predecessor Company historically purchased raw natural gas and other
petroleum products from Duke Energy and its subsidiaries at contractual prices
that approximated market prices. The Predecessor Company's purchases of raw
natural gas and other petroleum products from Duke Energy and its subsidiaries
totaled $48.9 million in 1997, $79.6 million in 1998 and $128.6 million in 1999.
We anticipate that we will continue to purchase residue gas and other petroleum
products at market prices from Duke Energy and its subsidiaries in the ordinary
course of our business.
The Predecessor Company historically provided gathering and transportation
services over its gathering systems and pipelines to Duke Energy and its
subsidiaries at market prices. The Predecessor Company generated no revenues in
1997, $6.4 million in 1998 and $2.7 million in 1999 from the provision of such
services. We anticipate that we will continue to provide gathering and
transportation to Duke Energy and its subsidiaries at market prices in the
ordinary course of our business.
Duke Energy historically provided the Predecessor Company with various
support services, including information technology services, accounting, legal,
insurance, payroll, cash management, risk management
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and welfare benefits services. Duke Energy historically billed the Predecessor
Company for such services at prices that approximate their cost to provide such
services. The Predecessor Company was charged $11.7 million in 1997, $12.1
million in 1998 and $19.1 million in 1999 for such services. Duke will continue
to provide some of these services under the terms of the Services Agreement
described above.
On June 30, 1995, the Predecessor Company issued a $101.6 million note to
Duke Energy. The note was scheduled to mature in 2004 and bore interest at 8.5%.
In addition, on December 31, 1996, the Predecessor Company issued a $540 million
note to Duke Energy. The note matured at the end of each year and was extended
for subsequent one year periods at each year end. The note bore interest at
prime rate, adjusted quarterly. Upon consummation of the Combination, these
notes were capitalized to equity.
TRANSACTIONS WITH PHILLIPS
TRANSITION SERVICES AGREEMENT
We have entered into a Transition Services Agreement with Phillips, dated
as of March 17, 2000. Under this agreement, Phillips will provide us with
various staff and support services, including information technology products
and services, cash management, real estate, claims and property tax services.
The above services are priced on the basis of a monthly charge equal to
Phillips' fully-burdened cost of providing the services. This agreement expires
on December 31, 2000.
TRANSACTIONS PRIOR TO THE COMBINATION
Transactions between Phillips and Duke Energy's midstream natural gas
business. Prior to the Combination, Phillips engaged in a number of transactions
with the Predecessor Company. These transactions were entered into in the
ordinary course of Phillips' and the Predecessor Company's business and were
related to the purchase and sale of raw natural gas, residue gas and NGLs at
market prices.
Transactions between Phillips and its midstream natural gas business. Prior
to the Combination, Phillips engaged in a number of transactions with GPM Gas
Corporation. The following is a description of those transactions.
GPM Gas Corporation, the subsidiary of Phillips that owned its midstream
natural gas assets that were contributed to us in the Combination, and Phillips
66 Company, a division of Phillips, entered into an NGL Output Purchase and Sale
Agreement effective as of January 1, 2000. The agreement allows Phillips 66
Company to purchase at index-based prices approximately all of the NGLs produced
by the processing plants owned by GPM Gas Corporation prior to the Combination.
The agreement also grants Phillips 66 Company the right to purchase at
index-based prices certain quantities of NGLs produced at processing plants that
are acquired and/or constructed by us in the future in various counties in the
Mid-Continent and Permian Basin regions and the Austin Chalk area. The agreement
has a 15-year primary term and a four-year phase-down period. The agreement
prohibits us from modifying our normal business practices to divert or reduce
NGLs available for purchase by Phillips 66 Company from current delivery levels.
GPM Gas Corporation historically sold a portion of its residue gas and
other by-products to Phillips at contractual prices that approximated market
prices. In addition, GPM Gas Corporation sold NGLs to Phillips at prices based
upon quoted market prices for fractionated NGLs, less transportation,
fractionation and quality-adjustment fees. GPM Gas Corporation's operating
revenues from the sale of residue gas, other by-products and NGLs to Phillips
were approximately $758.7 million in 1997, $537.5 million in 1998 and $725.5
million in 1999. We anticipate that we will continue to sell residue gas and
NGLs to Phillips and its subsidiaries or co-venturers at market prices in the
ordinary course of our business, including in connection with our long term
contract with Phillips described above.
The Phillips Combined Subsidiaries historically purchased raw natural gas
from Phillips at contractual prices that approximated market prices. The
Phillips Combined Subsidiaries' purchases of raw natural gas from Phillips
totaled $118.8 million in 1997, $76.6 million in 1998 and $100.3 million in
1999. We anticipate that we will continue to purchase raw natural gas from
Phillips at market prices in the ordinary course of our business.
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Phillips historically provided the Phillips Combined Subsidiaries with
various field services and other general administrative services including
insurance, personnel administration, employee benefits, office space,
communications, data processing, engineering, automotive and other field
equipment, and other miscellaneous services, including legal, treasury,
planning, tax, auditing and other corporate services. These services were priced
to reimburse Phillips for its actual costs to provide the services. Charges for
these services and benefits were $12.1 million in 1997, $12.1 million in 1998
and $11.4 million in 1999. These services were terminated upon consummation of
the Combination other than as provided in the Transition Services Agreement.
Phillips 66 Company, has historically purchased sulfur from GPM Gas
Corporation under an agreement for sulfur sales that is renewed annually.
Phillips 66 Company's purchases of sulfur from GPM Gas Corporation totaled
$446,000 in 1997, $412,000 in 1998 and $1.1 million in 1999. Phillips 66 Company
will continue to purchase sulfur from GPM Gas Corporation under the terms of the
agreement currently in effect.
Prior to the Combination, all operational and personnel requirements of the
Phillips Combined Subsidiaries were met by Phillips' employees. All services
provided by Phillips were priced to cover the actual costs of these services,
which equaled $76.6 million in 1997, $74.8 million in 1998 and $74.9 million in
1999. These services were terminated when we hired most of the employees of the
Phillip Combined Subsidiaries in connection with the Combination.
The Phillips Combined Subsidiaries earned interest of $2.7 million in 1997,
$2.4 million in 1998 and $2.5 million in 1999 from participation in Phillips'
centralized cash management system. Participation in the system was terminated
upon the completion of the Combination.
Phillips Gas Company had long-term borrowings from Phillips and other
liabilities outstanding to Phillips of $655.0 million at the end of 1997, $560.0
million at the end of 1998 and $1,350.0 million at the end of 1999. Phillips Gas
Company incurred interest expense of $20.3 million in 1997, $35.9 million in
1998 and $35.6 million in 1999 on these borrowings. Included in the $1,350.0
million of borrowings outstanding at the end of 1999 is a $780.0 million
dividend from Phillips Gas Company to Phillips in the form of a note payable.
These borrowings from Phillips were paid at the closing of the Combination.
The Phillips Combined Subsidiaries historically provided Phillips with
other minor administrative services. Costs allocated to Phillips for these
services were $120,000 in 1997, $79,000 in 1998 and $72,000 in 1999. These
services were terminated upon the consummation of the Combination other than as
provided in the Transition Services Agreement.
The Phillips Combined Subsidiaries periodically bought from, or sold to,
Phillips various assets in the operation of its business. These net acquisitions
totaled $22,000 in 1997, $60,000 in 1998 and $239,000 in 1999.
SHAREHOLDERS AGREEMENT
Immediately prior to the consummation of the offering, Duke Energy Natural
Gas Corporation, the subsidiary of Duke Energy that will hold all of Duke
Energy's shares of our common stock, and Phillips will enter into a shareholders
agreement covering the matters discussed below. The shareholders agreement will
terminate on the first date that either of Duke Energy or Phillips owns less
than 20% of our outstanding common stock. Duke Energy and Phillips have agreed
to cause each of their subsidiaries that hold shares of our common stock to
execute the shareholders agreement and to comply with the obligations of the
parties to the shareholders agreement.
ELECTION OF DIRECTORS
Each of Duke Energy and Phillips will agree to vote its shares of common
stock to elect seven directors designated by Duke Energy, so long as Duke Energy
owns at least 30% of our outstanding common stock, and four directors designated
by Phillips, so long as Phillips owns at least 20% of our outstanding common
stock. If Duke Energy owns less than 30% but at least 20% of our outstanding
common stock, the number of Duke Energy designees elected will be
proportionately reduced and the number of Phillips designees elected will be
proportionately increased. The shareholders agreement requires that Duke Energy
and Phillips together
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include in their director designees a total of three individuals who are not
officers, directors or employees of Duke Energy, Phillips or any of their
affiliates. Duke Energy has designated two of these independent directors, and
Phillips has designated one. In addition, each of Duke Energy and Phillips have
agreed to vote to remove any director designee of the other upon the request of
the other at any time with or without cause.
SPECIAL BUYOUT RIGHT
After the first anniversary of the completion of the offering, Duke Energy
will have the right to acquire all (but not less than all) of the common stock
owned by Phillips at an appraised fair market value of such shares if, on three
separate occasions within 18 months, certain specified actions (which are
described in the first five bullet points under "Description of Capital
Stock -- Supermajority Requirements") have failed to receive the approval of our
Board of Directors. Duke Energy will be entitled to exercise this right only if
each of its designated directors and none of Phillips' designated directors
voted in favor of such actions.
RIGHT OF FIRST REFUSAL
If Duke Energy or Phillips desires to sell all or any portion of its shares
of our common stock (other than in connection with a registered public
offering), the non-selling party will have a right of first refusal to purchase
all (but not less than all) of the shares that the selling party desires to
transfer, on the same terms and conditions as those set forth in the notice of
the proposed transfer.
CHANGE OF CONTROL
If Duke Energy or Phillips or any of their affiliates that hold our common
stock undergoes a specified type of change of control, the other party will have
the right to purchase the shares in our company owned by the entity experiencing
the change of control at an appraised fair market value of such shares.
REGISTRATION RIGHTS AGREEMENT
Upon completion of the offering, we will enter into a registration rights
agreement with Duke Energy and Phillips. This agreement will give each of Duke
Energy and Phillips the right, on two occasions, to demand that we register all
or any portion of their shares of our common stock for sale under the Securities
Act. Any demand to register shares must cover at least 3% of our common stock
then outstanding. Further, if we propose to register any of our common stock
under the Securities Act, Duke Energy and Phillips will have the right to
include their shares of common stock in the registration subject to certain
limitations. Despite a registration demand by either Duke Energy or Phillips, we
may delay registering their shares of our common stock for a reasonable time not
to exceed 180 days if, in the judgment of our Board, filing the registration
statement would require the disclosure of pending or contemplated matters or
information which would:
- likely be detrimental to our company;
- materially interfere with our business; or
- materially interfere with a pending or contemplated material transaction.
Furthermore, Duke Energy and Phillips may not require us to file a
registration statement within 120 days after the effectiveness of a registration
statement related to a demand registration made by Duke Energy or Phillips and
within 180 days after the effectiveness of any other registration statement in
which Duke Energy or Phillips was offered to participate.
We have agreed to cooperate fully in connection with any such registration
and with any offering made in connection with such registration. In addition, we
have agreed to pay all costs and expenses (other than fees, discounts and
commissions of underwriters, brokers and dealers; capital gains, income and
transfer taxes (if any); and the fees and disbursements of counsel to Duke
Energy or Phillips) related to the registration and sale of shares of our common
stock by Duke Energy or Phillips in any registered offering. The rights of Duke
Energy and Phillips under the registration rights agreement are assignable under
certain circumstances. The
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rights of each of Duke Energy and Phillips under the registration rights
agreement terminate at any time when they and their affiliates own less than 10%
of our outstanding common stock.
CONFLICTS OF INTEREST
Generally, directors and officers have a fiduciary duty to manage their
company in a manner beneficial to the company and its stockholders. The majority
of our directors and officers are either current or former directors or officers
of Duke Energy or Phillips, and four of our officers or directors are directors
of the general partner of TEPPCO. In certain circumstances, an action beneficial
to Duke Energy, Phillips or TEPPCO may be detrimental to our interests. Given
the shared directors and officers these circumstances may create conflicts of
interest. Additionally, our extensive relationships with Duke Energy and
Phillips also may result in conflicts of interest.
In order to mitigate potential conflicts of interest, as long as Duke
Energy and Phillips each own at least 20% of our voting stock, any future
transactions between our company and Duke Energy, Phillips or any of their
affiliates, which are on terms that are clearly less favorable terms than those
that are within the range of comparable transactions between unaffiliated third
parties, must be approved by eight of our 11 directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock, by:
- each holder of more than 5% of our common stock;
- our Chief Executive Officer and each of our next five most highly
compensated executive officers;
- each director and director nominee; and
- all directors, director nominees and executive officers as a group.
The exact allocation of shares of common stock between Duke Energy and Phillips
will be determined based on the average of the closing prices of our common
stock on the New York Stock Exchange Composite Tape on its first five trading
days. For purposes of the table set forth below the number of shares of common
stock to be beneficially owned by each of Duke Energy and Phillips has been
estimated based upon an assumed initial public offering price of $21.00. Unless
otherwise stated in the notes to the table, each of the stockholders has sole
voting and investment power with respect to the shares of common stock
beneficially owned by it. The table below does not include the approximate
110,500 shares of common stock that are expected to be issued concurrently with
the offering under restricted stock grants.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------------
PERCENTAGE
-------------------
BEFORE AFTER
NAME OF BENEFICIAL OWNERS SHARES OFFERING OFFERING
- ------------------------- ----------- -------- --------
<S> <C> <C> <C>
Duke Energy Corporation..................................... 82,548,500 72.2% 58.7%
526 South Church Street
Charlotte, North Carolina 28201-1006
Phillips Petroleum Company.................................. 31,793,211 27.8 22.6
Phillips Building
Bartlesville, Oklahoma 74004
Jim W. Mogg................................................. -- -- --
Michael J. Panatier......................................... -- -- --
Mark A. Borer............................................... -- -- --
Michael J. Bradley.......................................... -- -- --
David D. Frederick.......................................... -- -- --
Robert F. Martinovich....................................... -- -- --
Ruth G. Shaw................................................ -- -- --
William W. Slaughter........................................ -- -- --
Martha B. Wyrsch............................................ -- -- --
Milton Carroll.............................................. -- -- --
Fred J. Fowler.............................................. -- -- --
William H. Grigg............................................ -- -- --
John E. Lowe................................................ -- -- --
J.J. Mulva(1)............................................... 31,793,211 27.8 22.6
Wayne W. Murdy.............................................. -- -- --
Richard B. Priory(2)........................................ 82,548,500 72.2 58.7
C.J. Silas.................................................. -- -- --
All directors, director nominees and executive officers as a
group (17 persons)(1)(2).................................. 114,341,711 100% 81.3%
</TABLE>
- ---------------
(1) Mr. Mulva serves as Chairman of the Board, President and Chief Executive
Officer of Phillips. As such, Mr. Mulva may be deemed to have voting and
dispositive power over the shares beneficially owned by Phillips. Mr. Mulva
disclaims beneficial ownership of the securities owned by Phillips.
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(2) Mr. Priory serves as Chairman, President and Chief Executive Officer of Duke
Energy. As such, Mr. Priory may be deemed to have voting and dispositive
power over the shares beneficially owned by Duke Energy. Mr. Priory
disclaims beneficial ownership of the securities owned by Duke Energy.
DESCRIPTION OF CAPITAL STOCK
After our offering, our authorized capital stock will consist of
500,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $.01 per share. Immediately following the
offering, 140,752,211 shares of common stock and no shares of preferred stock
will be issued and outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of common stock do not
have cumulative voting rights. As a result, the holders of a majority of the
shares of our common stock can elect all of the members of the Board of
Directors, subject to the rights, powers and preferences of any outstanding
series of preferred stock. Subject to preferences of any preferred stock that
may be issued, the holders of our common stock are entitled to receive such
dividends as may be declared by the Board of Directors. The common stock is
entitled to receive pro rata all of our assets available for distribution to our
stockholders in liquidation, subject to the rights and preferences of any
outstanding series of preferred stock. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and non-assessable.
PREFERRED STOCK
Subject to the provisions of the certificate of incorporation and
limitations prescribed by law, our Board of Directors has the authority to issue
up to 10,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights and rates, conversion rates, voting rights, redemption terms and prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, which may be superior to those of the common stock,
without further vote or action by the stockholders.
The issuance of shares of preferred stock under the Board of Directors'
authority described above may adversely affect the rights of the holders of our
common stock. For example, preferred stock may rank prior to the common stock
with respect to dividend rights, liquidation preference or both, may have full
or limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
our common stock or may otherwise adversely affect the market price of our
common stock. In addition, the preferred stock may enable our Board of Directors
to render more difficult or to discourage attempts by others to obtain control
of our company through a hostile tender offer, proxy contest, merger or
otherwise.
ANTI-DILUTION RIGHTS
If we sell shares of our common stock or shares of any other previously
issued and outstanding capital stock in a public offering (other than in
connection with an employee compensation or benefit plan or program approved by
our Board of Directors in accordance with our bylaws), our certificate of
incorporation provides that Duke Energy and Phillips each have the right to
purchase the number of shares necessary to maintain their ownership percentages
in that class of securities. In order to exercise this right, Duke Energy or
Phillips must each own, directly or indirectly, at least 20% of all outstanding
shares of our common stock. So long as Duke Energy and Phillips each own at
least 20% of all outstanding common stock, any proposed amendment to these
rights requires the consent of both Duke Energy and Phillips.
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ANTI-TAKEOVER PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation and bylaws contain several provisions that
could delay or make more difficult the acquisition of us through a hostile
tender offer, open market purchases, proxy contest, merger or otherwise.
WRITTEN CONSENT OF STOCKHOLDERS
Our certificate of incorporation provides that, on and after the date when
Duke Energy ceases to own (directly or indirectly) a majority of the shares of
our outstanding securities entitled to vote in the election of directors, any
action by our stockholders must be taken at an annual or special meeting of
stockholders. Until that date, any action required or permitted to be taken by
our stockholders may be taken at a duly called meeting of stockholders or by the
written consent of stockholders owning the minimum number of shares required to
approve the action.
SPECIAL MEETINGS OF STOCKHOLDERS
Subject to the rights of the holders of any series of preferred stock
approved by our Board of Directors, our by-laws provide that special meetings of
the stockholders may only be called by the Chairman of the Board of Directors or
by the resolution of a majority of our Board of Directors.
ADVANCE NOTICE PROCEDURE FOR DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS
Our bylaws establish advance notice procedures for the nomination of
candidates for election as directors as well as for stockholder proposals to be
considered at annual meetings of stockholders. Notice of a stockholder's intent
to nominate a director must be received at our principal executive offices as
follows:
- with respect to an election to be held at the annual meeting of
stockholders, not later than 90 calendar days nor earlier than 120
calendar days prior to the anniversary date of the immediately preceding
annual meeting of stockholders; and
- with respect to an election to be held at a special meeting of
stockholders, not earlier than 120 calendar days before the special
meeting nor later than the later of:
(1) 90 calendar days prior to the special meeting or
(2) 10 calendar days following the public announcement of the special
meeting.
Notice of a stockholder's intent to raise business at an annual meeting
must be received at our principal executive offices not later than 90 calendar
days nor earlier than 120 calendar days prior to the anniversary date of the
preceding annual meeting of stockholders.
These procedures may operate to limit the ability of stockholders to bring
business before a stockholders meeting, including the nomination of directors or
considering a transaction that could result in a change in control.
LIMITATION OF BUSINESS OPPORTUNITIES
We have added provisions to our certificate of incorporation that limit the
scope of our business and provide that Duke Energy and its affiliates may engage
in the midstream gas gathering, processing, marketing and transportation
businesses, even if those businesses have a competitive impact on us. In
general, Duke Energy is permitted to engage in any business, including
businesses in competition with us, provided:
- the business opportunity is not identified through the disclosure of
information by or on behalf of our company or as a direct result of a
person's service as an officer or director of our company; and
- the business is developed and pursued solely through Duke Energy's own
personnel and not through us.
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If a business opportunity is presented to a person who is an officer or
director of both Duke Energy and our company, Duke Energy has no obligation to
communicate or offer the opportunity to us and may pursue the opportunity as it
sees fit, unless it was presented to that person solely in, and as a direct
result of, that person's service as a director or officer of our company.
The purpose clause of our certificate of incorporation permits us to engage
only in the midstream natural gas gathering, processing, marketing and
transportation businesses in the United States and Canada, the marketing of NGLs
in Mexico and the transportation, marketing and storage of other petroleum
products. We may engage in other activities with the approval of eight of the
eleven members of our Board and, so long as Duke Energy owns, directly or
indirectly, a majority of our common stock or otherwise controls our company,
with the approval of Duke Energy in its sole discretion. We cannot amend our
certificate of incorporation to expand our purpose clause without Duke Energy's
prior written consent.
AMENDMENT OF THE BYLAWS
Our certificate of incorporation and bylaws provide that the Board of
Directors may amend or repeal the bylaws and adopt new bylaws. Our bylaws
provide that the holders of common stock may amend or repeal the bylaws and
adopt new bylaws by a majority vote. However, so long as each of Duke Energy and
Phillips owns (directly or indirectly) at least 20% of our voting stock, any
amendment or repeal of, or adoption of any new bylaw inconsistent with, certain
of our bylaws relating to our Board of Directors (including supermajority
approval requirements) must be approved by each of Duke Energy and Phillips.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation provides that no director shall be
personally liable to our company or our stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by Delaware law, for
liability as follows:
- for any breach of the director's duty of loyalty to our company or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payment of a dividend or unlawful stock purchase or
redemption; and
- for any transaction from which the director derived an improper personal
benefit.
These provisions eliminate the rights of our company and our stockholders,
through stockholders' derivative suits on our behalf, to recover monetary
damages against a director for breach of fiduciary duty as a director, including
breaches resulting from grossly negligent behavior, except in the situations
described above.
DELAWARE ANTI-TAKEOVER STATUTE
Under the terms of our certificate of incorporation and as permitted under
Delaware law, we have elected not to be governed by Delaware's anti-takeover
law. This law provides that specified persons who, together with affiliates and
associates, own, or within three years did own, 15% or more of the outstanding
voting stock of a corporation may not engage in certain business combinations
with the corporation for a period of three years after the date on which the
person became an interested stockholder. The law defines the term "business
combination" to encompass a wide variety of transactions with or caused by an
interested stockholder, including mergers, asset sales and other transactions in
which the interested stockholder receives or could receive a benefit on other
than a pro rata basis with other stockholders. With the approval of our
stockholders, we may amend our certificate of incorporation in the future to
become governed by the anti-takeover law. This provision would then have an
anti-takeover effect for transactions not approved in advance by our Board of
Directors, including discouraging takeover attempts that might result in a
premium over the market price for the shares of our common stock. By opting out
of the Delaware anti-takeover law, a transferee of Duke Energy or Phillips could
pursue a takeover transaction that was not approved by our Board of Directors.
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SUPERMAJORITY REQUIREMENTS
Our bylaws require the approval of at least eight of our eleven directors
for any of the following:
- entering a new line of business outside of the midstream natural gas
gathering, processing, marketing and transportation businesses (and
directly related activities) in the United States and Canada;
- any merger, consolidation, recapitalization, acquisition, divestiture,
joint venture or alliance (or a related series of such transactions)
involving the acquisition or expenditure (in the form of cash or
otherwise) of more than $200 million in value to or from the company;
- entering into any sales contract or commitment that has a term of five
years or more and that involves annual revenues to the company of more
than 5% of the company's total annual sales revenues for the most
recently completed fiscal year;
- any capital expenditure in excess of $200 million;
- any borrowing in excess of $200 million;
- approval of any shut-down of a facility having a fair market value of
more than $100 million;
- any liquidation or dissolution of the company;
- changing auditors;
- settlement of actions or claims against us involving payment by us of
more than $25 million, excluding amounts covered or reimbursed by
insurance;
- entering into transactions with either Duke Energy, Phillips or any of
their affiliates on terms that are clearly less favorable than those
terms that are within the range of comparable transactions between
unaffiliated third parties; and
- approval of compensation policies for employees, including specific
compensation and benefit plans and programs, to the extent such policies
are of the type that would customarily be considered by a compensation
committee of the board of directors of a comparably sized,
publicly-traded corporation.
As long as each of Duke Energy and Phillips owns (directly or indirectly) at
least 20% of our voting stock, these provisions of the bylaws may not be amended
or changed without the consent of both Duke Energy and Phillips. The
requirements of super-majority approval for these actions will terminate when
the ownership interest of either Duke Energy or Phillips falls below 20%.
Since the governance procedures described above require more than a
majority vote of the Board of Directors to approve a merger or consolidation,
this may make any merger or consolidation more difficult.
LISTING
Our common stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange under the symbol "DEF."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Duke Energy.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there was no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock. After the offering
is completed, the number of shares available for future sale into the public
markets will be subject to legal and contractual restrictions, some of which are
described below. The lapsing of these restrictions will permit sales of
substantial amounts of our common stock in the public market or could create the
perception that such sales could occur, which could adversely affect the market
price for our common stock. These factors could also make it more difficult for
us to raise funds through the future sale of common stock.
Immediately after the offering, 140,752,211 shares of our common stock will
be outstanding. Of these shares, the 26,300,000 shares sold in the offering will
be freely transferable and may be sold without restriction or further
registration under the Securities Act, except for any shares acquired by our
"affiliates" as defined in Rule 144 under the Securities Act. The 114,341,711
shares of common stock outstanding and owned by Duke Energy and Phillips will be
subject to the lock-up agreements described below for 180 days after the date of
this prospectus after which they may be sold in the future without registration
under the Securities Act to the extent permitted by Rule 144, as described
below, or any applicable exemption under the Securities Act. In addition, shares
owned by Duke Energy and Phillips may be registered for sale under the
Securities Act under the terms of the registration rights agreement with us.
RULE 144
Under Rule 144 beginning 90 days after the date of this prospectus, a
person, or persons whose shares are aggregated, who has beneficially owned
"restricted securities" for at least one year would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 1,407,500 shares immediately after the offering; and
- the average weekly trading volume of the common stock on the New York
Stock Exchange during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale with the SEC.
Sales under Rule 144 are also subject to certain other requirements regarding
the manner of sale, notice and availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner other than an affiliate) is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Because Duke Energy and Phillips are among our affiliates, subject to
exercise of their registration rights described under "Relationship with Duke
Energy and Phillips -- Registration Rights Agreement," the Rule 144 restrictions
and requirements would be applicable to Duke Energy's and Phillips' shares for
as long as they retain affiliate status.
LOCK-UP AGREEMENTS
In connection with the offering and for a period of 180 days after the date
of this prospectus, we, Duke Energy and Phillips have agreed not to directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise dispose of, directly or
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indirectly, any shares of common stock or securities convertible into or
exchangeable or exercisable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequence of ownership of common
stock whether any such swap or transaction is to be settled by delivery
of common stock or other securities, in cash or otherwise.
As exceptions to these restrictions, we may:
- issue shares of our common stock or grant options to purchase shares of
common stock in connection with our existing employee benefit plans;
- issue shares of our common stock in connection with any non-employee
director stock plan or dividend reinvestment plan;
- issue shares of our common stock in connection with the merger of the
subsidiary of Phillips that indirectly holds Phillips' interest in Field
Services LLC into our company to be completed concurrently with the
completion of the offering; and
- issue shares of our common stock or securities convertible or
exchangeable into our common stock as payment of any part of the purchase
price for businesses or assets we acquire; however, shares issued in this
manner may not be transferred during the 180-day lock-up period.
2000 LONG-TERM INCENTIVE PLAN
After the offering, we intend to file a registration statement covering the
sale of up to 4,000,000 shares of common stock which have been reserved for
issuance under our long-term incentive plan thus permitting resale of these
shares by non-affiliates in the public market without restriction.
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general discussion of the material U.S. federal income
and estate tax considerations with respect to the ownership and disposition of
common stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is
any beneficial owner of common stock other than
- a citizen or resident of the United States,
- a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any state
thereof,
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source, or
- a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
This discussion is based on current provisions of the Internal Revenue
Code, Treasury Regulations promulgated under the Internal Revenue Code, judicial
opinions, published positions of the Internal Revenue Service, and all other
applicable authorities, all of which are subject to change, possibly with
retroactive effect. This discussion does not address all aspects of income and
estate taxation or any aspects of state, local, or non-U.S. taxes, nor does it
consider any specific facts or circumstances that may apply to a particular
Non-U.S. Holder that may be subject to special treatment under the U.S. federal
income tax laws, such as insurance companies, tax-exempt organizations,
financial institutions, brokers, dealers in securities, and U.S. expatriates.
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Prospective investors are urged to consult their tax advisors regarding the
U.S. federal, state, local and non-U.S. income and other tax considerations of
acquiring, holding and disposing of shares of common stock.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to U.S.
withholding tax at a rate of 30% of the gross amount, or such lower rate
prescribed by an applicable income tax treaty, unless the dividends are
effectively connected with a trade or business carried on by (or, under an
applicable income tax treaty, attributable to a permanent establishment of) the
Non-U.S. Holder in the United States. Dividends that are so effectively
connected (or attributable) generally will not be subject to U.S. withholding
tax if the Non-U.S. Holder files Internal Revenue Service Form 4224 or W-8ECI
with the payor of the dividend, and generally will be subject to U.S. federal
income tax on a net income basis in the same manner as if the Non-U.S. Holder
were a resident of the United States. A Non-U.S. Holder that is a corporation
may be subject to an additional branch profits tax at a rate of 30%, or such
lower rate as may be specified by an applicable income tax treaty, on the
repatriation from the United States of its "effectively connected earnings and
profits," subject to adjustments. To determine the applicability of a tax treaty
providing for a lower rate of withholding under the currently effective Treasury
Regulations, dividends paid to an address in a foreign country are presumed to
be paid to a resident of that country absent knowledge to the contrary. Under
Treasury Regulations (the "Final Regulations") generally effective for payments
made after December 31, 2000, however, a Non-U.S. Holder will be required to
satisfy certification requirements in order to claim a reduced rate of
withholding under an applicable income tax treaty. In addition, under the Final
Regulations, in the case of common stock held by a foreign partnership, the
certification requirement would generally be applied to the partners of the
partnership (unless the partnership agrees to become a "withholding foreign
partnership") and the partnership would be required to provide certain
information. The Final Regulations also provide "look-through" rules for tiered
partnerships.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
withholding under a tax treaty may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the Internal Revenue
Service.
GAIN ON SALE OR OTHER DISPOSITION OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to U.S. federal income
tax on any gain realized upon the sale or other taxable disposition of the
holder's shares of common stock so long as:
- the gain is not effectively connected with a trade or business carried on
by the Non-U.S. Holder within the United States;
- if the Non-U.S. Holder is an individual, the Non-U.S. Holder holds shares
of common stock as a capital asset, is not present in the United States
for 183 days or more in the taxable year of disposition or does not have
a "tax home" in the United States for U.S. federal income tax purposes
and meets certain other requirements; and
- the common stock continues to be "regularly traded on an established
securities market" for U.S. federal income tax purposes and the Non-U.S.
Holder has not held, directly or indirectly, at any time during the
five-year period ending on the date of disposition (or, if shorter, the
Non-U.S. Holder's holding period) more than five percent of the
outstanding common stock.
ESTATE TAX
Common stock owned or treated as owned by an individual who is not a
citizen or resident, as defined for U.S. federal estate tax purposes, of the
United States at the time of death will be includible in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise, and therefore may be subject to U.S. federal estate
tax.
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BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
We must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced by an applicable tax treaty. Copies of this
information also may be made available under the provisions of a specific treaty
or agreement with the tax authorities in the country in which the Non-U.S.
Holder resides or is established.
Under current law, U.S. backup withholding tax (which generally is imposed
at the rate of 31% on applicable payments to persons that fail to furnish the
information required under the U.S. information reporting requirements) and
information reporting requirements generally will not apply to dividends paid on
common stock to a Non-U.S. Holder at an address outside the United States.
Backup withholding and information reporting generally will apply, however, to
dividends paid on shares of common stock to a Non-U.S. Holder at an address in
the United States if the holder fails to establish an exemption or to provide
certification of its non-U.S. status and other required information to the
payor.
Under current law, the payments of proceeds from the disposition of common
stock to or through a U.S. office of a broker will be subject to information
reporting and backup withholding unless the beneficial owner, under penalties of
perjury, certifies, among other things, its status as a Non-U.S. Holder or
otherwise establishes an exemption. The payment of proceeds from the disposition
of common stock to or through a non-U.S. office of a broker generally will not
be subject to backup withholding and information reporting, except as noted
below. In the case of proceeds from a disposition of common stock paid to or
through a non-U.S. office of a broker that is
- a United States person,
- a "controlled foreign corporation" for U.S. federal income tax purposes,
or
- a foreign person 50% or more of whose gross income from a specified
period is effectively connected with a U.S. trade or business,
information reporting, but not backup withholding, will apply unless the broker
has documentary evidence in its files that the owner is a Non-U.S. Holder and
other conditions are satisfied, or the beneficial owner otherwise establishes an
exemption, and the broker has no actual knowledge to the contrary.
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of common stock to a Non-U.S. Holder may be
subject to information reporting and backup withholding unless the recipient
satisfies the certification requirements of the Final Regulations by proving its
non-U.S. status or otherwise establishes an exemption. Under the Final
Regulations, the sale of common stock outside the U.S. through a non-U.S. broker
will also be subject to information reporting if the broker is a foreign
partnership and at any time during its tax year:
- one or more of its partners are United States persons who in the
aggregate hold more than 50% of the income or capital interests in the
partnership, or
- the foreign partnership is engaged in a U.S. trade or business.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder can be refunded or
credited against the Non-U.S. Holder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the Internal Revenue
Service in a timely manner.
Each prospective Non-U.S. Holder of common stock should consult that
holder's own tax adviser with respect to the federal, state, local and foreign
tax consequences of the acquisition, ownership and disposition of common stock.
82
<PAGE> 85
UNDERWRITERS
GENERAL
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Banc of America Securities LLC, Lehman Brothers Inc., J.P. Morgan
Securities Inc., PaineWebber Incorporated and Petrie Parkman & Co. are acting as
representatives, have severally agreed to purchase, and Duke Energy Field
Services Corporation has agreed to sell to them, severally, the number of shares
indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- -----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Banc of America Securities LLC .............................
Lehman Brothers Inc. .......................................
J.P. Morgan Securities Inc. ................................
PaineWebber Incorporated....................................
Petrie Parkman & Co. .......................................
Blaylock & Partners, L.P. ..................................
Dain Rauscher Wessels.......................................
Dresdner Kleinwort Benson...................................
A.G. Edwards & Sons, Inc. ..................................
First Union Securities, Inc. ...............................
Howard, Weil, Labouisse, Fredrichs Inc. ....................
Edward D. Jones & Co., L.P. ................................
Toronto Dominion Securities.................................
UBS Warburg.................................................
Wachovia Securities, Inc. ..................................
-----------
Total.................................................. 26,300,000
===========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from Duke Energy Field Services Corporation and subject
to prior sale. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered by this prospectus are subject to certain conditions. The
underwriters are obligated to take and pay for all of the shares of common stock
offered by this prospectus if any such shares are taken. However, the
underwriters are not required to take or pay for the shares covered by the
underwriters' over-allotment option described below.
The per share price of any shares sold by the underwriters shall be the
public offering price listed on the cover page of this prospectus, in United
States dollars, less an amount not greater than the per share amount of the
concession to dealers described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives.
83
<PAGE> 86
Duke Energy Field Services Corporation has granted to the underwriters an
option, exercisable for 30 calendar days from the date of this prospectus, to
purchase up to an aggregate of 3,945,000 additional shares of common stock at
the public offering price listed on the cover page of this prospectus, less
underwriting discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock offered by this
prospectus. To the extent the option is exercised, each underwriter will become
obligated, subject to certain conditions, to purchase about the same percentage
of the additional shares of common stock as the number listed next to the
underwriter's name in the preceding table bears to the total number of shares of
common stock listed next to the names of all underwriters in the preceding
table. If the underwriters' option is exercised in full, the total price to the
public would be $635.1 million, the total underwriters' discounts and
commissions would be $33.3 million and proceeds to Duke Energy Field Services
Corporation would be $601.7 million.
The underwriters have informed Duke Energy Field Services Corporation that
they do not intend sales to discretionary accounts to exceed five percent of the
total number of shares of common stock offered by them.
Our common stock has been approved for listing, subject to official notice
of issuance, on the NYSE under the symbol "DEF."
Each of Duke Energy Field Services Corporation and our directors, executive
officers and certain of our stockholders has agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, it will not, during the period ending 180 days after the date of
this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by Duke Energy Field Services Corporation of shares of
common stock or the grant of options to purchase common stock pursuant to
employee benefit plans in existence as of the date of this prospectus or
pursuant to any non-employee director stock plan or dividend reinvestment
plan;
- the issuance by Duke Energy Field Services Corporation of shares of
common stock in connection with the merger of the subsidiary of Phillips
that indirectly holds Phillips' interest in Field Services LLC into Duke
Energy Field Services Corporation to be completed concurrently with the
completion of the offering;
- the issuance by Duke Energy Field Services Corporation of shares of
common stock or securities exchangeable or convertible into common stock
as payment of any part of the purchase price for businesses or assets it
acquires, so long as any shares so issued are subject to the 180-day
lock-up period; or
- transactions by any person other than Duke Energy Field Services
Corporation relating to shares of common stock or other securities
acquired in open market transactions after the completion of the offering
of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In
84
<PAGE> 87
addition, to cover over-allotments or to stabilize the price of the common
stock, the underwriters may bid for, and purchase, shares of common stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the common stock in the
offering, if the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the common stock above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
From time to time, some of the underwriters have provided, and continue to
provide, investment banking services to Duke Energy Field Services Corporation,
Duke Energy, Phillips and their affiliates.
Duke Energy Field Services Corporation and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act. The underwriters have agreed to reimburse Duke Energy Field
Services Corporation for certain of its expenses incurred in connection with the
offering in an amount not to exceed approximately $4.5 million.
At the request of Duke Energy Field Services Corporation, the underwriters
have reserved for sale, at the initial offering price, up to 1,972,500 shares
offered hereby for directors, officers, employees, business associates of Duke
Energy Field Services Corporation, and its two principal stockholders Duke
Energy and Phillips, and related persons. The shares of common stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered hereby.
PRICING OF THE OFFERING
Prior to the offering, there has been no public market for the common
stock. The initial public offering price will be determined through negotiations
between Duke Energy Field Services Corporation and the representatives. Among
the factors to be considered in determining the initial public offering price
will be the future prospects of Duke Energy Field Services Corporation and its
industry in general, sales, earnings and certain other financial operating
information of Duke Energy Field Services Corporation in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the company. The estimated initial public offering price
range set forth on the cover page of this preliminary prospectus is subject to
change as a result of market conditions and other factors.
VALIDITY OF THE COMMON STOCK
The validity of the shares of common stock we are offering will be passed
upon for us by Vinson & Elkins L.L.P., Houston, Texas and for the underwriters
by Sullivan & Cromwell, New York, New York.
85
<PAGE> 88
EXPERTS
The combined financial statements of Duke Energy Field Services Corporation
and Affiliates as of December 31, 1998 and 1999 and for each of the three years
in the period ended December 31, 1999 and the 1997 combined statements of
operations and cash flows for UP Fuels Division included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Phillips Gas Company as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 appearing in this prospectus and elsewhere in the registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Union Pacific Fuels, Inc. as of
December 31, 1998 and March 31, 1999 included in this prospectus have been
audited by Arthur Andersen LLP, independent accountants, as stated in their
report on such financial statements which have been included herein in reliance
upon their authority as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered under this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and the attached exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract or other document that is filed as
an exhibit to the registration statement are summaries of the material
provisions of those documents. These summaries are qualified in all respects by
reference to the full text of such contract or document.
The registration statement can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the registration statement can be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Section by calling the SEC at (800) 732-0330. In addition, the
registration statement is publicly available through the SEC's site on the
internet, located at http://www.sec.gov.
Upon completion of the offering, we will be required to comply with the
informational requirements of the Securities Exchange Act of 1934 and,
accordingly, will file current reports on Form 8-K, quarterly reports on Form
10-Q, annual reports on Form 10-K, proxy statements and other information with
the SEC. Those reports, proxy statements and other information will be available
for inspection and copying at the regional offices, public reference facilities
and internet site of the SEC referred to above. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
86
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
PRO FORMA ----
<S> <C>
DUKE ENERGY FIELD SERVICES CORPORATION (THE "COMPANY")
Unaudited Pro Forma Balance Sheet as of March 31, 2000.... F-3
Notes to the Unaudited Pro Forma Balance Sheet............ F-4
Unaudited Pro Forma Income Statements for the Year Ended
December 31, 1999...................................... F-6
Unaudited Pro Forma Income Statements for the Three Month
Period Ended March 31, 2000............................ F-7
Notes to the Unaudited Pro Forma Income Statements........ F-8
HISTORICAL
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES (THE
"PREDECESSOR COMPANIES")
Independent Auditors' Report.............................. F-10
Combined Balance Sheets at December 31, 1998 and 1999..... F-11
Combined Statements of Income for the Years Ended December
31, 1997, 1998 and 1999................................ F-12
Combined Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999................. F-13
Combined Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................... F-14
Notes to Combined Financial Statements.................... F-15
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000 (Unaudited)............................. F-30
Unaudited Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 2000................... F-31
Unaudited Consolidated Statements of Stockholder's Equity
for the Three Months Ended March 31, 2000.............. F-32
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 2000............. F-33
Notes to Unaudited Consolidated Financial Statements...... F-34
PHILLIPS GAS COMPANY ("GPM")
Report of Independent Auditors............................ F-40
Consolidated Balance Sheets at December 31, 1998 and
1999................................................... F-41
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999....................... F-42
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and
1999................................................... F-43
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Years Ended December 31, 1997, 1998
and 1999............................................... F-44
Notes to Financial Statements............................. F-45
Unaudited Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 2000................... F-54
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 2000............. F-55
Notes to Unaudited Consolidated Financial Statements...... F-56
UP FUELS DIVISION OF UNION PACIFIC RESOURCES GROUP INC. ("UP
FUELS")
Reports of Independent Auditors........................... F-58
Combined Statements of Income for the Years Ended December
31, 1997 and 1998 and the Quarter Ended March 31,
1999................................................... F-60
Combined Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the Quarter Ended March
31, 1999............................................... F-61
Notes to Combined Financial Statements.................... F-62
</TABLE>
F-1
<PAGE> 90
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements (the "Unaudited Pro
Forma Financial Statements") of Duke Energy Field Services Corporation were
derived by the application of pro forma adjustments to historical combined and
consolidated financial statements included elsewhere in this prospectus. On
March 31, 2000, the Duke Energy and Phillips Petroleum midstream natural gas
businesses were contributed to Duke Energy Field Services LLC. Such contribution
included the general partner of TEPPCO as well as certain midstream natural gas
assets of Conoco, Inc. and Mitchell Energy & Development Corp. which were
acquired immediately prior to the Contribution. The contributions have been
reflected in the March 31, 2000 balance sheet of the Predecessor Company. The
Unaudited Pro Forma Balance Sheet gives effect to the subsequent borrowings,
distributions to Duke Energy and Phillips Petroleum, the public offering of
common stock in the Offering at an assumed initial public offering price of
$21.00 per share, elimination of minority interest and tax effects thereof
resulting from the merger of the holder of Phillips Petroleum's member interest
in Duke Energy Field Services LLC with the Company (the "Merger"), as if such
occurred on March 31, 2000. All of the events above are referred to collectively
as the "Transactions."
The Unaudited Pro Forma Income Statements give effect to i) the
Transactions and ii) acquisition of the gas gathering business of Union Pacific
Resources (the "UP Fuels Acquisition"), which occurred March 31, 1999 as if such
transactions were consummated as of January 1, 1999.
The adjustments are described in the accompanying Notes to the Unaudited
Pro Forma Balance Sheet and the Notes to the Unaudited Pro Forma Income
Statement. The Unaudited Pro Forma Financial Statements should not be considered
indicative of the actual results that would have been achieved had the
Transactions or the UP Fuels Acquisition been consummated on the dates or for
the period indicated and do not purport to indicate balances or results of
operations as of any future date or for any future period. The Unaudited Pro
Forma Financial Statements should be read in conjunction with the historical
combined and consolidated financial statements of the Predecessor Company, UP
Fuels, GPM and the notes thereto included elsewhere in this prospectus.
F-2
<PAGE> 91
DUKE ENERGY FIELD SERVICES CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents....................... $ 172 $ 10,898(1) $ 11,070
Accounts receivable:
Customers, net............................... 496,102 -- 496,102
Affiliates................................... 79,824 -- 79,824
Other........................................ 29,031 -- 29,031
Receivables from parents -- working capital
adjustments.................................. 95,751 (95,751)(2) --
Inventories..................................... 26,877 -- 26,877
Notes receivable................................ 8,309 -- 8,309
Other........................................... 2,710 -- 2,710
---------- ----------- ----------
Total current assets.................... 738,776 (84,853) 653,923
PROPERTY AND EQUIPMENT, NET....................... 4,619,169 4,619,169
INVESTMENT IN AFFILIATES.......................... 275,280 275,280
INTANGIBLE ASSETS
Natural Gas liquids sales contracts, net........ 103,977 -- 103,977
Goodwill, net................................... 495,554 (136,929)(6) 358,625
OTHER NONCURRENT ASSETS........................... 79,536 (943)(3) 78,593
---------- ----------- ----------
TOTAL ASSETS............................ $6,312,292 $ (222,725) $6,089,567
========== =========== ==========
CURRENT LIABILITIES
Accounts payable
Trade........................................ 561,806 -- 561,806
Affiliates................................... 75,252 -- 75,252
Other........................................ 30,765 -- 30,765
Accrued taxes other than income................. 19,617 -- 19,617
Distributions payable -- Parents................ 2,744,319 (2,744,319)(4) --
Short-term debt................................. -- 2,138,400(5) 2,138,400
Other........................................... 30,927 -- 30,927
---------- ----------- ----------
Total current liabilities............... 3,462,686 (605,919) 2,856,767
DEFERRED INCOME TAXES............................. 979,013 (137,287)(6) 841,726
OTHER LONG TERM LIABILITIES....................... 33,703 33,703
MINORITY INTEREST................................. 521,705 (521,705)(7) --
STOCKHOLDER'S EQUITY.............................. 1,315,185 1,042,186(8) 2,357,371
---------- ----------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY................................ $6,312,292 $ (222,725) $6,089,567
========== =========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-3
<PAGE> 92
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO THE UNAUDITED PRO FORMA
BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
In December 1999, Duke Energy Field Services Corporation (the "Company")
and its subsidiary Duke Energy Field Services LLC ("Field Services LLC") were
formed to facilitate the combination of the midstream natural gas businesses of
Duke Energy and Phillips Petroleum Company (the "Combination"). The Company was
capitalized with 1,000 shares of common stock with a par value of $1.00 per
share.
The Combination occurred on March 31, 2000. As part of the Combination
distributions of $1,524,519 and $1,219,800 payable to Duke Energy and Phillips,
respectively, have been recorded. In addition to contributing its midstream
natural gas business, Duke Energy contributed the General Partner of TEPPCO
Partners, L.P., a publicly traded limited partnership ("TEPPCO General
Partner"), and the mid-continent midstream natural gas assets of Conoco, Inc.
and Mitchell Energy & Development Corp. acquired immediately prior to the
Combination. Subsequent to March 31, 2000 the Company borrowed $2,790,900 in
commercial paper (the "Indebtedness") and made the distributions discussed
above. In connection with the Offering, the Company acquired the Phillips member
interests in Field Services LLC in exchange for shares of the Company in the
Merger.
The Combination was accounted for as a purchase business combination in
accordance with Accounting Principles Board Opinion (APB) No. 16 "Accounting for
Business Combinations." The Predecessor Company was the acquiror of Phillips'
midstream natural gas business ("GPM") in the Combination.
The following Notes to the Unaudited Pro Forma Balance Sheet describe the
adjustments to March 31, 2000 historical balances to give effect to borrowings,
the Offering and related transactions.
1. The pro forma financial data have been derived by the application of pro
forma adjustments to the historical financial statements of the Company for
the period noted. The sources and uses of funds are as follows:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
Sources of Funds:
Indebtedness.............................................. $2,790,900
Proceeds from the Offering................................ 552,300
Net cash settlement for working capital receivables from
parents................................................ 95,751
----------
Total Sources.......................................... $3,438,951
----------
Uses of Funds:
Distributions to Duke Energy and Phillips................. $2,744,319
Paydown of Indebtedness................................... 652,500
Underwriter fees and other transaction expenses........... 31,234
----------
Total Uses............................................. $3,428,053
==========
Net adjustment to cash.................................... $ 10,898
==========
</TABLE>
2. Reflects the cash settlement for working capital receivables from parents.
3. Reflects the write-off of a portion of the deferred financing fees when
indebtedness is paid down with the proceeds of the Offering.
4. Reflects payment of the distributions payable.
5. Reflects the Indebtedness incurred in connection with the Combination. On
March 31, 2000, Field Services LLC entered into a $2,800,000 credit facility
with several financial institutions (the "Credit Facility"). The Credit
Facility will be used as the liquidity backstop to support Field Services LLC
F-4
<PAGE> 93
NOTES TO THE UNAUDITED PRO FORMA
BALANCE SHEET -- (CONTINUED)
AS OF MARCH 31, 2000
(IN THOUSANDS)
Commercial Paper program. On April 3, 2000 Field Services LLC borrowed
$2,790,900 in the commercial paper market to fund distributions to Field
Services LLC members and provide working capital. Commercial paper
outstanding at April 30, 2000 has maturities ranging from one day to 70 days
and had annual interest rates between 6.20% and $6.45%. The Credit Facility,
matures on March 30 2001, bears interest at a rate equal to, at the Company's
option, either (1) London Interbank Offered Rate (LIBOR) plus 0.50% per year
for the first 90 days following the closing of the credit facility and LIBOR
plus 0.625% per year thereafter or (2) the higher of (a) the Bank of America
prime rate and (b) the Federal Funds rate plus 0.50% per year. Upon
completion of the Offering, Field Services LLC's obligations under the
facility will be assumed by Duke Energy Field Services Corporation and become
an unsecured obligation.
The Company plans to refinance a portion of the commercial paper with the
proceeds of a term credit facility. Accordingly, pro forma interest expense
has been calculated using Management's estimate of the weighted average rate
at which the Company believes it will be able to refinance the commercial
paper. Management believes that 8% is the appropriate interest rate for such
an estimate. Such rate is higher than the prevailing commercial paper
interest rate available as of the date of this filing.
<TABLE>
<S> <C>
Indebtedness................................................ $2,790,900
Pay-down of Indebtedness with net proceeds of the
Offering.................................................. (521,066)
Pay-down of Indebtedness with working capital and other
funds..................................................... (131,434)
----------
$2,138,400
==========
</TABLE>
6. Reflects additional tax basis received in connection with the exchange of
common stock for Phillips Petroleum's Field Services LLC member interest as
a reduction of goodwill. In addition, deferred income taxes have been
reduced for the tax benefit of deferred financing fees written-off.
7. Reflects issuance of the Company's common stock in exchange for Phillip's
Petroleum's member interest of Field Services LLC.
8. The pro forma adjustment to total stockholder's equity related to the
Offering reflect the following:
<TABLE>
<S> <C>
Issuance of the Company's stock in exchange for Phillips
Petroleum's member interest of Field Services LLC......... $ 521,705
Estimated net proceeds of the Offering...................... 521,066
Write-off of deferred financing fees related to the pay-down
of Indebtedness, net of tax............................... (585)
----------
Net adjustment....................................... $1,042,186
==========
</TABLE>
F-5
<PAGE> 94
DUKE ENERGY FIELD SERVICES CORPORATION
UNAUDITED PRO FORMA INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR CONOCO/
COMPANY UP FUELS GPM MITCHELL TEPPCO GP
HISTORICAL ACQUISITION(1) HISTORICAL ACQUISITION(2) CONTRIBUTION(3)
----------- -------------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Sales of natural gas and petroleum products........ $3,310,260 $228,600 $1,501,178 $228,889 $
Transportation, storage and processing............. 148,050 69,324 88,279 -- --
---------- -------- ---------- -------- ------
Total operating revenues..................... 3,458,310 297,924 1,589,457 228,889 --
COSTS AND EXPENSES
Natural gas and petroleum products................. 2,965,297 252,880 1,148,910 187,689 --
Operating and maintenance.......................... 181,392 22,478 176,864 12,400 --
Depreciation and amortization...................... 130,788 15,125 80,458 6,200 --
General and administrative......................... 73,685 6,965 15,560 -- --
Net (gain) loss on sale of assets.................. 2,377 (907) -- --
---------- -------- ---------- -------- ------
Total costs and expenses..................... 3,353,539 297,448 1,420,885 206,289 --
---------- -------- ---------- -------- ------
OPERATING INCOME.................................... 104,771 476 168,572 22,600 --
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES..... 22,502 4,821 1,048 (8,994) 9,300
---------- -------- ---------- -------- ------
EARNINGS BEFORE INTEREST AND
TAXES.............................................. 127,273 5,297 169,620 13,606 9,300
INTEREST EXPENSE.................................... 52,915 35,643 0 --
---------- -------- ---------- -------- ------
EARNINGS BEFORE INCOME TAXES........................ 74,358 5,297 133,977 13,606 9,300
INCOME TAXES........................................ 31,029 1,900 52,244 5,170 3,534
---------- -------- ---------- -------- ------
INCOME FROM CONTINUING OPERATIONS................... $ 43,329 $ 3,397 $ 81,733 $ 8,436 $5,766
========== ======== ========== ======== ======
EARNINGS PER COMMON SHARE(9)........................
WEIGHTED AVERAGE SHARES OUTSTANDING(9)..............
<CAPTION>
ADJUSTMENTS(4) PRO FORMA
-------------- ----------
<S> <C> <C>
OPERATING REVENUES
Sales of natural gas and petroleum products........ $ $5,268,927
Transportation, storage and processing............. -- 305,653
--------- ----------
Total operating revenues..................... -- 5,574,580
COSTS AND EXPENSES
Natural gas and petroleum products................. -- 4,554,776
Operating and maintenance.......................... -- 393,134
Depreciation and amortization...................... 34,826(5) 267,397
General and administrative......................... -- 96,210
Net (gain) loss on sale of assets.................. -- 1,470
--------- ----------
Total costs and expenses..................... 34,826 5,312,987
--------- ----------
OPERATING INCOME.................................... (34,826) 261,593
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES..... (1,339)(6) 27,338
--------- ----------
EARNINGS BEFORE INTEREST AND
TAXES.............................................. (36,165) 288,931
INTEREST EXPENSE.................................... 83,055(7) 171,613
--------- ----------
EARNINGS BEFORE INCOME TAXES........................ (119,220) 117,318
INCOME TAXES........................................ (40,061)(8) 53,816
--------- ----------
INCOME FROM CONTINUING OPERATIONS................... $ (79,159) $ 63,502
========= ==========
EARNINGS PER COMMON SHARE(9)........................ $ .45
==========
WEIGHTED AVERAGE SHARES OUTSTANDING(9).............. 140,752
==========
</TABLE>
See Notes to the Unaudited Pro Forma Income Statements.
F-6
<PAGE> 95
DUKE ENERGY FIELD SERVICES CORPORATION
UNAUDITED PRO FORMA INCOME STATEMENT
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR GPM CONOCO/MITCHELL TEPPCO GP
COMPANY HISTORICAL ACQUISITION(2) CONTRIBUTION(3) ADJUSTMENTS(4) PRO FORMA
----------- ---------- --------------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Sales of natural gas and petroleum
products......................... $1,415,465 $532,762 $57,222 $ -- $ -- $2,005,449
Transportation, storage and
processing....................... 35,746 9,603 -- -- -- 45,349
---------- -------- ------- ------ --------- ----------
Total operating revenues..... 1,451,211 542,365 57,222 -- -- 2,050,798
COSTS AND EXPENSES
Natural gas and petroleum
products......................... 1,278,511 377,659 46,922 -- -- 1,703,092
Operating and maintenance.......... 49,039 47,285 3,100 -- -- 99,424
Depreciation and amortization...... 37,899 20,700 1,550 -- 8,121(5) 68,270
General and administrative......... 29,701 4,251 -- -- -- 33,952
Net (gain) loss on sale of
assets........................... 4,139 (88) -- -- -- 4,051
---------- -------- ------- ------ --------- ----------
Total costs and expenses..... 1,399,289 449,807 51,572 -- 8,121 1,908,789
---------- -------- ------- ------ --------- ----------
OPERATING INCOME.................... 51,922 92,558 5,650 -- (8,121) 142,009
EQUITY EARNINGS (LOSS) OF
UNCONSOLIDATED AFFILIATES.......... 6,759 (250) (895) 4,700 (346)(6) 9,968
---------- -------- ------- ------ --------- ----------
EARNINGS BEFORE INTEREST AND
TAXES.............................. 58,681 92,308 4,755 4,700 (8,467) 151,977
INTEREST EXPENSE.................... (14,477) (17,865) -- -- (10,562)(7) (42,904)
---------- -------- ------- ------ --------- ----------
EARNINGS BEFORE INCOME TAXES........ 44,204 74,443 4,755 4,700 (19,029) 109,073
INCOME TAXES........................ 17,352 29,110 1,807 1,786 (5,920)(8) 44,135
---------- -------- ------- ------ --------- ----------
NET INCOME FROM CONTINUING
OPERATIONS......................... $ 26,852 $ 45,333 $ 2,948 $2,914 $ (13,109) $ 64,938
========== ======== ======= ====== ========= ==========
EARNINGS PER COMMON SHARE(9)........ $ .46
==========
WEIGHTED AVERAGE SHARES
OUTSTANDING(9)..................... 140,752
==========
</TABLE>
See Notes to the Unaudited Pro Forma Income Statements.
F-7
<PAGE> 96
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO THE UNAUDITED PRO FORMA INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE THREE MONTH PERIOD ENDED MARCH 31,
2000
(IN THOUSANDS)
The Company's pro forma financial data have been derived by the application
of pro forma adjustments to the historical financial statements of the
Predecessor Company and other contributed businesses for the period noted. See
Note (1) to the Unaudited Pro Forma Balance Sheet.
1. Reflects the historical operating results of UP Fuels for the three month
period ended March 31, 1999, the date the UP Fuels Acquisition was
consummated by the Predecessor Company.
2. Reflects the results of operations associated with the acquisition of the
Conoco and Mitchell businesses, net of the earnings from the
Ferguson/Burleson Joint Venture interest exchanged as part of the
consideration for the businesses.
3. Reflects equity earnings of the TEPPCO general partnership interest
contributed by Duke Energy.
4. The pro forma adjustments exclude non-recurring expenses directly related to
the Transactions which the Company anticipates will be reflected in the
income statement for the period including the Transactions. Such expenses
relate principally to the write-off of existing deferred financing fees on
debt repaid as described in Note (3) to the Unaudited Pro Forma Balance
Sheet.
5. The excess purchase cost over the book value of net GPM assets acquired in
the Combination has not yet been fully allocated to individual assets and
liabilities acquired. However, the Company believes a portion will be
allocated to property, plant and equipment and identifiable intangibles and
the remainder, representing goodwill, will be amortized over 20 years. Given
its preliminary estimate of the allocation of the purchase cost to net assets
acquired, management has estimated a composite life of 20 years.
The adjustment to depreciation and amortization was calculated as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
-------------------------
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Net book value of GPM property at January 1, 1999......... $ 943,302 $ 943,302
Excess purchase price over net assets acquired in
Combination Allocated to property and equipment......... 1,086,452 1,086,452
Allocated to goodwill................................... 275,923 275,923
---------- ----------
Subtotal................................................ 2,305,677 2,305,677
Composite life -- 20 years................................ 20 20
Depreciation and amortization calculated.................. 115,284 28,821
Less: GPM historical depreciation and amortization........ (80,458) (20,700)
---------- ----------
Net adjustment............................................ $ 34,826 $ 8,121
========== ==========
</TABLE>
6. Reflects elimination of the equity earnings associated with the Predecessor
Company's investment in Westana, which was sold in February 2000 in
connection with the Combination.
F-8
<PAGE> 97
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO THE UNAUDITED PRO FORMA
INCOME STATEMENTS--CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE THREE MONTH PERIOD ENDED MARCH 31,
2000
(IN THOUSANDS)
7. The pro forma adjustment to interest expense, net under the new capital
structure is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
------------------------
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
Indebtedness at estimated weighted average of 8%............ $223,272 $ 55,818
Amortization of deferred financing costs over estimated
weighted average life of 7.5 years........................ 667 167
-------- --------
Subtotal for the year and one quarter..................... 223,939 55,985
Less: historical interest expense........................... (88,558) (32,342)
-------- --------
Incremental interest expense from Indebtedness before the
Offering.................................................. 135,381 23,643
-------- --------
Indebtedness paid down with proceeds of the Offering and
Other..................................................... $652,500 $652,500
Estimated weighted average rate............................. 8.0% 8.0%
Subtotal for the year and one quarter..................... (52,200) (13,050)
Deferred Fees written off in pay-down of the Indebtedness... (943) (943)
Estimated weighted average life............................. 7.5 7.5
Reduction in amortization for one year and one quarter,
respectively.............................................. (126) (31)
Reduction of interest expense resulting from pay-down of the
Indebtedness.............................................. (52,326) (13,081)
-------- --------
Net adjustment.............................................. $ 83,055 $ 10,562
======== ========
</TABLE>
A .125% increase or decrease in the assumed weighted average interest rate
would change pro forma interest expense with respect to the Indebtedness by
$2,673 after paydown with the proceeds of the Offering. Pro forma net income
would change by $1,657 on an annual basis.
8. The pro forma adjustment to income taxes reflects the use of the combined
federal and state statutory income tax of 38% on pro forma taxable income,
which is adjusted for the increase in non-deductible goodwill amortization as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1999 MARCH 31, 2000
----------------------------- ----------------------------
PRO FORMA PRO FORMA
ADJUSTMENT AMOUNT RATE ADJUSTMENT AMOUNT RATE ADJUSTMENT
---------- --------- ---- ---------- -------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Incremental depreciation on
stepped-up GPM assets...... $ (21,030) 38% $ (7,991) $ (4,672) 38% $(1,775)
Net adjustment to equity
earnings on unconsolidated
affiliates................. (1,339) 38% (509) (346) 38% (131)
Incremental interest expense
under the Indebtedness..... (83,055) 38% (31,561) (10,562) 38% (4,014)
--------- -------- -------- -------
$(105,424) $(40,061) $(15,580) $(5,920)
========= ======== ======== =======
</TABLE>
9. Earnings per share has been determined using total outstanding shares after
the offering of 140,752. Stock options to be granted at the offering price
will have no affect on earnings per share.
F-9
<PAGE> 98
INDEPENDENT AUDITORS' REPORT
Duke Energy Field Services Corporation and Affiliates
We have audited the accompanying combined balance sheets of Duke Energy
Field Services Corporation and Affiliates ("the Predecessor Companies") as of
December 31, 1998 and 1999, and the related combined statements of income and
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. The Predecessor Companies are under common ownership
and common management. These financial statements are the responsibility of the
Predecessor Companies' management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Predecessor Companies as of
December 31, 1998 and 1999, and the combined results of their operations and
their combined cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 18, 2000
Denver, Colorado
F-10
<PAGE> 99
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 168 $ 792
Accounts receivable:
Customers (net of allowance for doubtful accounts,
1998, $749 and 1999, $6,743).......................... 155,143 370,139
Affiliates............................................. 57,725 63,927
Other.................................................. 27,246 30,067
Inventories............................................... 23,713 38,701
Notes receivable.......................................... 5,266 13,050
Other..................................................... 531 1,580
---------- ----------
Total current assets.............................. 269,792 518,256
PROPERTY, PLANT AND EQUIPMENT:
Cost...................................................... 1,763,594 3,005,510
Accumulated depreciation and amortization................. (480,296) (596,125)
---------- ----------
Net property, plant, and equipment................ 1,283,298 2,409,385
INVESTMENTS IN AFFILIATES................................... 187,938 347,735
INTANGIBLE ASSETS:
Natural gas liquids sales contracts, net.................. 102,382
Goodwill, net............................................. 15,299 81,946
OTHER NONCURRENT ASSETS..................................... 14,511 12,131
---------- ----------
TOTAL ASSETS................................................ $1,770,838 $3,471,835
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade.................................................. $ 200,864 $ 353,977
Affiliates............................................. 10,762 62,370
Other.................................................. 5,556 33,858
Accrued taxes other than income........................... 14,194 15,653
Advances, net -- parents.................................. 334,057 1,579,475
Notes payable -- affiliates............................... 540,000 588,880
Other..................................................... 8,976 6,372
---------- ----------
Total current liabilities......................... 1,114,409 2,640,585
DEFERRED INCOME TAXES....................................... 222,007 308,308
NOTE PAYABLE TO PARENT...................................... 101,600 101,600
OTHER LONG TERM LIABILITIES................................. 34,871
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock.............................................. 3 1
Paid-in capital........................................... 202,523 213,091
Retained earnings......................................... 130,296 173,091
Other comprehensive income................................ 288
---------- ----------
Total stockholders' equity........................ 332,822 386,471
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,770,838 $3,471,835
========== ==========
</TABLE>
See Notes to the Combined Financial Statements.
F-11
<PAGE> 100
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES:
Sales of natural gas and petroleum products............ $1,700,029 $1,469,133 $3,310,260
Transportation and storage of natural gas.............. 41,896 50,097 76,604
Other.................................................. 59,907 65,090 71,446
---------- ---------- ----------
Total operating revenues....................... 1,801,832 1,584,320 3,458,310
---------- ---------- ----------
COSTS AND EXPENSES:
Natural gas and petroleum products..................... 1,468,089 1,338,129 2,965,297
Operating and maintenance.............................. 104,308 113,556 181,392
Depreciation and amortization.......................... 67,701 75,573 130,788
General and administrative............................. 36,023 44,946 73,685
Net (gain) loss on sale of assets...................... (236) (33,759) 2,377
---------- ---------- ----------
Total costs and expenses....................... 1,675,885 1,538,445 3,353,539
---------- ---------- ----------
OPERATING INCOME......................................... 125,947 45,875 104,771
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES.......... 9,784 11,845 22,502
---------- ---------- ----------
EARNINGS BEFORE INTEREST AND TAXES....................... 135,731 57,720 127,273
INTEREST EXPENSE......................................... (51,113) (52,403) (52,915)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................... 84,618 5,317 74,358
INCOME TAXES............................................. 33,380 3,289 31,029
---------- ---------- ----------
NET INCOME............................................... $ 51,238 $ 2,028 $ 43,329
========== ========== ==========
</TABLE>
See Notes to the Combined Financial Statements.
F-12
<PAGE> 101
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
------ ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996....... $ 3 $200,326 $77,030 $277,359
Contributions....................
Net income....................... 51,238 51,238
--- -------- -------- ---- --------
BALANCE, DECEMBER 31, 1997....... 3 200,326 128,268 328,597
Contributions.................... 2,197 2,197
Net income....................... 2,028 2,028
--- -------- -------- ---- --------
BALANCE, DECEMBER 31, 1998....... 3 202,523 130,296 332,822
Contributions.................... 10,568 10,568
Net income....................... 43,329 43,329
Other............................ (2) (534) $288 (248)
--- -------- -------- ---- --------
BALANCE, DECEMBER 31, 1999....... $ 1 $213,091 $173,091 $288 $386,471
=== ======== ======== ==== ========
</TABLE>
See Notes to the Combined Financial Statements.
F-13
<PAGE> 102
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 51,238 $ 2,028 $ 43,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 67,701 75,573 130,788
Deferred income tax expense....................... 35,823 45,315 86,301
Equity in undistributed earnings.................. (9,784) (11,846) (22,502)
Loss (gain) on sale of assets..................... (236) (33,759) 2,377
Net change in operating assets and liabilities:
Accounts receivable............................... (76,679) 133,461 (175,008)
Inventories....................................... 5,572 1,762 (5,303)
Other current assets.............................. 11,320 10,150 20,356
Accounts payable.................................. 101,763 (177,418) 152,535
Other current liabilities......................... (13,361) (4,857) (4,390)
Other long term liabilities....................... (55,347)
----------- --------- -----------
Net cash provided by operating activities.... 173,357 40,409 173,136
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and other capital expenditures.......... (121,978) (185,479) (1,570,083)
Investment in affiliates............................. (29,600) (84,884) (62,752)
Affiliate distributions.............................. 10,742 15,051 31,999
Proceeds from sales of assets........................ 2,815 51,687 29,390
----------- --------- -----------
Net cash used in investing activities........ (138,021) (203,625) (1,571,446)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in advances -- parents....... (35,061) 162,514 1,350,054
Notes payable borrowings............................. 48,880
----------- --------- -----------
Net cash flows provided by (used in)
financing activities....................... (35,061) 162,514 1,398,934
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 275 (702) 624
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 595 870 168
----------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................. $ 870 $ 168 $ 792
=========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --Cash
paid for interest (net of amounts capitalized)....... $ 51,765 $ 52,948 $ 52,915
</TABLE>
See Notes to the Combined Financial Statements.
F-14
<PAGE> 103
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. ACCOUNTING POLICIES SUMMARY
Principles of Combining -- The accounting policies are presented to assist
the reader in evaluating the combined financial statements of Duke Energy Field
Services Corporation (the Company), Duke Energy Field Services, Inc. (DEFSI),
Panhandle Field Services Company (PFSC), Panhandle Gathering Company (PGC), and
Duke Energy Services Canada, Ltd. (DESCL) (together, "Duke Energy Field Services
Corporation and Affiliates" or the Predecessor Companies). The Predecessor
Companies are indirect subsidiaries of Duke Energy Corporation (Duke Energy).
During 1999, PFSC and PGC were contributed to and became wholly-owned
subsidiaries of DEFSI. The resulting December 31, 1999 stockholders' equity
(1,000 shares authorized and issued, $1.00 par value) reflects that of the
Company and DESCL. Our certificate of incorporation limits the scope of our
business to the midstream natural gas industry in the United States and Canada
and the marketing of natural gas liquids in Mexico.
The Combination -- On December 16, 1999, Duke Energy and Phillips Petroleum
Company
(Phillips) entered into an agreement to combine their United States and Canadian
midstream natural gas gathering, processing and natural gas liquid operations
(the Combination). In connection with the Combination, Duke Energy's midstream
natural gas gathering and processing business was transferred to Duke Energy
Field Services LLC (Field Services LLC) and the Combination will be accounted
for as an acquisition by the Predecessor Companies of Phillips' midstream
business.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- All liquid investments with maturities at date
of purchase of three months or less are considered cash equivalents.
Inventories -- Inventories are recorded at the lower of cost or market
using the average cost method.
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost, which does not purport to represent replacement or realizable value.
Assets, including goodwill and other intangibles, are evaluated for potential
impairment based on undiscounted cash flows and any impairment recorded is
derived based on discounted cash flows. There was no impairment during 1997,
1998 or 1999. Depreciation of property, plant and equipment is computed using
the straight-line method (see Note 4).
Interest totaling $2.3 million, $1.6 million and $.9 million has been
capitalized on construction projects for 1997, 1998 and 1999, respectively.
Revenue Recognition -- The Predecessor Companies recognize revenues on
sales of natural gas and petroleum products in the period of delivery and
transportation revenues in the period service is provided. An allowance for
doubtful accounts is established based on agings of accounts receivable and the
credit worthiness of our customers. Bad debt expense and writeoffs for each year
presented are not significant. A bad debt reserve of $6 million was established
in the purchase price allocation associated with the UP Fuels acquisition (see
Note 2). This amount represents the Predecessor Companies' assessment of the
unrecoverable portion of receivables acquired from UP Fuels.
Equity in Unconsolidated Affiliates -- Investments in 20% to 50% owned
affiliates are accounted for using the equity method. Investments greater than
50% are consolidated unless the Predecessor Companies do not operate these
investments and as a result do not have the ability to exercise control or
control is considered to be temporary (See Note 5).
F-15
<PAGE> 104
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
Derivative Contracts -- The Predecessor Companies use commodity swaps,
futures and option contracts in the conduct of their business. Unrealized gains
and losses associated with activity other than trading are recognized when the
underlying physical transaction is recorded. Trading activity is
marked-to-market and reflected in the statements of income as sales of natural
gas and petroleum products or costs of such.
Significant Customers -- Duke Energy Trading and Marketing, L.L.C. (DETM),
an affiliated company, is a significant customer. Sales to DETM totaled $567
million, $522 million and $684 million during 1997, 1998 and 1999, respectively.
Intangibles Amortization -- Goodwill is amortized over the period of
expected benefit. Goodwill is being amortized on a straight-line basis over 15
years related to the 1991 acquisition of MEGA Natural Gas Company and 20 years
related to the UP Fuels acquisition (see Note 2). Natural gas liquids sales
contracts are amortized on a straight-line basis over the contract lives which
average 15 years.
Environmental Costs -- Environmental expenditures are expensed or
capitalized as appropriate, depending upon the future economic benefit.
Expenditures that relate to an existing condition caused by past operations, and
that do not have future benefit, are expensed. Liabilities for these
expenditures are recorded on an undiscounted basis when environmental
assessments or clean-ups are probable and the costs can be reasonably estimated.
Environmental liabilities at the end of 1998 and 1999 were insignificant.
Gas Imbalance Accounting -- Quantities of natural gas over-delivered or
under-delivered related to imbalance agreements are recorded monthly as
receivables or payables using index prices or the weighted average prices of
natural gas at the plant or system. Generally, these balances are settled with
deliveries of natural gas.
Deferred Income Tax -- The Predecessor Companies follow the asset and
liability method of accounting for income tax. Deferred taxes are provided for
temporary differences in the tax and financial reporting basis of assets and
liabilities. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period the rate change is enacted.
Stock Based Compensation -- The Predecessor Companies account for
stock-based compensation using the intrinsic method of accounting. Under this
method, compensation cost, if any, is measured as the excess of the quoted
market price of stock at the date of the grant over the amount an employee must
pay to acquire stock. Restricted stock is recorded as compensation cost over the
requisite vesting period based on the market value on the date of the grant.
Earnings Per Share -- The historical capital structure of the Predecessor
Companies is not representative of the future capital structure of DEFSI (see
Note 2), as all companies were wholly-owned subsidiaries. Accordingly, the
historical net income per share and weighted average number of common shares
outstanding are not shown for any of the periods presented.
Comprehensive Income -- The Predecessor Companies' only item of other
comprehensive income is foreign currency translation.
Recently Issued Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). SFAS 133 establishes standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a
F-16
<PAGE> 105
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative (gains and losses)
depends on the intended use of the derivative and the resulting designation. The
Predecessor Companies are required to adopt SFAS 133 on January 1, 2001. The
Predecessor Companies have not completed the process of evaluating the impact
that will result from adopting SFAS 133.
2. BUSINESS COMBINATIONS/DISPOSITIONS
In March 1998, the Predecessor Companies sold a fractionator to TEPPCO
Colorado, L.L.C., an indirect, wholly-owned subsidiary of TEPPCO Partners, L.P.
(TEPPCO), of which Duke Energy, through an indirect, wholly-owned subsidiary,
has an equity interest of approximately 18%. The fractionator was sold for $40
million and the Predecessor Companies realized a gain of approximately $38
million.
On March 31, 1999, the Predecessor Companies acquired the assets and
assumed certain liabilities of Union Pacific Fuels, Inc. (UP Fuels), a
wholly-owned subsidiary of Union Pacific Resources Company (UPR), for a total
purchase price of $1.359 billion. The acquisition was accounted for under the
purchase method of accounting, and the assets and liabilities and results of
operations of UP Fuels have been consolidated in the Predecessor Companies'
financial statements since the date of purchase. The purchase price has been
allocated to the assets acquired and liabilities assumed based on estimated fair
value, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Property, plant and equipment...................... $1,046,316
Partnerships and other joint venture investments... 120,544
Natural gas liquids sales contracts................ 107,771
Goodwill........................................... 71,648
Gas marketing...................................... 104,843
Deferred tax asset................................. 10,200
Net working capital................................ (8,207)
Environmental and other liabilities................ (94,018)
----------
Net.............................................. $1,359,097
==========
</TABLE>
The gas marketing component of UP Fuels was immediately transferred to an
affiliate of Duke Energy after the acquisition at the above fair value. Revenues
and net income for 1998 on a pro forma basis would have increased $1.4 billion
and $54.9 million, respectively, if the acquisition had occurred on January 1,
1998. Revenues and net income for 1999 on a pro forma basis would have increased
$298 million and $2.8 million, respectively, if the acquisition had occurred on
January 1, 1999.
3. INVENTORIES
A summary of inventories by category follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gas held for resale......................................... $13,202 $18,114
NGLs........................................................ 5,962 18,211
Materials and supplies...................................... 4,549 2,376
------- -------
Total inventories................................. $23,713 $38,701
======= =======
</TABLE>
F-17
<PAGE> 106
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment by classification follows:
<TABLE>
<CAPTION>
DECEMBER 31,
DEPRECIATION -----------------------
RATES 1998 1999
------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gathering...................................... 4% - 6% $ 923,350 $1,231,050
Processing..................................... 4% 416,572 1,197,993
Transmission................................... 4% 251,079 413,633
Underground storage............................ 2% - 5% 79,875 73,958
General plant.................................. 20% - 33% 36,214 37,614
Construction work in progress.................. 56,504 51,262
---------- ----------
Total property, plant and
equipment.......................... $1,763,594 $3,005,510
========== ==========
</TABLE>
5. INVESTMENTS IN AFFILIATES
The Predecessor Companies have investments in the following businesses
accounted for using the equity method:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
OWNERSHIP 1998 1999
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Dauphin Island Gathering Partners................... 37.28% $ 96,869 $ 99,878
Mont Belvieu I...................................... 20.00% 40,440
Mobile Bay Processing Partners...................... 28.81% 30,166 35,906
Black Lake Pipeline................................. 50.00% 35,641
Sycamore Gas System General Partnership............. 48.45% 19,344 21,985
Main Pass Oil Gathering............................. 33.33% 15,762 16,967
Ferguson-Burleson................................... 55.00% 27,531
Other affiliates.................................... Various 12,406 54,141
-------- --------
174,547 332,489
Westana Gathering Company........................... 50.00% 13,391 15,246
-------- --------
Total investments in affiliates........... $187,938 $347,735
======== ========
</TABLE>
Dauphin Island Gathering Partners -- Dauphin Island Gathering Partners is a
partnership which owns the Dauphin Island Gathering system and the Main Pass Gas
Gathering system, which are natural gas gathering systems in the Gulf of Mexico.
Mont Belvieu I -- Mont Belvieu I operates a 200 MBbl/d fractionation
facility in the Mont Belvieu, Texas Market Center.
Mobile Bay Processing Partners -- Mobile Bay Processing Partners is a
partnership formed to engage in the financing, ownership, construction and
operation of one or more natural gas processing facilities onshore in Mobile
County, Alabama.
Black Lake Pipeline -- Black Lake Pipeline owns a 317 mile long NGL
pipeline, with a current capacity of approximately 40 MBbl/d. The pipeline
receives NGLs from a number of gas plants in Louisiana and Texas. The NGLs are
transported to Mont Belvieu fractionators.
F-18
<PAGE> 107
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
Sycamore Gas System General Partnership -- Sycamore Gas System General
Partnership is a partnership formed for the purpose of constructing, owning and
operating a gas gathering and compression system in Carter County, Oklahoma.
Main Pass Oil Gathering -- Main Pass Oil Gathering is a joint venture whose
primary operation is a crude oil gathering pipeline system of 81 miles in the
Main Pass East and Viosca Knoll Block areas in the Gulf of Mexico.
Ferguson-Burleson -- Ferguson-Burleson operates two independent gas
gathering systems, rich and lean, that are interconnected. The rich gas system
is comprised of over 1,450 miles of gathering lines serving six counties in
South Central Texas. The lean gas system consists of approximately 100 miles of
pipelines in two counties in South Central Texas. We own 55% of the economic
interest in Ferguson-Burleson but have only a 50% voting interest. The operator
of the assets controls the other 50% voting interest and manages the operations
on a daily basis. The Predecessor Companies do not have the ability to control
Ferguson-Burleson and therefore do not consolidate its results.
Equity in earnings amounted to the following for the years ended December
31:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Dauphin Island Gathering Partners........................ $4,250 $ 7,234 $ 5,974
Mont Belvieu I........................................... 440
Mobile Bay Processing Partners........................... 65 2,307
Black Lake Pipeline...................................... 1,141
Sycamore Gas System General Partnership.................. 261 142
Main Pass Oil Gathering.................................. 1,665 2,598 3,638
Ferguson-Burleson........................................ 5,600
Other affiliates......................................... 3,062 1,279 1,921
------ ------- -------
8,977 11,437 21,163
Westana Gathering Company................................ 807 409 1,339
------ ------- -------
Total equity earnings.......................... $9,784 $11,846 $22,502
====== ======= =======
</TABLE>
Distributions in excess of earnings were $1.0 million, $3.2 million and
$9.5 million in 1997, 1998 and 1999, respectively.
In connection with the Combination, the Predecessor Companies' interest in
Westana Gathering Company was sold in February 2000. Proceeds and loss on sale
approximated $12 million and $4 million, respectively.
F-19
<PAGE> 108
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
The following summarizes combined financial information of unconsolidated
affiliates excluding Westana for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Income statement:
Operating revenues................................. $54,898 $ 61,618 $ 452,118
Operating expenses................................. 34,281 36,173 374,079
Net income......................................... 21,318 27,878 55,606
Balance sheet:
Current assets..................................... $ 57,926 $ 119,506
Noncurrent assets.................................. 388,562 761,270
Current liabilities................................ (25,671) (113,121)
Noncurrent liabilities............................. (8,094) (14,853)
-------- ---------
Net assets................................. $412,723 $ 752,802
======== =========
</TABLE>
6. TRANSACTIONS WITH AFFILIATES
A summary of transactions with affiliates included in the combined
statements of income follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales of natural gas and petroleum products......... $567,800 $536,300 $ 696,700
Natural gas and petroleum products purchased........ 48,900 79,600 128,600
Transportation revenue.............................. 6,400 2,700
Operating expenses -- Billed to affiliates(1)....... 4,200 7,200
General and administrative expenses(1):
Billed to affiliates.............................. 1,200 502
Billed from affiliates............................ 11,700 12,100 19,100
Interest expense.................................... 60,100 60,100 53,900
</TABLE>
--------------------
(1) Operating, general and administrative expenses are allocated to
affiliates based on cost.
As of December 31, 1998 and 1999, the Predecessor Companies had a $101.6
million note payable to Duke Energy, scheduled to mature in 2004 bearing
interest at 8.5%. Additionally, as of December 31, 1999, the Predecessor
Companies had a $540 million note payable to Duke Energy, scheduled to mature
December 31, 2000 bearing interest at prime (8.5% at December 31, 1999),
adjusted quarterly, and a $44.3 million and $4.6 million note payable to Duke
Energy, payable on demand and bearing interest at the Canadian Prime Rate (6.5%
at December 31, 1999), plus fifty basis points, adjusted quarterly.
Intercompany advances do not bear interest. Advances are carried as open
accounts and are not segregated between current and non-current amounts.
Increases and decreases in advances result from the movement of funds to provide
for operations, capital expenditures, and debt payments of Duke Energy and its
subsidiaries. In addition, current income tax balances are recorded in these
accounts. Average intercompany advances payable approximated $117.3 million,
$203.8 million and $1,410 million for 1997, 1998 and 1999, respectively.
Duke Energy supplies the Predecessor Companies with various staff and
support services, including information technology products and services,
payroll, employee benefits, corporate insurance, cash manage-
F-20
<PAGE> 109
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
ment, ad valorem taxes, treasury and legal functions. These expenditures are
allocated to the Predecessor Companies using a cost based method of allocation.
Management believes the allocation is reasonable and estimates that such costs
approximate the costs for such services that would have been incurred on a stand
alone basis.
See Notes 5 and 12 for discussion of other specific transactions with
affiliates.
7. INCOME TAXES
The Predecessor Companies' taxable income is included in a consolidated
federal income tax return with Duke Energy. Therefore, income tax has been
provided in accordance with Duke Energy's tax allocation policy, which requires
subsidiaries to calculate federal income tax as if separate taxable income, as
defined, was reported. Foreign income taxes are not material and therefore are
not shown separately.
Income tax as presented in the combined statements of income is summarized
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $(1,012) $(36,142) $(46,429)
State............................................. (1,431) (5,884) (8,843)
------- -------- --------
Total current............................. (2,443) (42,026) (55,272)
------- -------- --------
Deferred:
Federal........................................... 30,800 38,961 73,201
State............................................. 5,023 6,354 13,100
------- -------- --------
Total deferred............................ 35,823 45,315 86,301
------- -------- --------
Total income tax expense............................ $33,380 $ 3,289 $ 31,029
======= ======== ========
</TABLE>
Total income tax expense differs from the amount computed by applying the
federal income tax rate to earnings before income tax. The reasons for this
difference are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax rate................................ 35.0% 35.0% 35.0%
======= ====== =======
Income tax, computed at the statutory rate............. $29,616 $1,861 $26,025
Adjustments resulting from:
State income tax, net of federal income tax effect... 2,962 186 2,863
Non-deductible amortization and other................ 802 1,242 2,141
------- ------ -------
Total income tax............................. $33,380 $3,289 $31,029
======= ====== =======
</TABLE>
F-21
<PAGE> 110
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
The tax effects of temporary differences that resulted in deferred income
tax assets and liabilities, and a description of the significant items that
created these differences are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Alternative minimum tax credit carryforward....... $ 20,400 $ 20,400 $ --
Other............................................. 2,300 500 7,600
--------- --------- ---------
Total deferred income tax assets........ 22,700 20,900 7,600
--------- --------- ---------
Property, plant, and equipment.................... (160,200) (209,507) (275,008)
Deferred charges.................................. (900) (15,000) (15,300)
State deferred income tax, net of federal tax
effect.......................................... (14,300) (18,400) (25,600)
--------- --------- ---------
Total deferred income tax liabilities... (175,400) (242,907) (315,908)
--------- --------- ---------
Net deferred income tax liability................. $(152,700) $(222,007) $(308,308)
========= ========= =========
</TABLE>
8. BUSINESS SEGMENTS AND RELATED INFORMATION
The Predecessor Companies operate in two principal business segments as
follows: (1) natural gas gathering, processing, transportation, marketing and
storage, and (2) natural gas liquids fractionation, transportation, marketing
and trading. These segments are separately monitored by management for
performance against its internal forecast and are consistent with the
Predecessor Companies internal financial reporting package. These segments have
been identified based upon the differing products and services, regulatory
environment and the expertise required for these operations. Margin, earnings
before interest, taxes, depreciation and amortization (EBITDA) and earnings
before interest and taxes (EBIT) are the performance measures utilized by
management to monitor the business of each segment. The accounting policies for
the segments are the same as those described in Note 1. Foreign operations are
not material and are therefore not separately identified.
The following table sets forth the Predecessor Companies' segment
information as of and for the years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues:
Natural gas............................................ $1,683,483 $1,497,901 $2,483,197
NGLs................................................... 423,680 309,380 1,365,577
Intersegment(a)........................................ (305,331) (222,961) (390,464)
---------- ---------- ----------
Total operating revenues....................... 1,801,832 1,584,320 3,458,310
---------- ---------- ----------
Margin:
Natural gas............................................ 334,129 243,787 459,843
NGLs................................................... (386) 2,404 33,170
---------- ---------- ----------
Total margin................................... 333,743 246,191 493,013
---------- ---------- ----------
Other operating costs:
Natural gas............................................ 104,072 79,797 182,062
NGLS................................................... -- -- 1,707
Corporate.............................................. 36,023 44,946 73,685
---------- ---------- ----------
Total other operating costs.................... 140,095 124,743 257,454
---------- ---------- ----------
</TABLE>
F-22
<PAGE> 111
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity in earnings of unconsolidated affiliates:
Natural gas............................................ 9,784 11,845 20,917
NGLs................................................... 1,585
---------- ---------- ----------
Total equity in earnings of unconsolidated
affiliates................................... 9,784 11,845 22,502
---------- ---------- ----------
EBITDA(b):
Natural gas............................................ 239,841 175,835 298,698
NGLs................................................... (386) 2,404 33,048
Corporate.............................................. (36,023) (44,946) (73,685)
---------- ---------- ----------
Total EBITDA................................... 203,432 133,293 258,061
---------- ---------- ----------
Depreciation and amortization:
Natural gas............................................ 65,593 73,470 119,425
NGLs................................................... 9,073
Corporate.............................................. 2,108 2,103 2,290
---------- ---------- ----------
Total depreciation and amortization............ 67,701 75,573 130,788
---------- ---------- ----------
EBIT:
Natural gas............................................ 174,248 102,365 179,273
NGLs................................................... (386) 2,404 23,975
Corporate.............................................. (38,131) (47,049) (75,975)
---------- ---------- ----------
Total EBIT..................................... 135,731 57,720 127,273
---------- ---------- ----------
Corporate interest expense............................... 51,113 52,403 52,915
---------- ---------- ----------
Income before income taxes:
Natural gas............................................ 174,248 102,365 179,273
NGLs................................................... (386) 2,404 23,975
Corporate.............................................. (89,244) (99,452) (128,890)
---------- ---------- ----------
Total income before income taxes............... $ 84,618 $ 5,317 $ 74,358
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Total assets:
Natural gas............................................... $1,505,111 $2,754,447
NGLs...................................................... 5,137 225,702
Corporate(c).............................................. 260,590 491,686
---------- ----------
Total assets...................................... $1,770,838 $3,471,835
========== ==========
</TABLE>
- ---------------
(a) Intersegment sales represent sales of NGLs from the Natural Gas segment to
the NGLs segment at either index prices or weighted average prices of NGLs.
Both measures of intersegment sales are effectively based on current
economic market conditions.
(b) EBITDA consists of income from continuing operations before interest
expense, income tax expense, and depreciation and amortization expense, less
interest income. EBITDA is not a measurement presented in accordance with
generally accepted accounting principles. You should not consider it in
isolation from or as a substitute for net income or cash flow measures
prepared in accordance with generally accepted accounting principles or as a
measure of our profitability or liquidity. EBITDA is included as a
F-23
<PAGE> 112
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
supplemental disclosure because it may provide useful information regarding
our ability to service debt and to fund capital expenditures. However, not
all EBITDA may be available to service debt.
(c) Includes items such as unallocated working capital, intercompany accounts
and intangible and other assets.
9. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
The Predecessor Companies' operations are subject to the volatility of
commodity prices, particularly that of NGL prices. The Predecessor Companies
manage exposure to risk from existing contractual commitments through forward
contracts, futures and over-the-counter swap agreements (collectively,
"commodity instruments"). Energy commodity forward contracts involve physical
delivery of an energy commodity. Energy commodity futures involve the buying or
selling of natural gas, crude oil (used to hedge NGLs prices) and NGLs at a
fixed price. Over-the-counter swap agreements require the Predecessor Companies
to receive or make payments based on the difference between a specified price
and the actual price of the underlying commodity.
Commodity Instruments -- Trading -- The Predecessor Companies, through a
wholly-owned subsidiary, engage in the trading of NGLs and crude oil commodity
instruments, and therefore experience net open positions. The Predecessor
Companies manage open positions with policies which limit its exposure to market
risk and require daily reporting to management of potential financial exposure.
The weighted-average life of the Predecessor Companies commodity risk portfolio
was approximately 2 months at December 31, 1999. During 1999 net gains of $9.7
million were recognized from trading NGLs and crude oil derivatives. The
Predecessor Companies were not trading NGLs nor crude oil commodity instruments
prior to 1999. As of December 31, 1999, the absolute notional contract quantity
of NGLs and crude oil commodity derivatives held for trading purposes was
5,826,000 and 6,486,500 barrels, respectively.
<TABLE>
<CAPTION>
1999
---------------------
ASSETS LIABILITIES
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fair value at December 31................................... $10,461 $10,079
Average fair value for the year............................. 8,588 8,359
</TABLE>
Commodity Derivatives -- Non-Trading -- At December 31, 1998 and 1999, the
Predecessor Companies held or issued derivatives that reduce the Predecessor
Companies' exposure to market fluctuations in the price and transportation costs
of natural gas and NGLs. The Predecessor Companies' market exposure arises from
inventory balances and fixed-price purchase and sale commitments that extend for
periods of up to 10 years. Futures and swaps are used to manage and hedge prices
and location risk related to these market exposures. Futures and swaps are also
used to manage margins on offsetting fixed-price purchase or sale commitments
for physical quantities of natural gas and NGLs.
The gains, losses and costs related to those commodity derivatives that
qualify as a hedge are not recognized until the underlying physical transaction
occurs. At December 31, 1998 and 1999, the Predecessor Companies unrealized net
gains (losses) related to commodity derivative hedges was $1.8 million and
$(63.5) million, respectively. As of December 31, 1998 and 1999, the absolute
notional contract quantity of commodity derivatives held for non-trading
purposes was 10.92 and 7.8 billion cubic feet (Bcf) of natural gas and 59,000
and 32,764,000 barrels of crude oil, respectively. Hedging losses in 1999
totaled approximately $34 million.
F-24
<PAGE> 113
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
Market and Credit Risk -- Most futures and swaps are conducted through
either DETM or Duke Energy Merchants (DEM). Under these arrangements the
Predecessor Companies do not have margin requirements.
New York Mercantile Exchange (Exchange) traded futures contracts are
guaranteed by the Exchange and have nominal credit risk. On all other
transactions previously described, the Predecessor Companies are exposed to
credit risk in the event of nonperformance by the counterparties. For each
counterparty, the Predecessor Companies analyze the financial condition prior to
entering into an agreement. The change in market value of exchange-traded
futures contracts other than those conducted through either DETM or DEM require
daily cash settlement in margin accounts with brokers. Swap contracts are
generally settled at the expiration of the contract term and may be subject to
margin requirements with the counterparty.
Gathering, processing, and transportation services are provided to
producers, refiners, and a variety of wholesale and retail customers located in
the Mid-Continent, Gulf Coast and Rocky Mountain areas as well as in Canada. The
principal markets for natural gas marketing services are industrial end-users
and utilities located throughout the United States. The Predecessor Companies
have a concentration of receivables due from gas and electric utilities and
their affiliates, as well as industrial customers throughout the United States.
These concentrations of customers may affect the Predecessor Companies' overall
credit risk in that certain customers may be similarly affected by changes in
economic, regulatory or other factors. Trade receivables are generally not
collateralized; however, the Predecessor Companies analyze customers' financial
condition prior to extending credit, establish credit limits and monitor the
appropriateness of these limits on an ongoing basis.
10. ESTIMATED 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 Predecessor Companies, using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Predecessor Companies
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------------- -------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 168 $ 168 $ 792 $ 792
Accounts receivable.................... 240,114 240,114 464,133 464,133
Notes receivable....................... 15,096 15,294 21,866 22,582
Accounts payable....................... 217,182 217,182 450,205 450,205
Advances, net -- parents............... 334,057 334,057 1,579,475 1,579,475
Notes payable.......................... 641,600 601,606 690,480 655,843
Natural gas, NGL and oil hedge
contracts............................ -- 1,800 -- (63,500)
</TABLE>
The fair value of cash and cash equivalents, accounts receivable, and
accounts payable are not materially different from their carrying amounts
because of the short-term nature of these instruments or the stated rates
approximating market rates.
F-25
<PAGE> 114
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
Notes receivable is carried in the accompanying balance sheet at cost. Fair
value has been estimated using discounted cash flows assuming current interest
rates, similar credit risk and maturities.
Related party advances and notes payable are carried at cost. Fair value
has been estimated using discounted cash flows of maturities of five years and
interest rates of 8.0%.
The estimated fair value of the natural gas, NGL and oil hedge contracts is
determined by multiplying the difference between the quoted termination prices
for natural gas, NGL and oil and the hedge contract prices by the quantities
under contract.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The midstream natural gas industry has seen an increase in the number of
class action lawsuits involving royalty disputes, mismeasurement and mispayment
allegations. Although the industry has seen these types of cases before, they
were typically brought by a single plaintiff or small group of plaintiffs. Many
of these cases are now being brought as class actions. The Predecessor Companies
are currently named as defendants in certain of these cases. Management believes
the Predecessor Companies have meritorious defenses to these cases, and
therefore will continue to defend them vigorously. However, these class actions
can be costly and time consuming to defend.
The Predecessor Companies are subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
as well as other environmental matters. The Predecessor Companies are not aware
of any material violations and have accrued for the known remediation that is in
process. In connection with the UP Fuels acquisition, the Company analyzed water
and soil samples surrounding UP Fuels facilities and identified necessary
remedial actions. The Company transferred this obligation to a third party for a
payment of approximately $48 million. Generally, environmental liabilities are
not expected to be recoverable from insurance or other third parties.
The Predecessor Companies utilize assets under operating leases in several
areas of operation. Combined rental expense amounted to $8.1 million, $8.2
million and $11.8 million in 1997, 1998 and 1999, respectively. Minimum rental
payments under the Predecessor Companies' various operating leases for the years
2000 through 2004 are $6.1, $6.0, $5.0, $5.0 and $4.3 million, respectively.
Thereafter, payments aggregate $15.4 million through 2011.
F-26
<PAGE> 115
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
12. STOCK-BASED COMPENSATION, PENSION AND OTHER BENEFITS
Under Duke Energy's 1999 Stock Incentive Plan, stock options of Duke
Energy's common stock may be granted to key employees of the Predecessor
Companies. Under the plan, the exercise price of each option granted equals the
market price of Duke Energy's common stock on the date of grant. Vesting periods
range from one to five years with a maximum exercise term of ten years. The
following tables set forth information regarding options to purchase Duke
Energy's common stock granted to employees of the Predecessor Companies.
Stock Option Activity
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- --------------
<S> <C> <C>
Outstanding at December 31, 1996............................ 254 $20
Granted................................................... 25 44
Exercised................................................. (54) 18
Forfeited................................................. 0 0
----- ---
Outstanding at December 31, 1997............................ 225 23
Granted................................................... 279 55
Exercised................................................. (70) 21
Forfeited................................................. 0 0
----- ---
Outstanding at December 31, 1998............................ 434 44
Granted................................................... 878 53
Exercised................................................. (33) 25
Forfeited................................................. (18) 55
----- ---
Outstanding at December 31, 1999............................ 1,261 51
</TABLE>
Stock Options at December 31, 1999
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES (IN THOUSANDS) LIFE (YEARS) PRICE (IN THOUSANDS) PRICE
-------- -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$10 to $14 16 1.5 $11 16 $ 11
$15 to $20 52 3.9 18 52 18
$21 to $25 25 5.1 23 25 23
$26 to $31 10 6.1 27 10 27
$42 to $50 474 9.8 49 22 44
$55 to $60 684 8.8 56 66 55
----- ---
Total 1,261 191 34
</TABLE>
There were 29,646 and 82,050 options exercisable at December 31, 1997 and
1998 with a weighted average exercise price of $21 and $22 per option.
No compensation cost related to the stock options has been recorded as the
intrinsic method of accounting is used and the exercise price of each option
granted equaled the market price on the date of grant. The weighted average fair
value of options granted was $10.00, $9.00 and $10.00 per option during 1997,
1998 and 1999, respectively. The fair value of each option granted was estimated
on the date of grant using the Black-Scholes option-pricing model. The
weighted-average assumptions for option-pricing in 1997, 1998 and
F-27
<PAGE> 116
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
1999 were: stock dividend yield of 3.5%, 4.2% and 4.1%, expected stock price
volatility of 20.7%, 15.1% and 18.8% and risk-free interest rates of 6.5%, 5.6%
and 5.9%, respectively. The expected option life for 1997, 1998 and 1999 was
seven years. Stock-based compensation expense calculated using the Black-Scholes
option-pricing model for 1997, 1998 and 1999 would have been $0.1 million, $0.8
million and $2.5 million, respectively and net income would have been $51.1
million, $1.5 million and $41.8 million, respectively.
In addition, Duke Energy granted restricted shares of Duke Energy common
stock to key employees of the Predecessor Companies under Duke Energy stock
incentive plans. Grants under the plans vest over periods ranging from one to
seven years. In 1997 and 1999 Duke Energy awarded 2,817 shares (fair value at
grant dates of approximately $168,000) and 36,300 shares (fair value at grant
dates of approximately $2 million) to key employees of the Predecessor
Companies. No restricted shares were awarded in 1998. Compensation expense for
the stock grants is charged to the earnings of the Predecessor Companies over
the vesting period, and amounted to approximately $168,000, $0 and $488,000 in
1997, 1998 and 1999, respectively.
Duke Energy has, and the Predecessor Companies' participate in, a
non-contributory trustee pension plan which covers eligible employees with a
minimum of one year vesting service. The plan provides pension benefits for
eligible employees of the Predecessor Companies that are generally based on the
employee's actual eligible earnings and accrued interest. Through December 31,
1998, for certain eligible employees, a portion of their benefit may also be
based on the employee's years of benefit accrual service and highest average
eligible earnings. Effective January 1, 1999, the benefit formula under the plan
for all eligible employees was changed to a cash balance formula. Duke Energy's
policy is to fund amounts, as necessary, on an actuarial basis to provide assets
sufficient to meet benefits to be paid to plan members. Aspects of the plan
specific to the Predecessor Companies is as follows:
COMPONENTS OF NET PERIODIC PENSION COSTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................ $ 950 $ 911 $ 1,280
Interest cost............................................... 681 794 1,375
Expected return on plan assets.............................. (1,227) (1,391) (2,307)
Amortization of transition (asset)/liability................ (86) (86) (85)
Amortization of prior service cost.......................... 29 43 34
Amortization of (gains)/losses.............................. 6
Settlement gain............................................. (40)
------- ------- -------
Net periodic pension cost................................... $ 347 $ 231 $ 303
======= ======= =======
</TABLE>
F-28
<PAGE> 117
DUKE ENERGY FIELD SERVICES CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999--CONTINUED
RECONCILIATION OF FUNDED STATUS TO PRE-FUNDED PENSION COSTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 9,219 $14,651
Service cost................................................ 911 1,280
Interest cost............................................... 794 1,375
Intercompany transfers...................................... 802 8,519
Benefits paid............................................... (250) (190)
Actuarial (gains)/losses.................................... 3,261 (3,789)
Plan amendments............................................. (86)
------- -------
Benefit obligation at end of year........................... $14,651 $21,846
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $16,868 $20,211
Intercompany transfers...................................... 743 8,519
Actual return on plan assets................................ 2,580 4,985
Employer contributions...................................... 270 302
Benefits paid............................................... (250) (190)
------- -------
Fair value of plan assets at end of year.................... $20,211 $33,827
======= =======
Funded status............................................... $ 5,563 $11,982
Unrecognized net transition asset........................... (510) (425)
Unrecognized prior service cost............................. 302 268
Unrecognized gains.......................................... (794) (7,267)
------- -------
Pre-funded pension costs.................................... $ 4,561 $ 4,558
======= =======
</TABLE>
Intercompany transfers relate to benefit obligations and plan assets
associated with employees transferring between the Predecessor Companies and
other Duke Energy affiliates.
ASSUMPTIONS USED FOR PENSION BENEFIT ACCOUNTING
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 7.25% 6.75% 7.50%
Rate of increase in compensation levels..................... 4.75% 4.67% 4.50%
Expected long-term rate of return on plan assets............ 9.25% 9.25% 9.25%
</TABLE>
The Predecessor Companies also sponsor an employee savings plan which
covers substantially all employees. During 1997, 1998 and 1999, the Predecessor
Companies expensed plan contributions of $1.6 million, $1.8 million and $3.6
million, respectively.
The Predecessor Companies' postretirement benefits, in conjunction with
Duke Energy, consist of certain health care and life insurance benefits for
certain retired employees. Postretirement benefits costs were not material in
1997, 1998 and 1999.
F-29
<PAGE> 118
DUKE ENERGY FIELD SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 792 $ 172
Accounts receivable:
Customers, net......................................... 370,139 496,102
Affiliates............................................. 63,927 79,824
Other.................................................. 30,067 29,031
Receivable from parents -- working capital adjustments.... -- 95,751
Inventories............................................... 38,701 26,877
Notes receivable.......................................... 13,050 8,309
Other..................................................... 1,580 2,710
---------- ----------
Total current assets.............................. 518,256 738,776
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 2,409,385 4,619,169
INVESTMENT IN AFFILIATES.................................... 347,735 275,280
INTANGIBLE ASSETS:
Natural gas liquids sales contracts, net.................. 102,382 103,977
Goodwill, net............................................. 81,946 495,554
OTHER NONCURRENT ASSETS..................................... 12,131 79,536
---------- ----------
TOTAL ASSETS...................................... $3,471,835 $6,312,292
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade.................................................. $ 353,977 $ 561,806
Affiliates............................................. 62,370 75,252
Other.................................................. 33,858 30,765
Accrued taxes other than income........................... 15,653 19,617
Advances, net............................................. 1,579,475 --
Distributions payable -- Parents.......................... -- 2,744,319
Notes payable -- affiliates............................... 588,880 --
Other..................................................... 6,372 30,927
---------- ----------
Total current liabilities......................... 2,640,585 3,462,686
DEFERRED INCOME TAXES....................................... 308,308 979,013
NOTE PAYABLE TO PARENT...................................... 101,600 --
OTHER LONG TERM LIABILITIES................................. 34,871 33,703
COMMITMENTS AND CONTINGENT LIABILITIES
MINORITY INTEREST........................................... -- 521,705
STOCKHOLDER'S EQUITY:
Common Stock.............................................. 1 1
Paid-in capital........................................... 213,091 1,115,241
Retained earnings......................................... 173,091 199,943
Other comprehensive income................................ 288 --
---------- ----------
Total stockholder's equity........................ 386,471 1,315,185
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $3,471,835 $6,312,292
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-30
<PAGE> 119
DUKE ENERGY FIELD SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
MARCH 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
1999 2000
--------------- ---------------
<S> <C> <C>
OPERATING REVENUES:
Sales of natural gas and petroleum products............... $305,152 $1,415,465
Transportation, storage and processing.................... 29,845 35,746
-------- ----------
Total operating revenues.......................... 334,997 1,451,211
-------- ----------
COSTS AND EXPENSES:
Natural gas and petroleum products........................ 272,530 1,278,511
Operating and maintenance................................. 29,096 49,039
Depreciation and amortization............................. 20,029 37,899
General and administrative................................ 16,112 29,701
Net (gain) loss on sale of assets......................... (42) 4,139
-------- ----------
Total costs and expenses.......................... 337,725 1,399,289
-------- ----------
OPERATING INCOME (LOSS)..................................... (2,728) 51,922
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES............. 3,286 6,759
-------- ----------
EARNINGS BEFORE INTEREST AND TAXES.......................... 558 58,681
INTEREST EXPENSE............................................ (12,445) (14,477)
-------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................... (11,887) 44,204
INCOME TAX EXPENSE (BENEFIT)................................ (3,366) 17,352
-------- ----------
NET INCOME (LOSS)........................................... $ (8,521) $ 26,852
======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-31
<PAGE> 120
DUKE ENERGY FIELD SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
THREE MONTH PERIOD ENDED MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
------ ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000............. $ 1 $ 213,091 $173,091 $ 288 $ 386,471
Combination at March 31,
2000 -- see Note 2
Contribution of TEPPCO general
partner interest.............. (36,920) (36,920)
Contribution of notes and
advances payable.............. 2,285,294 (288) 2,285,006
Contributions of GPM assets and
liabilities................... 1,919,800 1,919,800
Distributions payable........... (2,744,319) (2,744,319)
Reclassification of Minority
Interest...................... (521,705) (521,705)
Net income......................... 26,852 26,852
--- ----------- -------- ----- -----------
Balance, March 31, 2000.............. $ 1 $ 1,115,241 $199,943 $ -- $ 1,315,185
=== =========== ======== ===== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE> 121
DUKE ENERGY FIELD SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
MARCH 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1999 2000
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (8,521) $ 26,852
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 20,029 37,899
Deferred income tax expense............................ 6,780 24,521
Equity in earnings of unconsolidated affiliates........ (3,286) (6,759)
Loss (gain) on sale of assets.......................... (42) 4,139
Net change in operating assets and liabilities:
Accounts receivable.................................... (66,206) 80,530
Inventories............................................ 1,757 (13,843)
Other current assets................................... 18,625 31,193
Other non-current assets............................... 16,610 3,016
Accounts payable....................................... 51,536 28,225
Other current liabilities.............................. (12,914) (10,132)
Other long term liabilities............................ 0 (19,436)
----------- ---------
Net cash provided by operating activities......... 24,368 186,205
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and other capital expenditures............... (1,443,961) (129,591)
Investment expenditures................................... (21,606) (521)
Investment distributions.................................. 7,379 5,662
Proceeds from sales of assets............................. 0 13,031
----------- ---------
Net cash used in investment activities............ (1,458,188) (111,419)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in advances -- parents............ 1,391,328 (75,406)
Proceeds from issuing debt................................ 42,368 0
----------- ---------
Net cash flows provided by (used in) financing
activities...................................... 1,433,696 (75,406)
NET DECREASE IN CASH AND CASH EQUIVALENTS:.................. (124) (620)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 168 792
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 44 $ 172
----------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE> 122
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. GENERAL
Duke Energy Field Services Corporation (collectively with its consolidated
subsidiaries, the Company) operates in the midstream natural gas gathering,
marketing and natural gas liquids industry. The Company is an indirect,
wholly-owned subsidiary of Duke Energy Corporation (Duke Energy). The Company
operates in the two principal segments of the midstream natural gas industry of
(1) natural gas gathering, processing, transportation, marketing and storage;
and (2) natural gas liquids (NGLs) fractionation, transportation, marketing and
trading.
The interim consolidated financial statements presented herein should be
read in conjunction with the combined financial statements and notes thereto of
Duke Energy Field Services Corporation and Affiliates. In the opinion of
management, all adjustments necessary for a fair presentation of the results for
the unaudited interim periods have been made. Except as explicitly noted, these
adjustments consist solely of normal recurring accruals.
2. COMBINATION
On March 31, 2000, the natural gas gathering, processing and natural gas
liquid assets, operations, and subsidiaries of Duke Energy were contributed to
Duke Energy Field Services, LLC (Field Services LLC). In connection with the
contribution of assets and subsidiaries at March 31, 2000, notes and advances
payable to Duke Energy were eliminated and contributed to stockholders' equity.
Also on March 31, 2000, Phillips Petroleum Company (Phillips) contributed its
midstream natural gas gathering, processing and natural gas liquid operations to
Field Services LLC. This contribution and Duke Energy's contribution to Field
Services LLC are referred to as "the Combination." In exchange for the
contributions, the Company received 69.7% of the member interests in Field
Services LLC, with Phillips holding the remaining 30.3% of the outstanding
member interests.
The Combination has been accounted for as a purchase business combination
in accordance with Accounting Principles Board Opinion (APB) No. 16 "Accounting
for Business Combinations". The Phillips assets, net of liabilities, have been
valued at $1,919.8 million. Goodwill of $412.9 million has been recorded
preliminarily for the deferred tax effect of the purchase price allocated to
property, plant and equipment being above the existing tax basis and will be
amortized on a straight-line basis over 20 years. Following is a summary of the
preliminary allocation of purchase price (in millions):
<TABLE>
<S> <C>
Property, plant and equipment............................... $2,073.0
Goodwill.................................................... 412.9
Deferred income taxes....................................... (607.5)
Other assets, net........................................... 41.4
--------
Total purchase price.............................. $1,919.8
========
</TABLE>
The purchase price has not yet been fully allocated to the individual
assets and liabilities acquired. The final allocation will be determined based
on independent appraisals.
In connection with the Combination, the Company has recorded a non-interest
bearing distribution payable to Phillips of $1,219.8 million and a non-interest
bearing distribution payable to Duke Energy of $1,524.5 million.
Working Capital Adjustments -- In connection with the Combination, Duke
Energy and Phillips each will either make contributions to Field Services LLC,
or receive distributions from Field Services LLC so that
F-34
<PAGE> 123
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
each of Duke Energy and Phillips will have contributed to Field Services LLC net
working capital positions equal to zero as of March 31, 2000.
Pro Forma Disclosures -- Revenues for the three months ended March 31, 1999
and 2000, on a pro forma basis would have increased $264.9 million and $542.4
million, respectively, and net income for the three months ended March 31, 1999
and 2000, on a pro forma basis would have decreased $8.2 million and increased
$17.0, respectively, if the acquisition of the Phillips midstream business had
occurred at the beginning of the period presented.
TEPPCO General Partner Interest -- On March 31, 2000, and in connection
with the Combination, Duke Energy contributed the general partner interest of
TEPPCO Partners L.P. to Field Services LLC. In connection with the contribution
of the general partner interest in TEPPCO, the Company recorded an investment in
TEPPCO of $2.3 million, recorded $39.2 million in non-current deferred tax
liability, and reduced stockholders' equity by $36.9 million.
TEPPCO is a publicly traded limited partnership that owns and operates a
network of pipelines for refined products and crude oil. The general partner is
responsible for the management and operations of TEPPCO. Through the ownership
of the general partner of TEPPCO, Field Services LLC has the right to receive
from TEPPCO incentive cash distributions in addition to a 2% share of
distributions based on the general partner interest. At TEPPCO's 1999 per unit
distribution level, the general partner received approximately 14% of the cash
distributed by TEPPCO to its partners. Due to the general partner's share of
unit distributions and control exercised through its management of the
partnership, the Company's investment in TEPPCO is accounted for under the
equity method.
3. ACQUISITIONS
Union Pacific Fuels, Inc. -- On March 31, 1999, the Company acquired the
assets and assumed certain liabilities of Union Pacific Fuels, Inc. (UP Fuels),
a wholly-owned subsidiary of Union Pacific Resources Corporation, for a total
purchase price of $1,359 million. The acquisition was accounted for under the
purchase method of accounting, and the assets and liabilities and results of
operations of UP Fuels have been consolidated in the Company's financial
statements since the date of purchase. Revenues and net income for the three
months ended March 31, 1999 on a pro forma basis would have increased $298
million and $3.4 million respectively, if the acquisition of UP Fuels had
occurred on January 1, 1999.
Conoco and Mitchell Assets -- On March 31, 2000, Field Services LLC (funded
by Duke Energy) acquired gathering and processing facilities located in central
Oklahoma from Conoco, Inc. and Mitchell Energy & Development Corp. Field
Services LLC paid cash of $99.5 million, and exchanged its interests in certain
gathering and marketing joint ventures located in southeast Texas having a total
net book value of $42.0 million as consideration for these facilities. The
exchange was accounted for as a like-kind exchange. These gathering and
processing assets are considered similar productive assets. Accordingly, no gain
or loss was recognized on the exchange.
4. AGREEMENTS AND TRANSACTIONS WITH DUKE ENERGY
Services Agreement with Duke Energy -- Effective with the Combination, the
Company entered into a services agreement with Duke Energy ("the Duke Energy
Services Agreement"). Under the Duke Energy Services Agreement, Duke Energy will
provide the Company with various staff and support services, including
information technology products and services, payroll, employee benefits,
corporate insurance, cash management, ad valorem taxes, treasury and legal
functions and shareholder services. These services will be priced on the basis
of a monthly charge approximating market prices. The Duke Energy Services
Agreement expires on December 31, 2000.
F-35
<PAGE> 124
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Transactions between Duke Energy and the Company -- Through March 31, 2000,
the Company has conducted a series of transactions with Duke Energy in which the
Company has sold a portion of its residue gas and NGLs to, purchased raw natural
gas and other petroleum products from, and provided gathering and transportation
services over its gathering systems and pipelines to, Duke Energy and its
subsidiaries at contractual prices that have approximated market prices in the
ordinary course of the Company's business. The Company anticipates continuing
these transactions in the ordinary course of business.
5. AGREEMENTS AND TRANSACTIONS WITH PHILLIPS
Services Agreement with Phillips -- Effective with the Combination, the
Company entered into a services agreement with Phillips ("the Phillips Services
Agreement"). Under the Phillips Services Agreement, Phillips will provide the
Company with various staff and support services, including information
technology products and services, cash management, real estate and property tax
services. These services will be priced on a basis of a monthly charge equal to
Phillips' fully-burdened cost of providing the services. The Phillips Services
Agreement expires on December 31, 2000.
Long-Term NGLs Purchases Contract with Phillips -- In connection with the
Combination, the Company has agreed to maintain the NGL Output Purchase and Sale
Agreement ("Phillips NGL Agreement") between Phillips and the midstream natural
gas assets that were contributed by Phillips to the Company in the Combination.
Under the Phillips NGL Agreement, Phillips 66 Company, a wholly-owned subsidiary
of Phillips, has the right to purchase at index-based prices approximately all
NGLs produced by the processing plants which were acquired by Field Services LLC
from Phillips in the Combination. The Phillips NGL Agreement also grants
Phillips 66 Company the right to purchase at index-based prices certain
quantities of NGLs produced at processing plants that are acquired and/or
constructed by the Company in the future in various counties in the
Mid-Continent and Permian Basis regions, and the Austin Chalk area. The primary
term of the agreement is effective until December 31, 2014.
Transactions between Phillips and the Midstream Business Acquired from
Phillips -- Through March 31, 2000, the Phillips' businesses (the "Phillips
Combined Subsidiaries") that owned the midstream natural gas assets that were
contributed to the Company in the Combination had conducted a series of
transactions with Phillips in which the Phillips Combined Subsidiaries sold a
portion of their residue gas and other by-products to Phillips at contractual
prices that approximated market prices. In addition, Phillips Combined
Subsidiaries purchased raw natural gas from Phillips at contractual prices that
have approximated market prices. The Company anticipates continuing these
transactions in the ordinary course of business.
6. FINANCING
Credit Facility with Financial Institutions -- In March 2000, Field
Services LLC entered into a $2,800 million credit facility with several
financial institutions. The credit facility will be used to support a commercial
paper program for short-term financing requirements. On April 3, 2000, Field
Services LLC borrowed $2,790.9 million in the commercial paper market to fund
one-time cash distributions of $1,524.5 million to Duke Energy, and $1,219.8
million to Phillips on such date and to meet working capital requirements. The
credit facility matures on March 30, 2001, and bears interest at a rate equal
to, at Field Services LLC's option, either (1) the London Interbank Offered Rate
(LIBOR) plus .50% per year for the first 90 days following March 31, 2000 and
LIBOR plus .625% per year thereafter, or (2) the higher of (a) the Bank of
America prime rate and (b) the Federal Funds rate plus .50% per year.
Revolving Credit Agreement -- Effective April 4, 2000, Field Services LLC
entered into a $100 million revolving credit agreement with Duke Capital
Corporation, an indirect, wholly-owned subsidiary of Duke Energy. The revolving
credit agreement will be used for short-term financing requirements. The
agreement terminates on May 31, 2000, and bears interest at the Bank of America
prime rate.
F-36
<PAGE> 125
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Historically, the Company's commodity price risk management program had
been directed by Duke Energy under its centralized program for controlling,
managing and coordinating its management of risks. During the three months ended
March 31, 1999 and 2000, the Company recorded a hedging gain of $4.0 million and
a hedging loss of $46.7 million, respectively, under Duke Energy's centralized
program. As of March 31, 2000, the existing commodity positions held under the
Duke Energy centralized program were transferred to Duke Energy.
Effective April 1, 2000, the Company began directing its risk management
activities, including commodity price risk for market fluctuations in the price
of NGLs, independently of Duke Energy. The Company plans to use commodity-based
derivative contracts to reduce the risk in the Company's overall earnings and
cash flow with the primary goals of: (1) maintaining minimum cash flow to fund
debt service, dividends and maintenance type capital projects; (2) avoiding
disruption of the Company's growth capital and value creation process; and (3)
retaining a high percentage of the potential upside relation to commodity price
increases. The Company has implemented a risk management policy that provides
guidelines for entering into contractual arrangements to manage commodity price
exposure. Futures and swaps will be used to manage and hedge prices related to
these market exposures.
In establishing its initial independent commodity risk management position,
on April 1, 2000 the Company acquired a portion of Duke Energy's existing
commodity derivatives held for non trading purposes. The absolute notional
contract quantity of the positions acquired was 4,607,000 barrels of crude oil.
Such positions were acquired at market value.
8. COMMITMENTS AND CONTINGENT LIABILITIES
The midstream natural gas industry has seen an increase in the number of
class action lawsuits involving royalty disputes, mismeasurement and mispayment
allegations. Although the industry has seen these types of cases before, they
were typically brought by a single plaintiff or small group of plaintiffs. Many
of these cases are now being brought as class actions. The Company and its
subsidiaries are currently named as defendants in certain of these cases.
Management believes the Company and its subsidiaries have meritorious defenses
to these cases, and therefore will continue to defend them vigorously. However,
these class actions can be costly and time consuming to defend.
9. PENSION AND OTHER BENEFITS
Effective March 31, 2000, participation by the Company's employees in Duke
Energy's non-contributory trustee pension plan and employee savings plan were
terminated. Effective April 1, 2000, the Company's employees began participation
in the Company's employee savings plan, in which the Company contributes 4% of
each eligible employee's qualified wages. Additionally, the Company matches
employees' contributions to the plan up to 6% of qualified wages.
10. BUSINESS SEGMENTS
The Company operates in two principal business segments as follows: (1)
natural gas gathering, processing, transportation, marketing and storage, and
(2) natural gas liquids fractionation, transportation, marketing and trading.
These segments are monitored separately by management for performance against
its internal forecast and are consistent with the Company's internal financial
reporting. These segments have been identified based on the differing products
and services, regulatory environment and the expertise required for these
operations. Margin, earnings before interest, taxes, depreciation and
amortization (EBITDA) and earnings before interest and taxes (EBIT) are the
performance measures utilized by management to monitor
F-37
<PAGE> 126
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the business of each segment. The accounting policies for the segments are the
same as those described in Note 1. Foreign operations are not material and are
therefore not separately identified.
The following table sets forth the Company's segment information for the
three months ended March 31, 1999 and 2000 and as of December 31, 1999 and March
31, 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS
ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 2000
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues:
Natural Gas............................................... $ 308,326 $ 899,214
NGLs...................................................... 72,582 798,816
Intersegment(a)........................................... (45,911) (246,819)
---------- ----------
Total operating revenues.......................... 334,997 1,451,211
---------- ----------
Margin:
Natural Gas............................................... 61,711 147,856
NGLs...................................................... 756 24,844
---------- ----------
Total margin...................................... 62,467 172,700
---------- ----------
Other operating costs:
Natural Gas............................................... 29,040 52,629
NGLs...................................................... 14 549
Corporate................................................. 16,112 29,701
---------- ----------
Total other operating costs....................... 45,166 82,879
---------- ----------
Equity in earnings of unconsolidated affiliates:
Natural Gas............................................... 3,286 6,514
NGLs...................................................... 245
---------- ----------
Total equity in earnings of unconsolidated
affiliates...................................... 3,286 6,759
---------- ----------
EBITDA(b):
Natural Gas............................................... 35,957 101,741
NGLs...................................................... 742 24,540
Corporate................................................. (16,112) (29,701)
---------- ----------
Total EBITDA...................................... 20,587 96,580
---------- ----------
Depreciation and amortization:
Natural Gas............................................... 19,456 34,030
NGLs...................................................... -- 3,027
Corporate................................................. 573 842
---------- ----------
Total depreciation and amortization............... 20,029 37,899
---------- ----------
EBIT:
Natural Gas............................................... 16,501 67,711
NGLs...................................................... 742 21,513
Corporate................................................. (16,685) (30,543)
---------- ----------
Total EBIT........................................ 558 58,681
---------- ----------
</TABLE>
F-38
<PAGE> 127
DUKE ENERGY FIELD SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS
ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 2000
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Corporate interest expense.................................. 12,445 14,477
---------- ----------
Income before income taxes:
Natural gas............................................... 16,501 67,711
NGLs...................................................... 742 21,513
Corporate................................................. (29,130) (45,020)
---------- ----------
Total income (loss) before income taxes........... $ (11,887) $ 44,204
========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF
----------------------------------
DECEMBER 31, MARCH 31,
1999 2000
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total assets:
Natural Gas............................................... $2,754,447 $5,329,520
NGLs...................................................... 225,702 191,337
Corporate(c).............................................. 491,686 791,435
---------- ----------
Total assets...................................... $3,471,835 $6,312,292
========== ==========
</TABLE>
- ---------------
(a) Intersegment sales represent sales of NGLs from the Natural Gas segment to
the NGLs segment at either index prices or weighted average prices of NGLs.
Both measures of intersegment sales are effectively based on current
economic market conditions.
(b) EBITDA consists of income from continuing operations before interest
expense, income tax expense, and depreciation and amortization expense, less
interest income. EBITDA is not a measurement presented in accordance with
generally accepted accounting principles. You should not consider it in
isolation from or as a substitute for net income or cash flow measures
prepared in accordance with generally accepted accounting principles or as a
measure of our profitability or liquidity. EBITDA is included as a
supplemental disclosure because it may provide useful information regarding
our ability to service debt and to fund capital expenditures. However, not
all EBITDA may be available to service debt.
(c) Includes items such as unallocated working capital, intercompany accounts
and intangible and other assets.
F-39
<PAGE> 128
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Phillips Gas Company
We have audited the accompanying consolidated balance sheets of Phillips
Gas Company as of December 31, 1998 and 1999, and the related consolidated
statements of income, changes in stockholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of Phillips Gas
Company at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 6, 2000
F-40
<PAGE> 129
PHILLIPS GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 27,045 $ 164,078
Accounts receivable
Affiliate................................................. 51,415 104,159
Trade (less allowances: 1998 -- $648; 1999 -- $329)....... 93,764 104,555
Inventories................................................. 4,957 3,066
Deferred income taxes....................................... 2,160 30,293
Prepaid expenses and other current assets................... 2,916 3,407
---------- ----------
Total Current Assets.............................. 182,257 409,558
Investments and long-term receivables....................... 13,013 9,585
Properties, plants and equipment (net)...................... 943,302 995,406
Deferred gathering fees..................................... 43,531 50,662
---------- ----------
Total............................................. $1,182,103 $1,465,211
========== ==========
LIABILITIES
Accounts payable
Affiliate................................................. $ 23,946 $ 106,410
Trade..................................................... 139,729 178,891
Deferred purchase obligation due within one year............ -- 8,300
Accrued income and other taxes.............................. 8,363 12,140
Other accruals.............................................. 212 63
---------- ----------
Total Current Liabilities......................... 172,250 305,804
Long-term debt due to affiliate............................. 560,000 1,350,000
Other liabilities and deferred credits...................... 4,908 3,065
Deferred income taxes....................................... 68,160 128,907
Deferred gain on sale of assets............................. 16,237 15,154
---------- ----------
Total Liabilities................................. 821,555 1,802,930
---------- ----------
STOCKHOLDER'S EQUITY/(DEFICIT)
Common stock -- 1,000 shares authorized at $.01 par value;
issued and outstanding -- 1,000 shares
Par value................................................. -- --
Capital in excess of par.................................. 142,917 --
Retained earnings/(accumulated deficit)..................... 217,631 (337,719)
---------- ----------
Total Stockholder's Equity/(Deficit).............. 360,548 (337,719)
---------- ----------
Total............................................. $1,182,103 $1,465,211
========== ==========
</TABLE>
See Notes to Financial Statements.
F-41
<PAGE> 130
PHILLIPS GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Natural gas liquids...................................... $ 711,785 $ 514,758 $ 714,439
Residue gas.............................................. 923,376 722,931 786,739
Other.................................................... 80,994 68,919 90,234
---------- ---------- ----------
Total Revenues................................. 1,716,155 1,306,608 1,591,412
---------- ---------- ----------
COSTS AND EXPENSES
Gas purchases............................................ 1,268,570 940,464 1,148,910
Operating expenses....................................... 190,385 186,572 176,864
Selling, general and administrative expenses............. 14,990 13,290 15,560
Depreciation............................................. 76,737 77,240 80,458
Interest expense......................................... 20,468 36,194 35,643
---------- ---------- ----------
Total Costs and Expenses....................... 1,571,150 1,253,760 1,457,435
---------- ---------- ----------
Income before income taxes............................... 145,005 52,848 133,977
Provision for income taxes............................... 54,998 21,535 52,244
---------- ---------- ----------
NET INCOME............................................... 90,007 31,313 81,733
Preferred stock dividend requirements.................... 30,813 -- --
---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK.................... $ 59,194 $ 31,313 $ 81,733
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-42
<PAGE> 131
PHILLIPS GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 90,007 $ 31,313 $ 81,733
Adjustments to reconcile net income to net cash provided
by operating activities
Non-working capital adjustments
Depreciation......................................... 76,737 77,240 80,458
Deferred taxes....................................... 38,700 41,550 60,747
Deferred gathering fees.............................. (7,803) (7,231) (7,131)
Gain on sale of assets............................... (1,965) (9,848) (907)
Other................................................ (2,119) (6,795) 644
Working capital adjustments
Decrease (increase) in accounts receivable........... 70,180 27,847 (63,465)
Decrease (increase) in inventories................... (798) 2,259 1,891
Decrease (increase) in prepaid expenses and other
current assets, including deferred taxes........... (1,654) 3,084 (28,624)
Increase (decrease) in accounts payable.............. (30,027) (98,776) 121,626
Increase (decrease) in taxes and other accruals...... (12,712) (6,191) 3,628
--------- --------- ---------
Net Cash Provided by Operating Activities................. 218,546 54,452 250,600
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures and investments...................... (116,520) (83,152) (124,009)
Proceeds from asset dispositions.......................... 5,499 17,611 442
--------- --------- ---------
Net Cash Used for Investing Activities.................... (111,021) (65,541) (123,567)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Preferred stock dividends................................. (34,922) -- --
Redemption of preferred stock............................. (345,000) -- --
Issuance of debt.......................................... 345,000 -- 10,000
Repayment of debt......................................... -- (95,000) --
Payment of note payable................................... (18,500) -- --
--------- --------- ---------
Net Cash Provided by (Used for) Financing Activities...... (53,422) (95,000) 10,000
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 54,103 (106,089) 137,033
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............. 79,031 133,134 27,045
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.................... $ 133,134 $ 27,045 $ 164,078
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-43
<PAGE> 132
PHILLIPS GAS COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES COMMON STOCK RETAINED
-------------------- --------------------- EARNINGS/
PREFERRED COMMON PREFERRED PAR CAPITAL IN (ACCUMULATED
STOCK STOCK STOCK VALUE EXCESS OF PAR DEFICIT)
----------- ------ --------- ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996............ 13,800,000 1,000 $ 345,000 -- $ 142,917 $ 131,233
Net income................... 90,007
Cash dividends paid on
preferred stock............ (34,922)
Redemption of preferred
stock...................... (13,800,000) (345,000)
----------- ----- --------- -- --------- ---------
December 31, 1997............ -- 1,000 -- -- 142,917 186,318
Net income................... 31,313
----------- ----- --------- -- --------- ---------
December 31, 1998............ -- 1,000 -- -- 142,917 217,631
Net income................... 81,733
Dividend declared............ (142,917) (637,083)
----------- ----- --------- -- --------- ---------
December 31, 1999............ -- 1,000 $ -- -- $ -- $(337,719)
=========== ===== ========= == ========= =========
</TABLE>
See Notes to Financial Statements.
F-44
<PAGE> 133
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Consolidation Principles and Basis of Presentation -- Phillips Gas Company
(PGC or the company) is a subsidiary of Phillips Petroleum Company (Phillips).
Phillips owns 100 percent of the company's outstanding common stock.
Majority-owned, controlled subsidiaries are consolidated. Investments in
affiliates in which the company owns 20 percent to 50 percent of voting control
are accounted for using the equity method.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosures of contingent assets and
liabilities. Actual results could differ from the estimates and assumptions
used.
Cash and Cash Equivalents -- Cash and cash equivalents are held by Phillips
as part of its centralized cash management system. Interest is paid monthly
based on the average daily balance of funds invested at a rate equal to the
weighted-average rate earned by Phillips or at the applicable federal funds
rate.
Cash equivalents are highly liquid short-term investments that are readily
convertible to known amounts of cash and have original maturities within three
months from their date of purchase.
Inventories -- Helium inventory is valued at cost, which is lower than
market, mainly on the last-in, first-out (LIFO) basis. Materials and supplies
are valued at, or below, average cost.
Derivative Contracts -- The company uses commodity swap and option
contracts. Commodity option contracts are recorded at market value through
monthly adjustments for unrealized gains and losses; however, swaps are not
marked to market. Gains and losses are recognized during the same period in
which the gains and losses from the underlying exposures being hedged are
recognized. In 1998 and 1999, the net realized and unrealized gains and losses
from derivative contracts were not material to the company's financial
statements.
Revenue Recognition -- Revenues associated with sales of natural gas,
natural gas liquids, and all other items are recorded when title passes to the
customer upon delivery.
Gas Exchanges and Imbalances -- Quantities of gas over-delivered or
under-delivered related to exchange or imbalance agreements are recorded monthly
as receivables or payables using the index price or the average price of gas at
the plant or system. Generally, these balances are settled with deliveries of
gas.
Depreciation -- Depreciation of plants and systems is determined using the
group composite straight-line method over an estimated life of 20 years for most
of the assets. Plants and systems are grouped for this purpose based on their
relative similarity and the degree of physical and economic interdependence
between individual pieces of equipment. Other relatively insignificant
properties and equipment are depreciated using the straight-line method over the
estimated useful lives of the individual assets.
Impairment of Assets -- Long-lived assets used in operations are assessed
for impairment whenever changes in facts and circumstances indicate a possible
significant deterioration in the future cash flows expected to be generated by
an asset group. If, upon review, the sum of the undiscounted pretax cash flows
are less than the carrying value of the asset group, the carrying value is
written down to estimated fair value.
The expected future cash flows used for impairment reviews and related fair
value calculations are based on the production volumes, prices and costs
considering all available evidence at the date of the review.
Property Dispositions -- When complete units of depreciable property are
retired or sold, the asset cost and related accumulated depreciation are
eliminated, with any gain or loss reflected in income. When less than complete
units of depreciable property are disposed of or retired, the difference between
asset cost and salvage value is charged or credited to accumulated depreciation
with no recognition of gain or loss. Retirements or sales of equipment, whether
complete units of depreciable property or less than complete units of
depreciable property, have been infrequent and not significant to the financial
statements.
F-45
<PAGE> 134
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Environmental Costs -- Environmental expenditures are expensed or
capitalized as appropriate, depending upon their future economic benefit.
Expenditures that relate to an existing condition caused by past operations, and
that do not have future economic benefit, are expensed. Liabilities for these
expenditures are recorded on an undiscounted basis when environmental
assessments or clean-ups are probable and the costs can be reasonably estimated.
Income Taxes -- Deferred taxes are computed using the liability method and
provided on all temporary differences between the financial reporting basis and
the tax basis of the assets and liabilities. Allowable tax credits are applied
currently as reductions of the provision for income taxes. The company's results
of operations for 1998 and 1999 were included in the consolidated federal income
tax return of Phillips, with any resulting tax liability or refund settled with
Phillips on a current basis. Income tax expense represents amounts due Phillips
for federal income taxes as if the company were filing a separate return, except
that the same principles and elections used in the consolidated return were
applied. Results of operations for 1997 were included in the separate federal
income tax return of Phillips Gas Company.
Income Per Share of Common Stock -- Income per share of common stock has
been omitted from the consolidated statement of income because all common stock
is owned by Phillips.
Comprehensive Income -- The company does not have any items of other
comprehensive income, as defined in Financial Accounting Standards Board (FASB)
Statement No. 130, "Reporting Comprehensive Income."
2. THE COMPANY'S BUSINESS
The company owns and operates natural gas gathering systems and processing
facilities concentrated in four major gas-producing areas in the Southwest. The
company's core gathering and processing regions are concentrated in the Permian
Basin area of West Texas and southeastern New Mexico, the Panhandle areas of
Texas and Oklahoma, and central and western Oklahoma. Under FASB Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information," the
four regions have been aggregated into a single segment for financial reporting
purposes. At December 31, 1999, the company wholly owned 15 natural gas liquids
extraction plants, and had an interest in another. The plants are located in
Texas (9), Oklahoma (3), and New Mexico (4). During 1999, the company purchased
a co-venturer's interest in the Artesia plant and gathering system in New Mexico
that the company had operated under a construction and operating agreement since
1959.
The company sells substantially all of its natural gas liquids to Phillips.
The company is able to interconnect to major gas transmission pipelines in each
of its regions in order to sell residue gas to local distribution companies,
electric utilities, various other business and industrial users and marketers.
The company's major residue gas markets are located primarily in Texas, Oklahoma
and the midwestern United States.
3. INVENTORIES
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Helium...................................................... $1,027 $ --
Materials, supplies and other............................... 3,930 3,066
------ ------
$4,957 $3,066
====== ======
</TABLE>
F-46
<PAGE> 135
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The company's helium inventory was sold in March 1999 for $4,989,000,
resulting in after-tax income of $2,575,000.
4. INVESTMENTS AND LONG-TERM RECEIVABLES
Components of investments and long-term receivables at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1999
------- ------
(IN THOUSANDS)
<S> <C> <C>
Investment in affiliated company............................ $ 3,328 $3,421
Long-term receivables....................................... 9,685 6,164
------- ------
$13,013 $9,585
======= ======
</TABLE>
In 1993 the company formed GPM Gas Gathering L.L.C. (GGG), a limited
liability company in which PGC invested approximately $4 million in exchange for
a 50 percent equity interest. In December 1993, the company sold a portion of
its gas gathering assets in the West Texas region of the Permian Basin to GGG
for $138 million. GGG is providing gas gathering services to the company under a
twenty-year contract. This contract does not represent a take-or-pay or
unconditional purchase obligation. Because of the company's continuing
involvement in GGG, a $22 million gain from the sale of the assets was deferred
and is being recognized over the economic life of the gathering assets. The
deferred gain recognized during 1998 and 1999 was $1,082,000 and $1,083,000,
respectively. Distributions received from GGG during 1998 and 1999 were
$1,153,000 and $955,000 respectively. See Note 10 for the gathering fees paid by
the company to GGG under this contract.
5. PROPERTIES, PLANTS AND EQUIPMENT
Properties, plants and equipment (net) at December 31 included the
following:
<TABLE>
<CAPTION>
USEFUL LIFE 1998 1999
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gathering.................................... 15-20 Years $1,529,026 $1,657,605
Processing................................... 15-20 Years 561,170 591,127
Work in progress............................. 42,694 6,484
Other........................................ 3-5 Years 10,670 11,788
---------- ----------
Total property, plant & equipment (at
cost)...................................... 2,143,560 2,267,004
Less accumulated depreciation and
amortization............................... 1,200,258 1,271,598
---------- ----------
$ 943,302 $ 995,406
========== ==========
</TABLE>
6. DEBT
Long-term debt due to affiliate at December 31 was:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Note due 2001............................................... $215,000 $ 225,000
Note due 2002............................................... -- 780,000
Note due 2005............................................... 345,000 345,000
-------- ----------
$560,000 $1,350,000
======== ==========
</TABLE>
F-47
<PAGE> 136
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
On December 9, 1999, Phillips Gas Company declared and distributed a
dividend to Phillips in the form of a note payable in the amount of $780
million. The note payable is due in full at maturity on December 9, 2002, bears
interest at a rate of 5.74 percent per annum, and may be paid prior to maturity
at any time without penalty or premium. The amount of the dividend exceeded the
company's historical-cost-based net assets, resulting in a negative balance in
stockholder's equity.
The declaration and payment of dividends is at the discretion of the
company's Board of Directors. In connection with each dividend declaration, the
Board of Directors makes a determination that, based upon its familiarity with
the company's business, prospects and financial condition, the company's recent
earnings history and forecast, an appraisal of the company's assets and
discussions with the company's executive officers, attorneys and accountants,
the dividend is a permitted dividend under Delaware law. This determination was
made prior to the declaration of the $780 million dividend made on December 9,
1999.
The note due 2001 bears interest at LIBOR plus 1/2 percent per annum (6.33
percent at December 31, 1999). Any amount repaid may be reborrowed as long as
the agreement is in effect. The note due 2005 bears interest at the applicable
federal mid-term rate (6.03 percent monthly rate for December 1999). The
carrying amount of the floating-rate debt approximates fair value.
7. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
The company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, accounts receivable and
over-the-counter derivative contracts. Derivative contracts are immaterial to
the financial statements of the company.
The company's cash and cash equivalents are held by Phillips as part of its
centralized cash management system. Cash equivalents are in high-quality
securities placed with major international banks and financial institutions.
Phillips' investment policy limits the company's exposure to concentrations of
credit risk with respect to its cash equivalent investments.
The company's affiliate receivables result primarily from its sales of
natural gas liquids and residue gas to Phillips. The company's trade receivables
result primarily from domestic sales of residue gas to local distribution
companies, electric utilities, various other business and industrial end-users,
and marketers. The company routinely assesses the financial strength of its
unaffiliated residue-gas customers. The company considers its concentrations of
credit risk, other than those with Phillips, to be limited.
Fair Values of Financial Instruments
The following methods and assumptions were used by the company in
estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet approximates fair value because of the short-term nature of these
investments.
Deferred purchase obligation due within one year: The carrying amount
reported in the balance sheet approximates fair value because of the
short-term nature of the obligation.
Long-term debt: The carrying amount of the company's floating- and
fixed-rate debt approximates fair value based on current market rates.
F-48
<PAGE> 137
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
8. PREFERRED STOCK
On December 15, 1997, the company redeemed its 13,800,000 shares of Series
A 9.32% Cumulative Preferred Stock at par. The liquidation value for each Series
A preferred share was $25, plus $.2006 for unpaid dividends.
9. CONTINGENT LIABILITIES
The company is a party to a number of legal proceedings pending in various
courts or agencies for which no provision has been made. Costs related to
contingencies are provided when a loss is probable and the amount can be
reasonably estimated. These accruals are not discounted for delays in future
payment and are not reduced for potential insurance recoveries. If applicable,
undiscounted receivables are accrued for probable insurance recoveries.
A judgment has been entered in the case of Chevron U.S.A., Inc. versus GPM
Gas Corporation (GPM), a wholly owned subsidiary of the company, upholding and
construing most favored nations clauses in three 1961 West Texas gas purchase
contracts. Although a federal district court decided that GPM owes Chevron
damages in the amount of $13,828,030 through July 31, 1998, plus 6 percent
interest from that date and attorneys' fees in the amount of $329,994, GPM has
appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit.
Based on currently available information, after taking into consideration
amounts already accrued and the pending appeal in the Chevron litigation, PGC
believes that any liability resulting from any of the above matters will not
have a material adverse effect on its financial statements. However, such
matters could have a material effect on results of operations in a particular
quarter or fiscal year as they develop or as new issues are identified.
10. RELATED PARTY TRANSACTIONS
Significant transactions with affiliated parties were:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues(a)................................ $758,700 $537,528 $725,478
Gas purchases(b)..................................... 118,827 76,617 100,253
Operating expenses(c)(e)(h).......................... 115,698 113,475 110,897
Selling, general and administrative
expenses(c)(d)(e).................................. 12,828 10,059 13,306
Interest income(f)................................... 2,701 2,430 2,487
Interest expense(g).................................. 20,340 35,880 35,610
</TABLE>
- ------------
(a) The company sells a portion of its residue gas and other by-products to
Phillips at contractual prices that approximate market prices. The company
sells substantially all of its natural gas liquids to Phillips at prices
based upon quoted market prices for fractionated natural gas liquids, less
charges for transportation, fractionation and quality-adjustment fees.
Effective January 1, 2000, the pricing formula contained in the natural gas
liquids supply arrangement with Phillips was renegotiated, as allowed under
the contract, to reflect current market conditions. The new arrangement
will be maintained for an initial term of 15 years. PGC believes that the
loss of Phillips as a natural gas liquids customer would have a material,
adverse effect on its revenues and operating results.
(b) The company purchases raw gas from Phillips at contractual prices that
approximate market prices. During 1999, Phillips provided the company with
approximately 8 percent of its raw gas throughput, under long-term supply
contracts, making Phillips its largest single supplier. PGC believes that
the loss of
F-49
<PAGE> 138
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Phillips as a raw gas supplier would have a material adverse effect on its
dedicated raw gas supplies and its operating results.
(c) Phillips provides the company with various field services (costs included
in operating expenses) and other general administrative services (costs
included in selling, general and administrative expenses) including
insurance, personnel administration, office space, communications, data
processing, engineering, automotive and other field equipment, and other
miscellaneous services. Charges for these services and benefits are based
on usage and actual costs or other allocation methods the company considers
reasonable.
(d) Phillips charges the company a portion of its corporate indirect overhead
costs including executive, legal, treasury, planning, tax, auditing and
other corporate services, under an administrative services agreement.
Charges for these services and benefits are based on usage and actual costs
or other allocation methods the company considers reasonable.
(e) All operational and staff personnel requirements are met by Phillips'
employees, most of whom are associated with the GPM Gas Services Company
division of Phillips. All services provided by Phillips, including (c) and
(d) above, are priced to reimburse Phillips for its actual costs. Charges
for these services and benefits are based on usage and actual costs or
other allocation methods the company considers reasonable. Selling, general
and administrative expenses included a severance charge reversal of $2
million in 1998, and a $2 million severance charge in 1999.
(f) The company earns interest from participation in Phillips' centralized cash
management system.
(g) The company incurs interest expense on borrowings from and debt to
Phillips.
(h) Beginning January 1, 1994, the company began paying GGG a fee for gas
gathering services under a long-term contract. The gas gathering fee
structure in the long-term contract contains a component that is paid to
GGG in an accelerated manner. Because GGG is providing the same gas
gathering services to the company over the contract period, recognition of
expenses related to this component of the gathering fee is deferred and
recognized on a straight-line basis through the remaining period of the
long-term contract. In 1997, 1998 and 1999, the total gathering fees were
$42,755,000, $42,951,000 and $41,447,000, respectively, of which
$34,952,000, $35,720,000 and $34,316,000, respectively, were expensed.
The company provides Phillips with other minor administrative services.
Costs allocated to Phillips for these services have been netted against the
above direct charges from Phillips and were $120,000, $79,000 and $72,000 in
1997, 1998 and 1999, respectively.
The company periodically buys from, or sells to, Phillips various assets
used in the operations of the business. These net acquisitions were recorded at
the assets' historical net book values, which generally approximated fair market
value, and totaled $22,000, $60,000 and $239,000 in 1997, 1998 and 1999,
respectively. Prior to such acquisition or sale, the company paid or received a
fee based on usage of such assets (included in operating expenses above). In
addition, the company purchases plastic pipe from Phillips, which is used in the
construction of gathering systems. Purchases in 1997, 1998 and 1999 were
$3,942,000, $2,276,000 and $2,175,000, respectively.
11. EMPLOYEE BENEFIT PLANS
Substantially all employees of Phillips' GPM Gas Services Company division
participate in Phillips' benefit plans, including pension plans, defined
contribution plans, stock option plans and health and life insurance plans.
Costs are allocated to the company based principally on base payroll costs of
participating employees. Total benefit plan costs charged to the company were
$22,095,000, $22,522,000 and $21,005,000 for the years ended 1997, 1998 and
1999, respectively.
F-50
<PAGE> 139
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
12. INCOME TAXES
Taxes charged to income were:
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current.............................................. $17,117 $(23,339) $19,072
Deferred............................................. 31,114 40,747 25,646
State
Current.............................................. 443 215 558
Deferred............................................. 6,324 3,912 6,968
------- -------- -------
$54,998 $ 21,535 $52,244
======= ======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Major components of the
company's deferred taxes at December 31 were:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities
Depreciation................................................ $164,065 $188,829
Prepaid gas gathering fees.................................. 17,612 20,374
-------- --------
Total deferred tax liabilities.............................. 181,677 209,203
-------- --------
Deferred Tax Assets
Alternative minimum tax credit carryforward................. 55,385 55,385
Net operating loss carryforwards............................ 45,104 36,312
Deferred gain on sale of assets............................. 6,495 6,062
Investment in partnerships.................................. 3,553 4,549
Contingency accruals........................................ 2,973 4,924
Benefit plan accruals....................................... 1,715 2,030
Other (net)................................................. 452 1,327
-------- --------
Total deferred tax assets................................... 115,677 110,589
-------- --------
Net deferred tax liabilities................................ $ 66,000 $ 98,614
======== ========
</TABLE>
The tax bases in the company's assets were increased as a result of the
1992 transfer of substantially all of its assets to GPM Gas Corporation and the
subsequent issuance and sale of preferred stock. The net operating loss
carryforwards and the alternative minimum tax credit carryforwards resulted
primarily from tax depreciation on the increased bases in the company's assets.
The company believes it is more likely than not that it will fully realize
its deferred tax assets, and, accordingly, a valuation allowance has not been
provided. Management expects that the deferred tax assets will be realized as
reductions in future taxable operating income or by utilizing available tax
planning strategies. Uncertainties that may affect the realization of these
assets include tax law changes, change in control as discussed in Note 16, and
the future level of product costs. Therefore, the company periodically reviews
its ability to realize these assets and will establish a valuation allowance if
needed.
At December 31, 1999, the company had net operating loss carryforwards of
$71 million for U.S. income tax purposes, and $221 million for state income tax
purposes. The U.S. income tax carryforwards begin
F-51
<PAGE> 140
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
expiring in 2009, and the state income tax carryforwards begin expiring in 2000.
The alternative minimum tax credit can be carried forward indefinitely to reduce
the company's regular tax liability.
The reconciliation of income tax at the federal statutory rate with the
provision for income taxes follows:
<TABLE>
<CAPTION>
PERCENT OF
PRETAX INCOME
------------------
1997 1998 1999 1997 1998 1999
------- ------- ------- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax....... $50,752 $18,497 $46,892 35.0% 35.0% 35.0%
State income tax................... 4,399 2,683 4,893 3.0 5.1 3.7
Other.............................. (153) 355 459 (0.1) 0.6 0.3
------- ------- ------- ---- ---- ----
$54,998 $21,535 $52,244 37.9% 40.7% 39.0%
======= ======= ======= ==== ==== ====
</TABLE>
13. KEEP WELL REPLACEMENT AGREEMENT
The redemption of the company's outstanding shares of Series A 9.32%
Cumulative Preferred Stock on December 15, 1997, cancelled the previous Keep
Well Agreement and triggered the need for a Keep Well Replacement Agreement
between Phillips and PGC. The Keep Well Replacement Agreement provides for
Phillips to maintain PGC's consolidated tangible net worth in an amount not less
than $50 million, or to irrecoverably and unconditionally guaranty the full and
timely performance, payment and discharge by PGC of all its obligations and
liabilities. Effective February 1, 2000, Phillips furnished a guaranty to GGG
assuring payment by PGC of all its existing or future obligations and
liabilities to GGG.
14. CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-Cash Investing and Financing Activities
Liquidating dividend to parent company in the form of a
promissory note...................................... $ -- $ -- $780,000
Deferred payment obligation to purchase property, plant
and equipment........................................ -- -- 8,300
Cash Payments
Interest............................................... 20,452 36,108 32,789
Income taxes, including payments to Phillips........... 25,432 123 20,773
</TABLE>
The deferred purchase obligation resulted from the company's July 1, 1999,
purchase of American Liberty Oil Company's interest in the Artesia plant and
gathering system in New Mexico. At the time of closing, a partial cash payment
was made. A second and final payment was made on January 3, 2000.
15. OTHER FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes other than income and payroll taxes............... $10,765 $10,772 $12,626
</TABLE>
16. PROPOSED BUSINESS COMBINATION
On December 16, 1999, Phillips and Duke Energy Corporation (Duke Energy)
announced that they had signed definitive agreements to combine the two
companies' gas gathering, processing and marketing
F-52
<PAGE> 141
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
businesses to form a new midstream company to be called Duke Energy Field
Services, LLC (Field Services LLC). The definitive agreements have been
unanimously approved by both companies' Boards of Directors. Subject to
regulatory approval, the transaction is expected to close by the end of the
first quarter of 2000.
If the transaction closes as expected, the subsidiaries of PGC will be
contributed to Field Services LLC in a partially tax-free exchange, and those
subsidiaries will cease to be wholly owned subsidiaries of Phillips. As part of
the transaction, the existing natural gas liquids purchase contract between
Phillips and the company will be maintained by the new company for an initial
term of 15 years. At closing, Duke Energy will own about 70 percent of Field
Services LLC, and Phillips will own about 30 percent.
17. IMPACT OF TRANSITION TO YEAR 2000 (UNAUDITED)
PGC relies on Phillips for computer systems, hardware and software for
operation of its facilities and business support systems. PGC's operations and
facilities were included as part of Phillips' companywide Year 2000 Project that
addressed the issue of computer programs and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000. That project is
now complete. With the rollover into 2000, neither PGC nor Phillips experienced
any significant Year 2000 failures. Some minor Year 2000 issues occurred and
were resolved, but none have had a material impact on PGC's results of
operations, liquidity, financial condition or safety record. The total costs
associated with Year 2000 issues were not material to PGC's or Phillips'
financial position. Phillips continues to monitor its mission-critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
F-53
<PAGE> 142
PHILLIPS GAS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
-------- --------
(UNAUDITED)
<S> <C> <C>
REVENUES
Natural gas liquids......................................... $104,035 $286,961
Residue gas................................................. 141,706 224,524
Other....................................................... 19,910 33,345
-------- --------
Total Revenues......................................... 265,651 544,830
-------- --------
COSTS AND EXPENSES
Gas purchases............................................... 189,421 377,659
Operating expenses.......................................... 42,741 47,285
Selling, general and administrative expenses................ 4,880 4,251
Depreciation................................................ 19,262 20,700
Interest expense............................................ 7,255 20,492
-------- --------
Total Costs and Expenses............................... 263,559 470,387
-------- --------
Income before income taxes.................................. 2,092 74,443
Provision for income taxes.................................. 851 29,110
-------- --------
NET INCOME.................................................. $ 1,241 $ 45,333
======== ========
</TABLE>
See Notes to Financial Statements.
F-54
<PAGE> 143
PHILLIPS GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................................. $ 1,241 $ 45,333
Adjustments to reconcile net income to net cash provided by
operating activities
Non-working capital adjustments
Depreciation......................................... 19,262 20,700
Deferred taxes....................................... 5,783 13,891
Deferred gathering fees.............................. (1,679) (1,651)
Gain on sale of assets............................... (212) (88)
Other................................................ 337 1,896
Working capital adjustments
Decrease (increase) in accounts receivable........... 4,028 (13,646)
Decrease (increase) in inventories................... 1,000 (298)
Decrease in prepaid expenses and other current
assets, including deferred taxes.................. 555 14,338
Decrease in accounts payable......................... (17,224) (64,535)
Decrease in taxes and other accruals................. (1,875) (753)
-------- --------
Net Cash Provided by Operating Activities................... 11,216 15,187
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures and investments........................ (13,532) (11,985)
Proceeds from asset dispositions............................ 55 673
-------- --------
Net Cash Used for Investing Activities...................... (13,477) (11,312)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of note payable..................................... -- (8,300)
-------- --------
Net Cash Used for Financing Activities...................... -- (8,300)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (2,261) (4,425)
Cash and cash equivalents at beginning of period............ 27,045 164,078
-------- --------
Cash and Cash Equivalents at End of Period.................. $ 24,784 $159,653
======== ========
</TABLE>
See Notes to Financial Statements.
F-55
<PAGE> 144
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
The financial information for the interim periods presented in the
financial statements included in this report is unaudited and includes all known
accruals and adjustments that Phillips Gas Company (PGC or the company)
considers necessary for a fair statement of the results for such periods. All
such adjustments are of a normal and recurring nature.
2. BUSINESS COMBINATION
On March 31, 2000, Phillips Petroleum Company (Phillips) combined its gas
gathering, processing and marketing business with Duke Energy Corporation's
(Duke Energy) gas gathering, processing and marketing business to form a new
midstream company called Duke Energy Field Services LLC (DEFS).
PGC contributed its holdings in its limited-liability-company subsidiaries
to DEFS in a tax-free exchange. The operations of these subsidiaries comprise
substantially all of the operations of PGC. Effective March 31, 2000, the
company is accounting for its investment in DEFS using the equity method.
In connection with the combination DEFS borrowed approximately $2.75
billion of short-term debt. In April 2000, the proceeds of the debt were used to
make one-time cash distributions of approximately $1,525 million to Duke Energy
and $1,220 million to Phillips. Duke Energy owns about 70 percent of DEFS, and
Phillips, through PGC, owns about 30 percent.
3. INCOME TAXES
The company's effective tax rate for the first three months of 1999 was 41
percent, compared with 39 percent for the same period of 2000.
Deferred income taxes are computed using the liability method and provided
on all temporary differences between the financial reporting basis and the tax
basis of the assets and liabilities. Allowable tax credits are applied currently
as reductions of the provision for income taxes. The results of operations for
1999 and 2000 are included in the consolidated federal income tax return of
Phillips, with any resulting tax liability or refund settled with Phillips on a
current basis. Income tax expense represents PGC on a separate return basis,
except that the same principles and elections used in the consolidated return
were applied.
4. RELATED PARTY TRANSACTIONS
Significant transactions with affiliated parties were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues.......................................... $110,613 $287,294
Gas purchases............................................... 17,970 35,499
Operating expenses.......................................... 27,363 29,509
Selling, general and administrative expenses................ 4,361 3,750
Interest income............................................. 452 2,618
Interest expense............................................ 7,224 20,474
</TABLE>
Prior to the contribution of its subsidiaries to DEFS on March 31, 2000,
the company purchased raw gas from, and sold a portion of its residue gas and
substantially all of its natural gas liquids to, Phillips. Phillips also
provided the company with various field and general administrative services. In
addition, the company purchased Phillips' plastic pipe, which is used in the
construction of gathering systems.
F-56
<PAGE> 145
PHILLIPS GAS COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The company earns interest from participation in Phillips' centralized cash
management system and incurs interest expense on its borrowings from Phillips.
The company paid gathering fees to GPM Gas Gathering L.L.C. (GGG) until it
contributed its equity interest in GGG into DEFS on March 31, 2000. In the first
three months of 1999 and 2000, net fees paid to GGG for gas gathering services
were $10,334,831 and $10,101,951, respectively; $8,655,478 and $8,450,827 were
expensed.
Selling, general and administrative expenses included a $2 million
severance charge during the first three months of 1999.
5. CASH FLOW INFORMATION
NON-CASH INVESTING ACTIVITIES
On March 31, 2000, the company contributed its holdings in its
limited-liability-company subsidiaries to DEFS. The contribution included
property, plant and other assets and liabilities held by these companies, except
for cash invested with Phillips, deferred taxes and current taxes payable.
Other non-cash investing activities and cash payments for the three-month
periods ended March 31 were as follows:
<TABLE>
<CAPTION>
1999 2000
------ -------
(IN THOUSANDS)
<S> <C> <C>
CASH PAYMENTS
Interest.................................................... $7,296 $20,477
Income taxes, including payments to Phillips................ 1,432 21
</TABLE>
F-57
<PAGE> 146
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management of
Duke Energy Field Services
Denver, Colorado
We have audited the accompanying combined statements of income and cash
flows of the UPFuels Division of Union Pacific Resources Group Inc. (a Utah
Corporation) for the year ended December 31, 1998 and the three-month period
ended March 31, 1999. These financial statements are the responsibility of the
UPFuels Division's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 combined financial statements referred to above present
fairly, in all material respects, the combined results of operations and cash
flows of the UPFuels Division for the year ended December 31, 1998, and the
three-month period ended March 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 10, 2000
F-58
<PAGE> 147
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Union Pacific Resources Group Inc.
Fort Worth, Texas
We have audited the accompanying combined statements of income and cash
flows for the year ended December 31, 1997 of the UPFuels Division of Union
Pacific Resources Group Inc. (as restated). These financial statements are the
responsibility of the UPFuels Division's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined results of operations and cash flows of the
UPFuels Division for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
June 12, 1998
F-59
<PAGE> 148
UPFUELS DIVISION
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND FOR THE QUARTER ENDED MARCH
31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999
------ -------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Operating revenues:
Gathering and processing.................................. $321.7 $ 227.2 $ 54.5
Pipelines................................................. 401.2 305.0 75.8
Marketing................................................. 2,761.6 3,062.8 784.0
Intersegment.............................................. (269.3) (188.6) (45.2)
------ -------- --------
Total operating revenues............................ 3,215.2 3,406.4 869.1
------ -------- --------
Product purchases:
Gathering and processing.................................. 157.1 119.6 30.9
Pipelines................................................. 312.4 198.4 44.9
Marketing................................................. 2,728.5 2,986.3 757.9
Intersegment.............................................. (269.3) (188.6) (45.2)
------ -------- --------
Total product purchases............................. 2,928.7 3,115.7 788.5
------ -------- --------
Gross margin:
Gathering and processing.................................. 164.6 107.6 23.6
Pipelines................................................. 88.8 106.6 30.9
Marketing................................................. 33.1 76.5 26.1
------ -------- --------
Total gross margin.................................. 286.5 290.7 80.6
------ -------- --------
Operating expenses:
Gathering and processing.................................. 57.9 66.4 17.7
Pipelines................................................. 27.3 37.3 7.8
Marketing................................................. -- -- --
------ -------- --------
Total operating expenses............................ 85.2 103.7 25.5
------ -------- --------
General & administrative expenses:
Gathering and processing.................................. 6.0 8.0 1.9
Pipelines................................................. 1.3 2.9 0.7
Marketing................................................. 13.0 13.0 3.0
Corporate................................................. 7.0 7.2 2.0
------ -------- --------
Total general & administrative expenses............. 27.3 31.1 7.6
------ -------- --------
Depreciation and amortization expense
Gathering and processing.................................. 44.0 41.6 11.8
Pipelines................................................. 29.4 32.7 8.0
Marketing................................................. 1.1 6.2 4.1
------ -------- --------
Total depreciation and amortization expense......... 74.5 80.5 23.9
------ -------- --------
Operating income (loss):
Gathering and processing.................................. 56.7 (8.4) (7.8)
Pipelines................................................. 30.8 33.7 14.4
Marketing................................................. 19.0 57.3 19.0
Corporate................................................. (7.0) (7.2) (2.0)
------ -------- --------
Total operating income.............................. 99.5 75.4 23.6
------ -------- --------
Other income................................................ -- 0.6 --
Minority interest........................................... (9.8) (7.6) (2.1)
------ -------- --------
Income before income taxes.................................. 89.7 68.4 21.5
Income taxes................................................ 33.2 25.3 8.0
------ -------- --------
Net income.................................................. $ 56.5 $ 43.1 $ 13.5
====== ======== ========
</TABLE>
The accompanying accounting policies and notes to the combined
financial statements are an integral part of these statements.
F-60
<PAGE> 149
UPFUELS DIVISION
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND FOR THE QUARTER ENDED MARCH
31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999
------- ------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Cash provided by operations:
Net income................................................ $ 56.5 $ 43.1 $ 13.5
Depreciation and amortization.......................... 74.5 80.5 23.9
Deferred income taxes.................................. 15.1 (24.0) 10.8
Minority interest earnings............................. 9.8 7.6 2.1
Other non-cash charges (credits) -- net................ 8.1 (1.0) (0.4)
Changes in current assets and liabilities................. 14.6 (35.8) 18.0
------- ------- ------
Cash provided by operations....................... 178.6 70.4 67.9
------- ------- ------
Investing activities:
Capital expenditures...................................... (168.5) (143.8) (32.0)
Acquisition of Highlands Gas Corporation.................. (179.4) -- --
Acquisition of certain assets of Norcen................... -- (83.2) --
------- ------- ------
Cash used by investing activities................. (347.9) (227.0) (32.0)
------- ------- ------
Financing activities:
Capital contributions by/(distributions to) Union Pacific
Resources Group Inc. .................................. 187.4 170.0 (39.9)
Distributions to minority interest owners................. (20.2) (11.3) (1.5)
------- ------- ------
Cash provided by (used in) financing activities... 167.2 158.7 (41.4)
------- ------- ------
Net change in cash and temporary investments................ (2.1) 2.1 (5.5)
Balance at beginning of period.............................. 9.5 7.4 9.5
------- ------- ------
Balance at end of period.................................... $ 7.4 $ 9.5 $ 4.0
======= ======= ======
Changes in current assets and liabilities:
Accounts receivable....................................... 1.4 13.1 35.7
Inventories............................................... (15.2) (10.4) 12.7
Other current assets...................................... (5.2) 11.3 0.7
Accounts payable.......................................... 30.5 (45.9) (29.4)
Other current liabilities................................. 3.1 (3.9) (1.7)
------- ------- ------
Total............................................. $ 14.6 $ (35.8) $ 18.0
======= ======= ======
</TABLE>
The accompanying accounting policies and notes to the combined
financial statements are an integral part of these statements.
F-61
<PAGE> 150
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination. The combined financial statements include the
accounts of certain gathering, processing, transporting and marketing operations
of companies which are wholly-owned subsidiaries of Union Pacific Resources
Group Inc. ("UPR"), a Utah Corporation. In addition, the combined financial
statements include the operations of certain gathering and processing assets
owned by wholly-owned subsidiaries of UPR that are not included in their
entirety herein. Collectively, these wholly-owned subsidiaries and assets are
considered and referred to herein as the "UPFuels Division" of UPR. All material
intra-divisional transactions have been eliminated.
The UPFuels Division accounts for its investments in pipeline partnerships
and joint ventures under the equity method of accounting for entities owned
20%-50% by the UPFuels Division and fully consolidates entities owned greater
than 50% by the UPFuels Division. The minority interest recorded by the UPFuels
Division represents the ownership of other parties in entities in which the
UPFuels Division owns greater than 50% but less than 100%.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. Management believes its estimates and
assumptions are reasonable; however, there are a number of risks and
uncertainties which may cause actual results to differ materially from the
estimates.
Depreciation and amortization. Provisions for depreciation of property,
plant and equipment are computed on the straight-line method based on estimated
service lives which range from three to 30 years. The cost of acquired gas
purchase and marketing contracts are amortized using the straight-line method
over the applicable period. Goodwill is being amortized using the straight-line
method over 20 years. Amortization of goodwill was $2.0 million, $4.5 million
and $1.1 million for the years ended December 31, 1997 and 1998 and for the
quarter ended March 31, 1999, respectively. The value of goodwill is
periodically evaluated based on the expected future undiscounted operating cash
flows to determine whether any potential impairment exists.
Revenue Recognition. The UPFuels Division recognizes revenues as gas and
natural gas liquids are delivered and services are rendered. Revenues are
recorded on an accrual basis, including an estimate for gas and natural gas
liquids delivered but unbilled at the end of each accounting period.
Derivative Financial Instruments. Unrealized gains/losses on derivative
financial instruments used for hedging purposes are not recorded. Recognition of
realized gains/losses and option premium payments/receipts are deferred and
recorded in the combined statement of income when the underlying physical
product is purchased or sold. The cash flow impact of derivative and other
financial instruments is reflected in cash provided by operations in the
combined statements of cash flows.
Income Taxes. The UPFuels Division is included in the consolidated Federal
income tax return of UPR. The consolidated Federal income tax liability of UPR
is allocated among all corporate entities on the basis of the entity's
contributions to the consolidated Federal income tax liability. Full benefit of
tax losses and credits made available and utilized in UPR's consolidated Federal
income tax returns are being allocated to the individual companies generating
such items. Income tax expense represents federal income taxes as if the company
were filing a separate return.
Environmental Expenditures. Environmental expenditures related to treatment
or cleanup are expensed when incurred, while environmental expenditures which
extend the life of the property or prevent future contamination are capitalized
in accordance with generally accepted accounting principles. Liabilities for
these expenditures are recorded when it is probable that obligations have been
incurred and the amounts can
F-62
<PAGE> 151
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
be reasonably estimated, based on current law and existing technologies.
Environmental accruals are recorded at undiscounted amounts and exclude claims
for recoveries from insurance or other third parties.
Earnings Per Share. Earnings per share have been omitted from the combined
statements of income as the UPFuels Division was wholly owned by UPR for all
periods presented.
1. NATURE OF OPERATIONS
The UPFuels Division owns and operates natural gas and natural gas liquids
gathering and pipeline systems and gas processing plants and is engaged in the
business of purchasing, gathering, processing, transporting, storing and
marketing natural gas and natural gas liquids. Through a related party
transaction, the UPFuels Division markets a substantial portion of UPR's natural
gas and natural gas liquid production together with significant volumes of
natural gas and natural gas liquids produced by others. The UPFuels Division has
a diverse customer base for its hydrocarbon products.
The UPFuels Division's results of operations are largely dependent on the
difference between the prices received for its hydrocarbon products and the cost
to acquire and market such resources. Hydrocarbon prices are subject to
fluctuations in response to changes in supply, market uncertainty and a variety
of factors beyond the control of the UPFuels Division. These factors include
worldwide political instability, the foreign supply of oil and natural gas, the
price of foreign imports, the level of consumer demand and the price and
availability of alternative fuels. Historically, the UPFuels Division has been
able to manage a portion of the operating risk relating to hydrocarbon price
volatility through hedging activities.
2. ACQUISITION OF THE UPFUELS DIVISION BY DUKE ENERGY FIELD SERVICES INC.
In November 1998, UPR reached an agreement with Duke Energy Field Services,
Inc. whereby Duke Energy Field Services would acquire certain gathering,
processing, pipeline and marketing assets of UPR. The sale transaction closed
effective March 31, 1999, with the purchase price being $1.35 billion. Certain
liabilities primarily income tax and retiree benefits obligations, were not
assumed by Duke Energy Field Services in connection with the sale transaction.
3. RELATED PARTY TRANSACTIONS
The UPFuels Division enters into certain natural gas and crude hedging
transactions on behalf of UPR. Services performed by UPR on behalf of the
UPFuels Division include cash management, internal audit and tax and employee
benefits administration. In the UPFuels Division originally issued financial
statements, there was no cost allocated for these services. The UPFuels Division
management subsequently determined that $2.0 million, $2.0 million and $0.5
million for 1997, 1998 and the three months ended March 31, 1999, respectively,
should have been allocated. As a result, the accompanying financial statements
have been revised from their original presentation. Other general and
administrative expenses have been allocated to the UPFuels Division, including
office rent expense. Since treasury is considered to be a UPR corporate
function, no interest expense has been allocated to the UPFuels Division in the
accompanying combined statements of income.
The UPFuels Division has a buy/sell agreement with UPR. Under this
agreement, the UPFuels Division gathers, transports, processes and sells natural
gas and natural gas liquids for UPR and purchases natural gas and natural gas
liquids from UPR.
The charges for allocated services are based on estimated full time
equivalent headcount at fully burdened rates. The buy/sell arrangements are
based on prevailing market conditions in each regional area. Accordingly, these
transactions reflect UP Fuels results as if they were on a stand alone basis.
F-63
<PAGE> 152
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
The following table reflects the intercompany balance outstanding at each
period end as well as the high and low balance for each period.
<TABLE>
<CAPTION>
AVERAGE
BALANCE HIGH LOW
OUTSTANDING BALANCE BALANCE
----------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
1997...................................................... $ 93.7 $187.4 $ 0
1998...................................................... $272.4 $357.4 $187.5
First Quarter 1999........................................ $337.5 $357.4 $317.5
</TABLE>
The following table summarizes product purchases, in volumes and dollars,
made by the UPFuels Division from UPR during each of the years ended December
31, 1997 and 1998 and the quarter ended March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 1999
------ ------ ---------
(VOLUMES)
<S> <C> <C> <C>
Gas (MMcf/day).............................................. 860.8 923.1 846.2
Natural gas liquids (Mbbls/day)............................. 68.8 68.5 63.1
(MILLIONS OF DOLLARS)
Gas......................................................... $628.4 $630.1 $140.1
Natural gas liquids......................................... $281.3 $203.5 $ 43.3
</TABLE>
4. SIGNIFICANT ACQUISITION
Highlands Gas Corporation. In August 1997, the UPFuels Division acquired
100% of the outstanding stock of Highlands Gas Corporation ("Highlands") for an
adjusted purchase price of approximately $179.4 million. Highlands is in the
business of gathering, purchasing, processing and transporting natural gas and
natural gas liquids. The acquisition included three natural gas processing
plants, five gathering systems with over 700 miles of gas and natural gas
liquids gathering pipeline and 400 miles of transportation pipeline located in
Western Texas and Eastern New Mexico. Results of operations for Highlands
subsequent to the acquisition date are included in the consolidated statements
of income.
The following unaudited pro forma combined results of operations for the
year ended December 31, 1997 are presented as if the Highlands acquisition had
been made at the beginning of the year. The unaudited pro forma information is
not necessarily indicative of either the results of operations that would have
occurred had the purchase been made during the periods presented or the future
results of the combined operations.
PRO FORMA RESULTS
<TABLE>
<CAPTION>
1997
---------------------
(MILLIONS OF DOLLARS)
<S> <C>
Revenues........................................ $3,376.8
Operating income................................ 96.3
Net income...................................... $ 54.5
</TABLE>
5. FINANCIAL INSTRUMENTS
Hedging. The UPFuels Division has established policies and procedures for
managing risk within its organization. It is balanced by internal controls and
governed by a risk management committee. The level of risk assumed by the
UPFuels Division is based on its objectives and earnings, and its capacity to
manage risk.
F-64
<PAGE> 153
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
Limits are established for each major category of risk, with exposures monitored
and managed by UPFuels Division management, and reviewed semi-annually by the
risk management committee. Major categories of the UPFuels Division's risk are
defined as follows:
Commodity Price Risk -- Non-Trading Activities. The UPFuels Division uses
derivative financial instruments for non-trading purposes in the normal course
of business to manage and reduce risks associated with contractual commitments,
price volatility, and other market variables in conjunction with transportation,
storage, and customer service programs. These instruments are generally put in
place to limit risk of adverse price movements, however, when this is done,
these same instruments usually limit future gains from favorable price
movements. Such risk management activities are generally accomplished pursuant
to exchange-traded contracts or over-the-counter options.
Recognition of realized gains/losses and option premium payments/receipts
are also deferred in the combined statements of income until the underlying
physical product is sold. Unrealized gains/losses on derivative financial
instruments are not recorded. The cash flow impact of derivative and other
financial instruments is reflected as cash flows provided from operations in the
combined statements of cash flows.
Commodity Price Risk -- Trading Activities. Periodically, the UPFuels
Division may enter into transactions involving a wide range of energy related
derivative financial transactions that are not the result of hedging activities.
These instruments are generally put into place based on the UPFuels Division's
analysis and expectations with respect to price movement or changes in other
market variables. As of March 31, 1999, there were no transactions in place
which would materially affect the results of operations or financial condition
of the UPFuels Division.
Credit Risk. Credit risk is the risk of loss as a result of nonperformance
by counterparties pursuant to the terms of their contractual obligations.
Because the loss can occur at some point in the future, a potential exposure is
added to the current replacement value to arrive at a total expected credit
exposure. The UPFuels Division has established methodologies to establish
limits, monitor and report creditworthiness and concentrations of credit to
reduce such credit risk. At March 31, 1999, the UPFuels Division's largest
credit risk associated with any single counterparty, represented by the net fair
value of open contracts with such counterparty was $2.2 million.
Performance Risk. Performance risk results when a counterparty fails to
fulfill its contractual obligations such as commodity pricing or volume
commitments. Typically, such risk obligations are defined within the trading
agreements. The UPFuels Division utilizes its credit risk methodology to manage
performance risk.
Concentrations of Credit Risk. Financial instruments which subject the
UPFuels Division to concentrations of credit risk consist principally of trade
receivables and short-term cash investments. A significant portion of the
UPFuels Division's trade receivables relate to customers in the energy industry,
and, as such, the UPFuels Division is directly affected by the economy of that
industry. However, excluding the relationship with UPR, the credit risk
associated with trade receivables is minimized by the UPFuels Division's diverse
customer base which includes local gas distribution companies, power generation
facilities, pipelines, industrial plants and other wholesale marketing
companies. Ongoing procedures are in place to monitor the creditworthiness of
customers. The UPFuels Division generally requires no collateral from its
customers and historically has not experienced significant losses on trade
receivables.
6. INCOME TAXES
The UPFuels Division is included in the consolidated Federal income tax
return of UPR. The consolidated Federal income tax liability of UPR is allocated
among all corporate entities on the basis of the entity's contributions to the
consolidated Federal income tax liability. Full benefit of tax losses and
credits made available and utilized in UPR's consolidated Federal income tax
returns are being allocated to the individual companies generating such items.
F-65
<PAGE> 154
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
Components of income tax expense for the years ended December 31, 1997 and
1998 and for the quarter ended March 31, 1999.
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal.................................................. $17.2 $ 46.7 $(2.7)
State.................................................... .9 2.6 (0.1)
----- ------ -----
Total current.................................... 18.1 49.3 (2.8)
Deferred:
Federal.................................................. 14.2 (22.7) 10.2
State.................................................... 0.9 (1.3) 0.6
----- ------ -----
Total deferred...................................... 15.1 (24.0) 10.8
----- ------ -----
Total............................................ $33.2 $ 25.3 $ 8.0
===== ====== =====
</TABLE>
A reconciliation between statutory and effective tax rates for the years
ended December 31, 1997 and 1998 and for the quarter ended March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 35.0% 35.0% 35.0%
State taxes -- net.......................................... 2.0% 2.0% 2.0%
---- ---- ----
Effective tax rate........................................ 37.0% 37.0% 37.0%
==== ==== ====
</TABLE>
All tax years prior to 1986 have been closed with the Internal Revenue
Service ("IRS"). On behalf of the UPFuels Division, UPR, through Union Pacific
Corporation ("UPC"), is negotiating with the Appeals Office concerning 1986
through 1989. The IRS is examining UPR's returns for 1990 through 1994 in
connection with the IRS' examination of UPC's returns. The UPFuels Division
believes it has adequately provided for Federal and state income taxes.
7. LEASES
The UPFuels Division leases certain compressors and other property. Future
minimum lease payments for operating leases with initial non-cancelable lease
terms in excess of one year as of March 31, 1999, are as follows:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
<S> <C>
1999............................................ $ 1.9
2000............................................ 2.5
2001............................................ 2.4
2002............................................ 1.5
2003............................................ 1.2
Later years..................................... 5.4
-----
Total minimum payments................ $14.9
=====
</TABLE>
Rent expense for operating leases with terms exceeding one year was $1.1
million and $1.3 million for the years ended December 31, 1997 and 1998,
respectively, and $0.5 million for the quarter ended March 31, 1999. Currently
there is no sublease income for the next five years or thereafter.
F-66
<PAGE> 155
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
8. EMPLOYEE STOCK OPTION PLANS
Stock Option and Retention Stock Plans. Pursuant to the UPR's stock option
and retention stock plans, UPR stock options under the plans are granted at 100%
of fair market value at the date of grant, become exercisable no earlier than
one year after grant and are exercisable for a period of up to eleven years from
grant date. Option grants have been made to directors, officers and employees
and vest over a period up to ten years from the grant date.
Retention shares of UPR common stock are awarded under the plans to
eligible employees, subject to forfeiture if employment terminates during the
prescribed retention period, generally one to five years from grant. Multi-year
retention stock awards also have been made, with vesting two to five years from
grant.
Expense related to these stock option and retention stock programs of UPR,
which pertain to UPFuels Division employees, amounted to $1.2 million, $1.3
million and $.7 million for the years ended 1997 and 1998 and the quarter ended
March 31, 1999, respectively.
Since UPR applies the intrinsic value method in accounting for its stock
option and retention stock plans, it generally records no compensation cost for
its stock option plans. Had compensation cost for UPR's stock option plan been
determined based on the fair value at the grant dates for awards to UPFuels
Division employees under the plan and for options that were converted at the
times of the initial public offering and spin-off of UPR from UPC, the UPFuels
Division's net income would have been reduced by $.6 million, $1.9 million and
$0.1 million for the years ended December 31, 1997 and 1998 and the quarter
ended March 31, 1999, respectively.
Employee Stock Ownership Plan. Effective January 2, 1997, UPR instituted an
employee stock ownership plan ("ESOP"). The ESOP purchased 3.7 million shares or
$107.3 million of newly issued common stock (the "ESOP Shares") from UPRG, which
will be used to fund UPR's matching obligation under its 401(k) Thrift Plan. All
regular employees of the UPFuels Division are eligible to participate in the
ESOP.
During the years ended December 31, 1997 and 1998, and the quarter ended
March 31, 1999, compensation cost related to the allocation of ESOP shares to
participants' accounts was $1.4 million, $1.6 million and $0.4 million,
respectively, for the UPFuels Division.
9. ENVIRONMENTAL EXPOSURE
The UPFuels Division generates and disposes of hazardous and nonhazardous
waste in its current and former operations and is subject to increasingly
stringent Federal, state and local environmental regulations. Certain Federal
legislation imposes joint and several liability for the remediation of various
sites; consequently, the UPFuels Division's ultimate environmental liability may
include costs relating to other parties in addition to costs relating to its own
activities at each site. In addition, the UPFuels Division is or may be liable
for certain environmental remediation matters involving existing or former
facilities.
The UPFuels Division has recorded environmental reserves related to future
costs of all sites where the UPFuels Division's obligation is probable and where
such costs reasonably can be estimated. This accrual includes future costs for
remediation and restoration of sites, as well as for ongoing monitoring costs,
but excludes any anticipated recoveries from third parties.
The UPFuels Division also is involved in reducing emissions, spills and
migration of hazardous materials. Remediation of identified sites and control of
environmental exposures required $1.2 million in 1998 and no spending for the
quarter ended March 31, 1999.
F-67
<PAGE> 156
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
10. COMMITMENTS AND CONTINGENCIES
The UPFuels Division is party to several long-term firm gas transportation
agreements, the largest of which are with Kern River Gas Transportation Company
("Kern River"), Texas Gas Transmission Corporation ("Texas Gas"), and Pacific
Gas Transmission ("PGT"). At December 31, 1997, the UPFuels Division had a keep
whole agreement with UPR which expired at the end of 2003 whereby UPR reimbursed
the UPFuels Division for the excess of the contractual fixed price over the
prevailing market price for the transportation. Conversely, the UPFuels
Division, under the keep whole agreement, was to pay UPR when the prevailing
market price exceeded the contractual fixed price. Accordingly, at December 31,
1997, the UPFuels Division recorded a reserve for the fair value of the
difference between the fixed rate under the firm transportation agreements and
the estimated market rates for the period from 2004 to the end of the respective
contract periods. At December 31, 1997, the reserves, which were included in
other long-term liabilities, were $13.0 million, $5.5 million, and $7.6 million
for the Kern River, Texas Gas, and PGT agreements, respectively.
In conjunction with the sale of the UPFuels Division to Duke Energy Field
Services, Inc. during 1998 the UPFuels Division extended the keep whole
agreement with UPR to cover a 10 year period commencing March 1, 1999 or through
the expiration of the contract, whichever is earlier. In addition, UPR retained
the transportation contract with Kern River. Accordingly, no reserves for the
Kern River and Texas Gas Agreements were recorded at December 31, 1998 or March
31, 1999 and $17.6 million was recorded at December 31, 1998 and March 31, 1999
for the PGT agreement, reflecting additional liabilities for volumes acquired in
1998, partially offset by the extension of the keep whole agreement. During
1998, $8.5 million was recorded as a change in divisional equity for the change
in the keep whole agreement. A detailed explanation of the three major long-term
firm transportation agreements are as follows:
Under the Kern River transportation agreement which expires in 2007, the
UPFuels Division has the right to transport 75 MMcfd of gas on the Kern River
Pipeline system which extends from Opal, Wyoming, to an interconnection with the
Southern California Gas Company pipeline system in southern California. Nine
years remain on the primary term of the agreement, and the current
transportation rate is $0.69 per Mcf. Thereafter, this rate can change based on
Kern River's cost of service and upon rate regulation policies of the Federal
Energy Regulatory Commission ("FERC"). Under a 1993 ruling of the FERC, the
UPFuels Division is obligated to pay all of the fixed costs included in the
transportation rate, whether or not the UPFuels Division actually uses Kern
River's pipeline to transport gas. Those fixed costs presently amount to $0.61
per Mcf. The undiscounted amount of the nine year fixed cost commitment,
assuming no future changes in the rate, is $136 million. The 1993 FERC ruling
was issued notwithstanding a provision in the transportation agreement between
Kern River and the UPFuels Division in which the parties agreed that a portion
of the fixed costs would be paid by the UPFuels Division only if and to the
extent that the UPFuels Division uses the pipeline. In light of recent changes
in the regulatory policies of FERC, the UPFuels Division is seeking
reinstatement of the contractually agreed rate structure, but there is no
assurance that such efforts will be successful.
The UPFuels Division is a party to an additional agreement under which it
may acquire, in 2001, at its option, an additional 25 MMcfd of transportation
rights on the Kern River system beginning in 2002.
Under the Texas Gas transportation agreement, which expires in 2008, the
UPFuels Division has the rights to transport 90 MMcfd of gas from the UPFuels
Division's East Texas plant. The UPFuels Division is obligated to pay a fixed
transportation rate of $0.33 per Mmbtu regardless of the volumes transported
under the agreement. The undiscounted amount of this commitment is $104 million.
Under the PGT transportation agreement, which expires in 2023, the UPFuels
Division has the rights to transport 25 MMcfd of gas from Kingsgate, British
Columbia to the California/Oregon border. The UPFuels Division is obligated to
pay a fixed transportation rate of $0.33 per Mmbtu regardless of the volumes
F-68
<PAGE> 157
UPFUELS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
transported under the agreement. However, the UPFuels Division has third party
agreements that reimburse the UPFuels Division for 90 percent of the firm
transportation cost until October 2002. As part of the third party agreements,
the UPFuels Division assigned 50 percent of the firm transportation capacity.
The term for the keep whole agreement for this contract commences on November 1,
2002 and terminates on February 28, 2009. The undiscounted amount of this
commitment, net of the third party reimbursements, is $64 million.
During 1998, the UPFuels Division assumed responsibility for additional
long-term firm transportation agreements with PGT to transport gas from
Kingsgate, British Columbia to the California/Oregon border. Under the
transportation agreements, the UPFuels Division has the rights to transport 106
Mmbtu per day of which 47 Mmbtu per day will expire in October 2007 and the
balance of the contract commitment will expire in October 2023. The UPFuels
Division does have a third party agreement that recovers all the transportation
cost for 20 Mmbtu per day through June 2011.
The UPFuels Division is a defendant in a number of lawsuits and is involved
in governmental proceedings arising in the ordinary course of business,
including contract claims, personal injury claims and environmental claims.
While management of the UPFuels Division cannot predict the outcome of such
litigation and other proceedings, management does not expect those matters to
have a materially adverse effect on the consolidated financial condition or
results of operations of the UPFuels Division.
F-69
<PAGE> 158
[DUKE ENERGY FIELD SERVICES LOGO]
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Duke Energy Field Services
Corporation (the "company") in connection with the sale of common stock being
registered. All amounts are estimates except the SEC registration fee and the
NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 211,200
NASD fee.................................................... 30,500
NYSE initial listing fee.................................... 500,000
Printing and engraving...................................... 1,500,000
Legal fees and expenses..................................... 1,500,000
Accounting fees and expenses................................ 1,500,000
Transfer agent fees......................................... 10,000
Miscellaneous expenses...................................... 1,148,300
----------
Total............................................. $6,400,000*
==========
</TABLE>
- ---------------
* The underwriters have agreed to reimburse the company for such expenses in an
amount not to exceed approximately $4.5 million.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
The company's certificate of incorporation and bylaws provide that
indemnification shall be provided for all current and former directors and may
be provided for all current or former officers to the fullest extent permitted
by the DGCL.
As permitted by the DGCL, the certificate of incorporation provides that
directors of the company shall have no personal liability to the company or its
stockholders for monetary damages for breach of fiduciary duty
II-1
<PAGE> 160
as a director, except (1) for any breach of the director's duty of loyalty to
the company or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law, (3) under
Section 174 of the DGCL or (4) for any transaction from which a director derived
an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The company has not sold any securities, registered or otherwise, within
the past three years, except as set forth below.
On December 8, 1999, the company issued 1,000 shares of its common stock to
Duke Energy Corporation ("Duke Energy") for $1,000. In so doing, the company
relied on the provisions of Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), in claiming exemption for the offering, sale and
delivery of such securities from registration under the Securities Act.
On December 16, 1999, Duke Energy, Phillips Petroleum Company ("Phillips")
and Duke Energy Field Services, LLC ("Field Services LLC") entered into a
Contribution Agreement (the "Contribution Agreement") pursuant to which Duke
Energy and Phillips, on March 31, 2000, contributed their respective midstream
natural gas assets to Field Services LLC, a subsidiary of the company, in
exchange for member interests in Field Services LLC and one-time cash payments.
Upon consummation of the offering contemplated by this registration statement,
the subsidiary ("Merger Subsidiary") that indirectly holds Phillips' interest in
Field Services LLC will be merged into the company, and, as a result, the
capital stock of Merger Subsidiary, all of which is owned by Phillips, will be
converted into shares of common stock of the company and the capital stock of
the company before the merger, all of which is owned by Duke Energy, will be
converted into new shares of common stock of the company. The exact allocation
between Duke Energy and Phillips of shares of common stock of the company issued
in the merger will be determined by the average of the closing prices of the
company's common stock on the New York Stock Exchange Composite Tape on the
stock's first five trading days. In so doing, the company relied on the
provisions of Section 4(2) of the Securities Act in claiming exemption for the
offering, sale and delivery of such securities from registration under the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement
2.1* -- Form of Agreement of Merger among Duke Energy Field
Services Corporation and Phillips Gas Company
Shareholder, Inc.
3.1+ -- Form of Amended and Restated Certificate of Incorporation
3.2+ -- Form of Amended and Restated Bylaws
4.1* -- Form of Common Stock Certificate
5.1* -- Opinion of Vinson & Elkins L.L.P.
10.1+ -- Employment Agreement dated as of April 1, 2000 between
Duke Energy Field Services Corporation and Mike J.
Panatier
10.2+ -- Form of Registration Rights Agreement among Duke Energy
Corporation, Phillips Petroleum Company and Duke Energy
Field Services Corporation.
10.3+ -- Services Agreement dated as of March 14, 2000 by and
between Duke Energy Corporation, Duke Energy Business
Services, LLC, Pan Service Company, Duke Energy Gas
Transmission Corporation and Duke Energy Field Services,
LLC
10.4+ -- Transition Services Agreement dated as of March 17, 2000
among Phillips Petroleum Company and Duke Energy Field
Services, LLC
</TABLE>
II-2
<PAGE> 161
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5+ -- Trademark License Agreement dated as of March 31, 2000
among Duke Energy Corporation and Duke Energy Field
Services, LLC
10.6+ -- Form of Shareholders Agreement among Duke Energy Natural
Gas Corporation and Phillips Petroleum Company
10.7(a)+ -- Contribution Agreement dated as of December 16, 1999
among Duke Energy Corporation, Phillips Petroleum Company
and Duke Energy Field Services, LLC (incorporated by
reference to Exhibit 2.1 to Duke Energy Corporation's
Form 8-K filed December 30, 1999)
10.7(b)+ -- First Amendment to Contribution and Governance Agreement
dated as of March 23, 2000 among Phillips Petroleum
Company, Duke Energy Corporation and Duke Energy Field
Services, LLC
10.8+ -- NGL Output Purchase and Sale Agreement effective as of
January 1, 2000 between GPM Gas Corporation and Phillips
66 Company, a division of Phillips Petroleum Company, as
amended by Amendment No. 1 dated December 16, 1999
10.9+ -- Sulfur Sales Agreement effective as of January 1, 1999
between Phillips 66 Company, a division of Phillips
Petroleum Company, and GPM Gas Corporation
10.10+ -- Parent Company Agreement dated as of March 31, 2000 among
Phillips Petroleum Company, Duke Energy Corporation, Duke
Energy Field Services, LLC and Duke Energy Field Services
Corporation
10.11+ -- Consulting Agreement dated as of April 1, 2000 between
Duke Energy Field Services Corporation and William W.
Slaughter
10.12* -- 364-Day Credit Facility among Duke Energy Field Services,
LLC, Duke Energy Field Services Corporation, Bank of
America, N.A., Morgan Stanley Senior Funding, Inc.,
Merrill Lynch Capital Corporation, and Morgan Guaranty
Trust Company of New York dated March 31, 2000
10.13* -- Credit Facility with Duke Capital Corporation dated April
4, 2000
10.14* -- 2000 Long Term Incentive Plan
21.1* -- Subsidiaries of the Company
23.1* -- Consent of Ernst & Young LLP
23.2* -- Consent of Arthur Andersen LLP
23.3* -- Consent of Deloitte & Touche LLP (Denver)
23.4* -- Consent of Deloitte & Touche LLP (Fort Worth)
23.5* -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1)
24.1+ -- Power of Attorney (included in signature page)
27.1+ -- Financial Data Schedule
99.1+ -- Consent of Michael J. Panatier to Serve as Director dated
March 13, 2000
99.2+ -- Consent of J.J. Mulva to Serve as Director dated March
10, 2000
99.3+ -- Consent of Milton Carroll to Serve as Director dated May
1, 2000
99.4+ -- Consent of William H. Grigg to Serve as Director dated
May 1, 2000
99.5+ -- Consent of John E. Lowe to Serve as Director dated May 1,
2000
99.6+ -- Consent of Wayne W. Murdy to Serve as Director dated May
1, 2000
99.7+ -- Consent of Ruth G. Shaw to Serve as Director dated May 1,
2000
99.8+ -- Consent of C.J. Silas to Serve as Director dated May 1,
2000
</TABLE>
II-3
<PAGE> 162
- ---------------
* Filed herewith.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULE
No financial statement schedules are required to be included herewith or
they have been omitted because the information required to be set forth therein
is not applicable.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
in Item 14, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriter(s) to permit prompt delivery
to each purchaser.
(c) For purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 163
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Denver, State of Colorado, on the 22nd day of May, 2000.
Duke Energy Field Services
Corporation
By:
/s/ JIM W. MOGG
----------------------------------
Name: Jim W. Mogg
Title: Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement has been signed below by the
following persons in the capacities indicated and on the 22nd day of May, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JIM W. MOGG Chairman of the Board, President and Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
Jim W. Mogg Officer)
/s/ DAVID D. FREDERICK Chief Financial Officer (Principal Financial
- ----------------------------------------------------- and Accounting Officer)
David D. Frederick
FRED J. FOWLER* Director
- -----------------------------------------------------
Fred J. Fowler
RICHARD B. PRIORY* Director
- -----------------------------------------------------
Richard B. Priory
* By: /s/ DAVID D. FREDERICK
- -----------------------------------------------------
David D. Frederick, pursuant to a power of
attorney filed with the Registration Statement
No. 333-32502, filed with the Securities and
Exchange Commission on March 15, 2000.
</TABLE>
II-5
<PAGE> 164
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement
2.1* -- Form of Agreement of Merger among Duke Energy Field
Services Corporation and Phillips Gas Company
Shareholder, Inc.
3.1+ -- Form of Amended and Restated Certificate of Incorporation
3.2+ -- Form of Amended and Restated Bylaws
4.1* -- Form of Common Stock Certificate
5.1* -- Opinion of Vinson & Elkins L.L.P.
10.1+ -- Employment Agreement dated as of April 1, 2000 between
Duke Energy Field Services Corporation and Mike J.
Panatier
10.2+ -- Form of Registration Rights Agreement among Duke Energy
Corporation, Phillips Petroleum Company and Duke Energy
Field Services Corporation.
10.3+ -- Services Agreement dated as of March 14, 2000 by and
between Duke Energy Corporation, Duke Energy Business
Services, LLC, Pan Service Company, Duke Energy Gas
Transmission Corporation and Duke Energy Field Services,
LLC
10.4+ -- Transition Services Agreement dated as of March 17, 2000
among Phillips Petroleum Company and Duke Energy Field
Services, LLC
10.5+ -- Trademark License Agreement dated as of March 31, 2000
among Duke Energy Corporation and Duke Energy Field
Services, LLC
10.6+ -- Form of Shareholders Agreement among Duke Energy Natural
Gas Corporation and Phillips Petroleum Company
10.7(a)+ -- Contribution Agreement dated as of December 16, 1999
among Duke Energy Corporation, Phillips Petroleum Company
and Duke Energy Field Services, LLC (incorporated by
reference to Exhibit 2.1 to Duke Energy Corporation's
Form 8-K filed December 30, 1999)
10.7(b)+ -- First Amendment to Contribution and Governance Agreement
dated as of March 23, 2000 among Phillips Petroleum
Company, Duke Energy Corporation and Duke Energy Field
Services, LLC
10.8+ -- NGL Output Purchase and Sale Agreement effective as of
January 1, 2000 between GPM Gas Corporation and Phillips
66 Company, a division of Phillips Petroleum Company, as
amended by Amendment No. 1 dated December 16, 1999
10.9+ -- Sulfur Sales Agreement effective as of January 1, 1999
between Phillips 66 Company, a division of Phillips
Petroleum Company, and GPM Gas Corporation
10.10+ -- Parent Company Agreement dated as of March 31, 2000 among
Phillips Petroleum Company, Duke Energy Corporation, Duke
Energy Field Services, LLC and Duke Energy Field Services
Corporation
10.11+ -- Consulting Agreement dated as of April 1, 2000 between
Duke Energy Field Services Corporation and William W.
Slaughter
10.12* -- 364-Day Credit Facility among Duke Energy Field Services,
LLC, Duke Energy Field Services Corporation, Bank of
America, N.A., Morgan Stanley Senior Funding, Inc.,
Merrill Lynch Capital Corporation, and Morgan Guaranty
Trust Company of New York dated March 31, 2000
10.13* -- Credit Facility with Duke Capital Corporation dated April
4, 2000
10.14* -- 2000 Long Term Incentive Plan
21.1* -- Subsidiaries of the Company
23.1* -- Consent of Ernst & Young LLP
23.2* -- Consent of Arthur Andersen LLP
23.3* -- Consent of Deloitte & Touche LLP (Denver)
23.4* -- Consent of Deloitte & Touche LLP (Fort Worth)
23.5* -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1)
24.1+ -- Power of Attorney (included in signature page)
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1+ -- Financial Data Schedule
99.1+ -- Consent of Michael J. Panatier to Serve as Director dated
March 13, 2000
99.2+ -- Consent of J.J. Mulva to Serve as Director dated March
10, 2000
99.3+ -- Consent of Milton Carroll to Serve as Director dated May
1, 2000
99.4+ -- Consent of William H. Grigg to Serve as Director dated
May 1, 2000
99.5+ -- Consent of John E. Lowe to Serve as Director dated May 1,
2000
99.6+ -- Consent of Wayne W. Murdy to Serve as Director dated May
1, 2000
99.7+ -- Consent of Ruth G. Shaw to Serve as Director dated May 1,
2000
99.8+ -- Consent of C.J. Silas to Serve as Director dated May 1,
2000
</TABLE>
- ---------------
* Filed herewith.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
DUKE ENERGY FIELD SERVICES
GLOBAL UNDERWRITING AGREEMENT
MORGAN STANLEY & CO. INCORPORATED
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Morgan Stanley & Co. Incorporated,
1585 Broadway,
New York, New York 10036
Dear Sirs:
Duke Energy Field Services Corporation, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to sell
to the several Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 26,300,000 shares (the "Firm Shares") and, at the election of the
Underwriters, up to 3,945,000 additional shares (the "Optional Shares") of
Common Stock (par value $.01 per share) ("Stock") of the Company (the Firm
Shares and the Optional Shares which the Underwriters elect to purchase pursuant
to Section 2 hereof are herein collectively called the "Shares").
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to
reserve up to 1,972,500 of the Shares to be purchased by it under this Agreement
for sale to the directors, officers, employees and business associates of the
Company and its principal shareholders and certain other persons (collectively,
"Participants"), as set forth in the Prospectus under the heading "Underwriters"
(the "Directed Share Program"). The Shares to be sold by Morgan Stanley and its
affiliates pursuant to the Directed Share Program are referred to hereinafter as
the "Directed Shares." Any Directed Shares not orally or otherwise confirmed for
purchase by any Participants by 11:00 p.m. Eastern time on the date on which
this Agreement is executed will be offered to the public by the Underwriters as
set forth in the Prospectus.
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement in respect of the Firm Shares and
the Optional Shares has been filed on Form S-1 with the Securities and
Exchange Commission (the "Commission"); such registration statement and
any post-effective amendment thereto, each in the form heretofore
delivered to you, and excluding exhibits thereto but including all
documents incorporated by reference in the prospectus contained
therein, for each of the other Underwriters, have been declared
effective by the Commission in such form; no other document with
respect to such registration statement or document incorporated by
reference therein has heretofore been filed with the Commission which
has not been
<PAGE> 2
delivered to you; and no stop order suspending the effectiveness of
such registration statement has been issued and no proceeding for that
purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in such effective registration
statement or filed with the Commission pursuant to Rule 424(a) of the
rules and regulations of the Commission under the Securities Act of
1933, as amended (the "Act"), being hereinafter called a "Preliminary
Prospectus"; the various parts of such registration statement,
including all exhibits thereto and including the information contained
in the form of final prospectus filed with the Commission pursuant to
Rule 424(b) under the Act in accordance with Section 5(a) hereof and
deemed by virtue of Rule 430A under the Act to be part of the
registration statement at the time it was declared effective, being
hereinafter called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the
Act being hereinafter called the "Prospectus"). If the Company has
filed an abbreviated registration statement to register additional
Shares pursuant to Rule 462(b) under the Act (the "Rule 462
Registration Statement"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; except that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information relating to the Underwriters furnished in
writing to the Company by an Underwriter through you expressly for use
therein.
(c) The Registration Statement conforms and the Prospectus
will conform in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder, and the
Registration Statement and the Preliminary Prospectus do not and the
Prospectus will not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, except that
this representation and warranty shall not apply to statements or
omissions made in any such document in reliance upon and in conformity
with information relating to the Underwriters furnished in writing to
the Company by an Underwriter through you expressly for use therein.
(d) This Agreement has been duly authorized, executed and
delivered by the Company. The compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust,
-2-
<PAGE> 3
loan agreement or other agreement or instrument to which the Company or
any entity in which the Company owns at least 50% of the capital stock
or other interests or voting securities or voting interests (each such
entity, a "subsidiary") is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, in each case that is
material to the Company and its subsidiaries taken as a whole; nor will
such action result in any violation of the provisions of the
Certificate of Incorporation or By-Laws of the Company or similar
organizational documents of any of its subsidiaries or any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties; and
no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required for the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act
of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state or
foreign securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(e) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(f) Each subsidiary has been duly incorporated, is validly
existing as a corporation (or limited liability company, as the case
may be) in good standing under the laws of the jurisdiction of its
incorporation or formation, has the corporate (or limited liability
company) power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing or to have such power and
authority singly or in the aggregate would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole; all of
the issued shares of capital stock (or limited liability company
interests) of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned
directly by the Company (or if not owned directly by the Company, are
owned by a subsidiary of the Company), free and clear of all liens,
encumbrances, equities or claims.
(g) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company
-3-
<PAGE> 4
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement).
(h) The Company and its subsidiaries (1) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (2) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (3) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(i) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) that would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(j) Deloitte & Touche LLP, Ernst & Young LLP and Arthur
Andersen LLP, who have certified certain financial statements of the
Company and its subsidiaries, are independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder.
(k) The Company and its subsidiaries have good and marketable
title to all real property and beneficial or record title to or
interest in all pipeline easements, rights of way, licenses and land
use permits owned by them, except where such failure would not, singly
or in the aggregate, have a material adverse effect on the Company and
its subsidiaries taken as a whole, in each case free and clear of all
liens, encumbrances and defects except (i) such as are described in the
Prospectus and (ii) liens securing taxes and other governmental changes
or claims of materialmen, mechanics and similar persons that are not
yet due and payable and that do not materially affect the value of such
property and do not materially interfere with the use made and proposed
to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under leases that are valid, existing and
in full force and effect, except as described in the Prospectus or
where the failure to be valid, existing and in full force and effect
would not have a material adverse effect on the Company and its
subsidiaries, taken a whole.
-4-
<PAGE> 5
(l) Except as described in the Prospectus, the Company and its
subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses except
where such failure to possess required certificates, authorizations and
permits would not, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole, and
neither the Company nor any of its subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
certificate, authorization or permit that, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(m) There are no legal or governmental proceedings pending or
to the Company's knowledge threatened or expected to which the Company
or any of its subsidiaries is a party or to which any of the properties
of the Company or any of its subsidiaries is subject that are required
to be described in the Registration Statement or the Prospectus and are
not so described or any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(n) No material labor dispute with the employees of the
Company or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent.
(o) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company (1) to file a registration statement under the Act
with respect to any securities of the Company (except for contacts,
agreements or understandings described in the Registration Statement or
the Prospectus) or (2) to require the Company to include any such
securities with the Shares registered pursuant to the Registration
Statement.
(p) The statements in the Prospectus under the captions
"Relationship with Duke Energy and Phillips," "Shares Eligible for
Future Sale" and "Description of Capital Stock", in each case insofar
as such statements constitute summaries of the documents or proceedings
referred to therein, fairly present the information called for with
respect to such documents and proceedings and fairly summarize the
matters referred to therein.
(q) When distributed together with the Canadian law supplement
dated May 16, 2000, as it may be hereafter amended, the Prospectus and
any Preliminary Prospectus comply, and any amendments or supplements
thereto will comply, with any applicable laws or regulations applicable
to sales of the Directed Shares of foreign jurisdictions in which the
Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share
Program.
-5-
<PAGE> 6
(r) No consent, approval, authorization or order of, or
qualification with, any governmental body or agency, other than those
obtained, is required in connection with the offering of the Directed
Shares in any jurisdiction where the Directed Shares are being offered.
(s) The Company has not offered, or caused Morgan Stanley or
its affiliates to offer, Shares to any person pursuant to the Directed
Share Program with the intent to unlawfully influence (1) a customer or
supplier of the Company to alter the customer's or supplier's level or
type of business with the Company, or (2) a trade journalist or
publication to write or publish favorable information about the Company
or its products.
(t) The Company is not a "holding company," or a
"public-utility company," or a "subsidiary company" of a "holding
company," as each such term is defined in the Public Utility Holding
Company Act of 1935, as amended.
(u) The shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable.
(v) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company at a purchase
price per share of $_________________ the number of Firm Shares to be purchased
by such Underwriter as set forth opposite the name of such Underwriter in
Schedule I hereto and (b) in the event and to the extent that the Underwriters
shall exercise the election to purchase Optional Shares as provided below, the
Company agrees to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at the purchase
price per share set forth in clause (a) of this Section 2, that portion of the
number of Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction the numerator of which
is the maximum number of Optional Shares that such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I hereto
and the denominator of which is the maximum number of the Optional Shares that
all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 3,945,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
over-allotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
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<PAGE> 7
4. Certificates in definitive form for the Shares to be purchased by
each Underwriter hereunder, and in such denominations and registered in such
names as Morgan Stanley may request upon at least forty-eight hours' prior
notice to the Company, shall be delivered by or on behalf of the Company to you
for the account of such Underwriter, against payment by such Underwriter or on
its behalf of the purchase price therefor by wire transfer in immediately
available funds to an account of the Company properly identified at least 48
hours in advance, at the office of Sullivan & Cromwell, 125 Broad Street, New
York, New York 10004 or at such other place as you and the Company may
determine. The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on [JUNE 1, 2000], or such
other time and date as you and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York City time, on the date
specified by you in the written notice given by you of the Underwriters'
election to purchase such Optional Shares, or such other time and date as you
and the Company may agree upon in writing. Such time and date for delivery of
the Firm Shares is herein called the "First Time of Delivery," such time and
date for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery," and each such time and date of
delivery is herein called a "Time of Delivery." Such certificates will be made
available for checking and packaging at least twenty-four hours prior to each
Time of Delivery at such office of Sullivan & Cromwell.
5. The Company covenants and agrees with the several Underwriters that:
(a) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Act any prospectus required to be filed pursuant to
such Rule.
(b) The Company will advise you promptly after it receives
notice thereof of the institution by the Commission of any stop order
proceedings in respect of the Registration Statement, and will use its
best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its withdrawal, if issued.
(c) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company promptly will prepare and file with the Commission an
amendment, supplement or an appropriate document that will correct such
statement or omission or that will effect such compliance.
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<PAGE> 8
(d) The Company, during the period when a prospectus relating
to the Shares is required to be delivered under the Act, will file
promptly all documents required to be filed with the Commission
pursuant to Section 13 or 14 of the Exchange Act.
(e) The Company will make generally available to its security
holders, in each case as soon as practicable after the close of the
period covered thereby, an earnings statement (in form complying with
the provisions of Section 11(a) of the Act, which need not be certified
by independent certified public accountants unless required by the Act)
covering a twelve-month period beginning not later than the first day
of the Company's fiscal quarter next following the effective date of
the Registration Statement.
(f) The Company will furnish to you copies of the Registration
Statement (three of which will be signed and will include all exhibits
other than those incorporated by reference), the Prospectus, and all
amendments and supplements to such documents, in each case as soon as
available and in such quantities as you reasonably request.
(g) The Company will arrange or cooperate in arrangements for
the qualification of the Shares for sale under the laws of the United
States, each State thereof, the District of Columbia and such
jurisdictions as you reasonably designate and will continue such
qualifications in effect so long as required for the distribution;
provided, however, that the Company shall not be required to qualify as
a foreign corporation or to file any general consents to service of
process under the laws of any state where it is not now so subject.
(h) The Company will not, during the period beginning from the
date hereof and continuing to and including the date 180 days after the
date of the Prospectus, offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend or otherwise
dispose of, directly or indirectly, any securities of the Company that
are substantially similar to the Shares (any of the foregoing, a
"Transfer"), including but not limited to any securities that are
convertible into or exchangeable for or that represent the right to
receive the Shares or any such substantially similar securities or
enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of such
securities, whether or not such transaction is to be settled by the
delivery of common stock or other securities, in cash or otherwise,
without your prior written consent. The foregoing sentence shall not
apply to (A) the Shares to be sold hereunder, (B) any securities of the
Company that are substantially similar to the shares and are issued, or
options to purchase such securities are granted, pursuant to existing
employee benefit plans of the Company referred to in the Prospectus,
(C) any securities that are substantially similar to the Shares and are
issued pursuant to any non-employee director stock plan, (D) any
securities that are issued pursuant to the merger described in the
Prospectus and are substantially similar to the Shares or [(E) any
securities that
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<PAGE> 9
are substantially similar to the Shares or convertible into or
exchangeable for common stock which represent payment of all or part of
the purchase price of a business or assets the Company acquires;
provided the Company shall take all action necessary to ensure that any
securities issued pursuant to clause (E) will not be Transferred by the
holder thereof for 180 days from the date of the Prospectus]. [N.B.
Acquisition exception to be confirmed by MSDW, together with any
applicable cap.]
(i) The Company will take appropriate action to prevent
transfer of any Directed Shares that have been sold to Participants who
are subject to the three month restriction on sale, transfer,
assignment, pledge or hypothecation imposed by NASD Regulation, Inc.
under its Interpretative Material 2110-1 on free-riding and withholding
to the extent necessary to ensure compliance with the three-month
restrictions.
(j) The Company will comply with all applicable securities and
other applicable laws, rules and regulations in each jurisdiction in
which the Directed Shares are offered in connection with the Directed
Share Program.
6. The Company covenants and agrees with the several Underwriters that
(a) the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing with the
Commission of the Registration Statement, any Preliminary Prospectus, the
Prospectus and amendments and supplements thereto and the mailing and delivering
of copies thereof to the Underwriters and dealers; (ii) the cost of printing or
producing any Agreement among Underwriters, this Agreement, the Selling
Agreements, the Blue Sky memorandum, closing binders and any other documents in
connection with the offering, purchase, sale and delivery of the Shares; (iii)
all expenses in connection with the qualification of the Shares for offering and
sale under state securities laws as provided in Section 5(g) hereof, including
the fees and disbursements of counsel for the Underwriters in connection with
such qualification and in connection with the Blue Sky survey; (iv) the filing
fees and the reasonable fees and disbursements of counsel to the Underwriters
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (v) the cost of
preparing stock certificates, the cost and charges of any transfer agent or
registrar and; (vi) all costs and expenses incident to listing the Shares on The
New York Stock Exchange, Inc.; (vii) the costs and expenses of the Company
relating to investor presentations on any "road show" undertaken in connection
with the marketing of the offering of the Shares, including, without limitation,
expenses associated with the production of road show slides and graphics, fees
and expenses of any consultants engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show; (viii) all fees and disbursements of counsel incurred by the Underwriters
in connection with the Directed Share Program and stamp duties, similar taxes or
duties or other taxes, if any, incurred by the Underwriters in connection with
the
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<PAGE> 10
Directed Share Program; and (ix) all other costs and expenses (other than as
provided for in Sections 8 and 9) incident to the performance of the Company's
obligations hereunder that are not otherwise specifically provided for in this
Section. It is understood that, except as provided in this Section, Sections 8,
9 and 11 hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses connected with any offers they
may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties of the Company herein are,
at and as of such Time of Delivery, true and correct, the condition that the
Company shall have performed all of its obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) The Prospectus shall have been filed, if required, with
the Commission pursuant to Rule 424(b) within the applicable time
period prescribed for such filing by the rules and regulations under
the Act; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding
for that purpose shall have been initiated or, to the knowledge of the
Company, threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with
to your reasonable satisfaction.
(b) Sullivan & Cromwell, counsel for the Underwriters, shall
have furnished to you such opinion or opinions, dated such Time of
Delivery, generally with respect to the matters set forth in clause
(c)(i), (c)(ii), (c)(v), (c)(x) and (c)(xii) and with respect to such
other matters as are reasonably requested by you, and such counsel
shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters.
(c) Vinson & Elkins LLP, counsel for the Company, shall have
furnished to you its written opinion, dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) The Company is validly existing as a corporation
in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus;
(ii) The Shares have been duly authorized, and when
issued and delivered in accordance with this Agreement, will
be validly issued, fully paid and non-assessable, and the
issuance of such Shares are not subject to any preemptive or
similar rights.
(iii) Each "Significant Subsidiary" of the Company
(as such term is defined in Rule 1-02 of Regulation S-X) (each
a "Significant
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<PAGE> 11
Subsidiary" and, collectively, the "Significant Subsidiaries")
is validly existing as a corporation (or limited liability
company, as the case may be) in good standing under the laws
of the jurisdiction of its incorporation, has the corporate
(or limited liability company) power and authority to own its
property and to conduct its business as described in the
Prospectus.
(iv) The outstanding shares of Stock of the Company
have been duly authorized and issued and are fully paid and
nonassessable.
(v) The Registration Statement has become effective
under the Act, and, to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the
Act.
(vi) This Agreement has been duly authorized,
executed and delivered by the Company.
(vii) The performance by the Company of this
Agreement and the consummation of the transactions herein and
therein contemplated will not contravene any of the provisions
or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party that
in each case has been filed as an exhibit to the Registration
Statement or any of the provisions of the Certificate of
Incorporation or By-laws of the Company.
(viii) The Company is not and, after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be
required to register as an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended.
(ix) The Company is not, and after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus will not be,
required to register as a holding company under the Public
Utility Holding Company Act of 1935, as amended.
(x) No authorization, approval or consent of any
governmental body is legally required for the consummation by
the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the
Shares, and such consents, approvals, authorizations,
registrations and qualifications as may be required under
state or foreign securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters.
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<PAGE> 12
(xi) The descriptions in the Registration Statement
and Prospectus of legal or governmental proceedings are
accurate and fairly present the information required to be
shown and such counsel does not know of any other legal or
governmental proceedings required to be described in the
Registration Statement or Prospectus that are not described as
required.
(xii) The Registration Statement as of the date of
effectiveness under the Act and the Prospectus as of the date
it was filed with, or transmitted for filing to, the
Commission (in each case, other than the financial statements
and other financial information included therein, as to which
no opinion need be rendered) appeared on their face to comply
as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder, and nothing
has come to their attention that would lead them to believe
that the Registration Statement as of the date of
effectiveness under the Act (or if an amendment to such
Registration Statement has been filed by the Company with the
Commission subsequent to the effectiveness of the Registration
Statement, then at the time of the most recent such filing)
contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading or
that the Prospectus as of the date it was filed with, or
transmitted for filing to, the Commission and at such Time of
Delivery contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.
(xiii) The statements made in the Prospectus under
the caption "Description of Capital Stock", insofar as they
purport to constitute summaries of the terms of the Stock,
under the caption "Material United States Tax Consequences to
Non-United States Holders", insofar as they purport to
constitute summaries of the principal United States federal
income consequences to foreign holders of the Stock , and
under "Relationship with Duke Energy and Phillips", "Shares
Eligible for Future Sale" and "Underwriting" insofar as they
purport to constitute summaries of the legal matters and
documents referred to therein, are accurate in all material
respects.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
State of Texas, the general corporation law of the State of Delaware
and the federal securities laws of the United States.
(d) Martha Wyrsch, General Counsel to the Company shall have
furnished to you her written opinion dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
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<PAGE> 13
(i) each of the Company and its subsidiaries is
validly existing as a corporation (or limited liability
company, as the case may be), is in good standing under the
laws of the jurisdiction of its incorporation, has the
corporate (or limited liability company) power and authority
to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business
and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(ii) the performance by the Company of this Agreement
and the consummation of the transactions herein and therein
contemplated will not contravene any of the provisions or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of
its subsidiaries is subject, nor will such action contravene
any of the provisions of the Certificate of Incorporation or
By-Laws of any of its subsidiaries or to the best knowledge of
such counsel any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction
over the Company or any of its properties.
(iii) the descriptions in the Registration Statement
and Prospectus of legal or governmental proceedings are
accurate and fairly present the information required to be
shown and such counsel does not know of any other legal or
governmental proceedings required to be described in the
Registration Statement or Prospectus that are not described as
required.
(e) At 10:00 a.m., New York City time, on the effective date
of the Registration Statement and also at each Time of Delivery,
Deloitte & Touche LLP and Ernst & Young LLP and Arthur Andersen LLP
shall have furnished to you a letter or letters, dated the respective
date of delivery thereof in form and substance satisfactory to you, to
the effect set forth in Annex I hereto.
(f) Since the respective dates as of which information is
given in the Prospectus, there shall not have been any change or any
development involving a prospective change, in the condition, financial
or otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement), the effect of which is, in
your judgment, so material and adverse as to make it, in your judgment,
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus.
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<PAGE> 14
(g) There shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any securities
of the Company or Duke Capital Corporation by any "nationally
recognized statistical rating organization," as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act.
(h) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in
trading in securities generally or of the securities of the Company or
Duke Energy Corporation on the New York Stock Exchange; (ii) a general
moratorium on commercial banking activities in New York declared by
either Federal or New York State authorities; (iii) the outbreak or
material escalation of hostilities or the declaration by the United
States of a national emergency or war; or (iv) any change in financial
markets or any calamity or crisis, if the effect of any such event
specified in these clauses (i) through (iv) in your judgment makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus.
(i) "Lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the persons listed on Schedule A
hereto relating to sales and certain other dispositions of shares of
Stock or certain other securities, shall have been executed and
delivered to you.
(j) The Company shall have furnished or caused to be furnished
to you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as
to the performance by the Company of all of its obligations hereunder
to be performed at or prior to such Time of Delivery, and as to such
other matters relating to the transactions contemplated herein as you
may reasonably request, and the Company shall have furnished or caused
to be furnished certificates as to the matters set forth in subsections
(a), (f), (g), (h) and (i) of this Section, and as to such other
matters relating to the transactions contemplated herein as you may
reasonably request.
8. (a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934 (the "Exchange Act"), as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the prospectus constituting a
part of the
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<PAGE> 15
Registration Statement in the form in which it became effective or the
Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission or any such
alleged untrue statement or omission, if such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever reasonably
incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid
under (i) or (ii) above;
unless in each case of (i), (ii) or (iii) above such statement or omission or
such alleged statement or omission was made in reliance upon and in conformity
with the information relating to the Underwriters furnished in writing to the
Company by an Underwriter through you expressly for use in the Registration
Statement (or any amendment thereto) or such Preliminary Prospectus or the
Prospectus (or any amendment or supplement thereto).
In no case shall the Company be liable under this indemnity agreement
with respect to any claim made against any Underwriter or any such controlling
person unless the Company shall be notified in writing of the nature of the
claim within a reasonable time after the assertion thereof, but failure so to
notify the Company shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement. The Company shall be
entitled to participate at its own expense in the defense, or, if it so elects,
within a reasonable time after receipt of such notice, to assume the defense of
any suit brought to enforce any such claim, but if it so elects to assume the
defense, such defense shall be conducted by counsel chosen by it and approved by
the Underwriter or Underwriters or controlling person or persons, defendant or
defendants in any suit so brought, which approval shall not be unreasonably
withheld. In any such suit, any Underwriter or any such controlling person shall
have the right to employ its own counsel, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company and such Underwriter shall have mutually agreed to the
employment of such counsel or (ii) the named parties to any such action
(including any impleaded parties) include both such Underwriter or such
controlling person and the Company and such Underwriter or such controlling
person shall have been advised by such counsel that a conflict of interest
between the Company and such Underwriter or such controlling person may arise
and for this reason it is not desirable for the same counsel to represent both
the indemnifying party and also the indemnified party (it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related
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<PAGE> 16
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) for all such
Underwriters and all such controlling persons, which firm shall be designated in
writing by you). The Company agrees to notify you within a reasonable time of
the assertion of any claim against it, any of its officers or directors or any
person who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, in connection with the sale of the Shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors and each of the Company's officers who signed
the Registration Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
to the same extent as the indemnity contained in subsection (a) of this Section,
but only with respect to statements or omissions made in the Registration
Statement (or any amendment thereto) or any Preliminary Prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with the information relating to the Underwriters furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), such Preliminary Prospectus
or the Prospectus (or any amendment or supplement thereto). In case any action
shall be brought against the Company or any person so indemnified based on the
Registration Statement (or any amendment thereto) or such Preliminary Prospectus
or the Prospectus (or any amendment or supplement thereto) and in respect of
which indemnity may be sought against any Underwriter, such Underwriter shall
have the rights and duties given to the Company, and the Company and each person
so indemnified shall have the rights and duties given to the Underwriters, by
the provisions of subsection (a) of this Section.
(c) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(d) To the extent the indemnification provided for in Sections 8(a) or
8(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect not only the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares but also the relative fault of
the Company on the one hand and of the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the
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<PAGE> 17
one hand and the Underwriters on the other hand in connection with the offering
of the Shares shall be deemed to be in the same respective proportions as the
net proceeds from the offering of the Shares (before deducting expenses)
received by the Company and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate Public Offering Price of the
Shares. The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 8 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 8(d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 8 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
(f) The indemnity and contribution provisions contained in Sections 8
and 9 and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter or
by or on behalf of the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Shares.
9.
(a) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Act or Section 20 of the Exchange Act ("Morgan Stanley
Entities"), from and
-17-
<PAGE> 18
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (i) caused by any untrue
statement or alleged untrue statement of a material fact contained in any
material prepared by or with the consent of the Company for distribution to
Participants in connection with the Directed Share Program, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; (ii)
caused by the failure of any Participant to pay for and accept delivery of
Directed Shares that the Participant has agreed to purchase; or (iii) related
to, arising out of, or in connection with the Directed Share Program other than
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or negligence
of Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 9(a), the Morgan Stanley Entity
seeking indemnity shall promptly notify the Company in writing and the Company,
upon request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
in such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any Morgan Stanley Entity
shall have the right to retain its own counsel, but the fees and expenses of
such counsel shall be at the expense of such Morgan Stanley Entity unless (i)
the Company shall have agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the Company and the Morgan Stanley Entity and representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. The Company shall not, in respect of the legal expenses
of the Morgan Stanley Entities in connection with any proceeding or related
proceedings the same jurisdiction, be liable for the fees and expenses of more
than one separate firm (in addition to any local counsel) for all Morgan Stanley
Entities. Any such firm for the Morgan Stanley Entities shall be designated in
writing by Morgan Stanley. The Company shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Company agrees to
indemnify the Morgan Stanley Entities from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time a Morgan Stanley Entity shall have requested the Company to
reimburse it for fees and expenses of counsel as contemplated by the second and
third sentences of this paragraph, the Company agrees that it shall be liable
for any settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than 30 days after receipt by the Company
of the aforesaid request and (ii) the Company shall not have reimbursed the
Morgan Stanley Entity in accordance with such request prior to the date of such
settlement. The Company shall not, without the prior written consent of Morgan
Stanley, effect any settlement of any pending or threatened proceeding in
respect of which any Morgan Stanley Entity is or could have been a party and
indemnity could have been sought hereunder by such Morgan Stanley Entity, unless
such settlement includes an unconditional release of the Morgan Stanley Entities
from all liability on claims that are the subject matter of such proceeding.
-18-
<PAGE> 19
(c) To the extent the indemnification provided for in Section 9(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then the Company, in lieu of
indemnifying the Morgan Stanley Entity thereunder, shall contribute to the
amount paid or payable by the Morgan Stanley Entity as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
not only the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares but also the relative fault of the Company on the one hand and of the
Morgan Stanley Entities on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and of the Morgan Stanley Entities on the other
hand in connection with the offering of the Directed Shares shall be deemed to
be in the same respective proportions as the net proceeds from the offering of
the Directed Shares (before deducting expenses) and the total underwriting
discounts and commissions received by the Morgan Stanley Entities for the
Directed Shares, bear to the aggregate Public Offering Price of the Shares. If
the loss, claim, damage or liability is caused by an untrue or alleged untrue
statement of a material fact, the relative fault of the Company on the one hand
and the Morgan Stanley Entities on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
or the omission or alleged omission relates to information supplied by the
Company or by the Morgan Stanley Entities and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would not
be just or equitable if contribution pursuant to this Section 9 were determined
by pro rata allocation (even if the Morgan Stanley Entities were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 9(c). The amount
paid or payable by the Morgan Stanley Entities as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by the Morgan Stanley
Entities in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, no Morgan Stanley Entity shall
be required to contribute any amount in excess of the amount by which the total
price at which the Directed Shares distributed to the public were offered to the
public exceeds the amount of any damages that such Morgan Stanley Entity has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The remedies provided for in this
Section 9 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any Morgan Stanley Entity at law or in equity.
(e) The indemnity and contribution provisions contained in this Section
9 shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
-19-
<PAGE> 20
10. The Agreement shall become effective upon the execution and
delivery hereof by the parties hereto.
(a) If any Underwriter shall default in its obligation to purchase the
Shares that it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter, you notify the Company that you have so arranged for
the purchase of such Shares, you shall have the right to postpone such Time of
Delivery for a period of not more than seven days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees to
file promptly any amendments to the Registration Statement or the Prospectus
that may be required. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters as provided in subsection (a)
above, the aggregate number of such Shares that remains unpurchased does not
exceed 10% of the aggregate number of all the Shares to be purchased at such
Time of Delivery, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares that such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares that such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you as provided in
subsection (a) above, the aggregate number of such Shares that remains
unpurchased exceeds 10% of the aggregate number of all the Shares to be
purchased at such Time of Delivery, or if the Company shall not exercise the
right described in subsection (b) above to require non-defaulting Underwriters
to purchase Shares of a defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to the Second Time of Delivery, the obligations of
the Underwriters to purchase and of the Company to sell the Optional Shares)
shall thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company, except for the expenses to be borne by the Company
and the Underwriters as provided in Section 6 hereof and the indemnity agreement
in Sections 8 and 9 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
11. If this Agreement shall be terminated pursuant to Section 10
hereof, the Company shall not be under any liability to any Underwriter except
as provided in Section 6, Section 8 and Section 9 hereof; but, if for any other
reason any Shares are not delivered by or on behalf of the Company as provided
herein, the Company will reimburse the Underwriters through you for all
out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the
-20-
<PAGE> 21
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company shall then be under no further
liability to any Underwriter in respect of the Shares not so delivered except as
provided in Section 6, 8 and 9 hereof.
12. All statements, requests, notices and agreements hereunder shall be
in writing, and if to the Underwriters shall be delivered or sent by mail to you
as the representatives in care of Morgan Stanley, at 1585 Broadway, New York,
N.Y. 10036, Attention: Registration Department; and if to the Company shall be
delivered or sent by mail or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(a) hereof shall
be delivered or sent by mail or facsimile transmission to such Underwriter at
its address or facsimile number set forth in its Underwriters' Questionnaire or
telex constituting such Questionnaire, which address or facsimile number will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
9 hereof, the officers and directors of the Company, and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
As used herein, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
-21-
<PAGE> 22
If the foregoing is in accordance with your understanding, please sign
and return to us eight counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters and
the Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters the form of which shall be submitted to the Company
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
Very truly yours,
DUKE ENERGY FIELD SERVICES CORPORATION
By:
-----------------------------------
Name:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
MORGAN STANLEY & CO. INCORPORATED
By: MORGAN STANLEY & CO. INCORPORATED
By:
---------------------------------
On behalf of each of the several Underwriters
-22-
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES TO BE MAXIMUM OPTION
UNDERWRITER PURCHASED EXERCISED
- --------------------------------- ----------------- ------------------
<S> <C> <C>
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner &
Smith Incorporated
JP Morgan
Lehman Brothers
Paine Webber
Petrie Parkman
Dresdner Kleinwort Benson
A.G. Edwards & Sons, Inc.
First Union Securities, Inc.
Howard, Weil Labouisse,
Fredrichs Inc.
Edward D. Jones & Co., L.P.
UBS Warburg
Blaylock & Partners, L.P.
Dain Rauscher Wessels
Toronto Dominion Securities
Wachovia Securities
------------- -------------
Total
============= =============
</TABLE>
-23-
<PAGE> 24
EXHIBIT A
[FORM OF LOCK-UP AGREEMENT]
________________, 2000
Morgan Stanley & Co. Incorporated
As representative of the several Underwriters named in Schedule I hereto,
c/o Morgan Stanley & Co. Incorporated
1585 Broadway, 32nd Floor
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Duke Energy Field Services Corporation, a
Delaware corporation (the "COMPANY") providing for the public offering (the
"PUBLIC OFFERING") by the several Underwriters, including Morgan Stanley (the
"UNDERWRITERS"), of an aggregate of 26,300,000 shares (the "Firm Shares") and,
at the election of the Underwriters, up to 3,945,000 additional shares (the
"Optional Shares") of Common Stock (par value $.01 per share) (the "Stock") of
the Company.
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS") (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
-24-
<PAGE> 25
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
------------------------------
(Name)
------------------------------
(Address)
-25-
<PAGE> 26
SCHEDULE II
PERSONS TO SIGN LOCK UP AGREEMENTS
Duke Energy Corporation
Phillips Petroleum Company
Jim W. Mogg
Mike J. Panatier
David D. Fredrick
Mark A. Borer
Michael J. Bradley
Richard B. Priory
[other directors, officers and stockholders of DEFS]
[Option or Restricted Stock Award holders]
[N.B. Directed Share Program Participants will be subject to the lock up
provisions of the DSP materials.]
-26-
<PAGE> 1
EXHIBIT 2.1
AGREEMENT OF MERGER
OF
PHILLIPS GAS COMPANY SHAREHOLDER, INC.
(a Delaware corporation)
WITH AND INTO
DUKE ENERGY FIELD SERVICES CORPORATION
(a Delaware corporation)
This Agreement of Merger, dated as of May ___, 2000 (this "Agreement"),
is hereby executed pursuant to Section 251 of the General Corporation Law of the
State of Delaware (the "DGCL") by and between PHILLIPS GAS COMPANY SHAREHOLDER,
INC., a Delaware corporation ("PGCSI"), and DUKE ENERGY FIELD SERVICES
CORPORATION, a Delaware corporation ("DEFS Corp." and, following the Merger (as
hereinafter defined), the "Surviving Corporation," and, collectively with PGCSI,
the "Constituent Corporations").
RECITALS:
1. Pursuant to its Certificate of Incorporation, as amended to the date
hereof, PGCSI is authorized to issue a total of 1,000 shares of Common Stock,
with no par value ("PGCSI Common Stock"), of which ten shares are now issued and
outstanding and each of which is entitled to one vote and held of record by
Phillips Petroleum Company ("PGCSI Parent");
2. Pursuant to its Certificate of Incorporation, DEFS Corp. is
authorized to issue a total of 500,000,000 shares of Common Stock, par value
$.01 per share ("DEFS Corp. Common Stock"), of which 1,000 shares are now issued
and outstanding and each of which is entitled to one vote and held of record by
Duke Energy Natural Gas Corporation ("DENG"), a wholly owned subsidiary of Duke
Energy Corporation ("Duke");
3. The registered office of PGCSI in the State of Delaware is located
at 1013 Centre Road, Wilmington, New Castle County, Delaware 19805-1297 and The
Prentice-Hall Corporation Systems, Inc. is the registered agent in charge
thereof upon whom process against PGCSI may be served;
4. The registered office of DEFS Corp. in the State of Delaware is
located at 1209 Orange Street, Wilmington, Delaware 19801 and The Corporation
Trust Company is the registered agent in charge thereof upon whom process
against DEFS Corp. may be served; and
5. The Boards of Directors of both of the Constituent Corporations have
adopted resolutions declaring the advisability of the proposed merger (the
"Merger") of PGCSI with and into DEFS Corp. upon the terms and conditions
hereinafter set forth, approving this Agreement and directing that it be
submitted to their respective sole stockholders for approval in accordance with
the applicable statutes of the State of Delaware.
6. Upon consummation of the Merger, DENG and PGCSI Parent will enter
into a Shareholders Agreement.
<PAGE> 2
7. It is intended that the Merger shall qualify as a tax-free
"reorganization" within the meaning of Section 368 of the Internal Revenue Code,
as amended.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for the purpose of prescribing
the terms and conditions of the Merger, the mode of carrying it into effect, the
manner and basis of converting shares of each of the Constituent Corporations
into shares of the Surviving Corporation and such other details and provisions
of the Merger as are deemed necessary or desirable, the parties hereto have
agreed and covenanted, and do hereby agree and covenant, as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 Definitions. Each capitalized term used and not otherwise
defined herein shall have the meaning given such term set forth below:
"Company" shall mean Duke Energy Field Services, LLC, a
Delaware limited liability company.
"Contribution Closing" shall mean March 31, 2000.
"Independent Directors" shall mean directors meeting the
independence and experience requirements, as set forth by the New York Stock
Exchange as of the date of the IPO for membership on an audit committee of a
board of directors, with respect to each of PGCSI, DENG and the Surviving
Corporation.
"IPO" shall mean the initial offering of shares of Surviving
Corporation Common Stock to the public in a transaction registered under the
Securities Act of 1933, as amended.
Section 1.2 Construction. Unless the context requires otherwise: (a)
the gender (or lack of gender) of all words used in this Agreement includes the
masculine, feminine and neuter; (b) references to Articles and Sections refer to
Articles and Sections of this Agreement; (c) references to laws refer to such
laws as they may be amended from time to time, and references to particular
provisions of a law include any corresponding provisions of any succeeding law;
(d) references to money refer to legal currency of the United States of America;
(e) the word "including" means "including, without limitation"; and (f) all
capitalized terms defined herein are equally applicable to both the singular and
plural forms of such terms.
ARTICLE II
THE AGREEMENT
Section 2.1 Approval and Certification. This Agreement shall be
submitted as promptly as practicable to the sole stockholder of each of the
Constituent Corporations, and, if duly adopted and approved by each such
stockholder in accordance with the provisions of the
-2-
<PAGE> 3
DGCL, shall, subject to the further provisions of this Agreement, promptly be
certified in accordance with the DGCL at such time as the respective authorized
officers of PGCSI and DEFS Corp. deem proper.
Section 2.2 Filing of Agreement or Certificate of Merger. Immediately
after the approvals and certification referenced in Section 2.1 hereof, the
Constituent Corporations shall file this Agreement or a Certificate of Merger
with the Secretary of State of Delaware, as required by Section 251 of the DGCL.
The Merger shall be effective upon acceptance of such filing or such later time
as is set forth in such Certificate of Merger, which time is hereinafter called
the "Effective Time."
ARTICLE III
RESULT OF MERGER
Section 3.1 Effective Time Events. At the Effective Time:
(a) PGCSI shall be merged with and into DEFS Corp., with the
effect as provided in the DGCL, at which time the separate existence of PGCSI
shall cease.
(b) DEFS Corp., as the corporation surviving the Merger, shall
continue its corporate existence under the DGCL.
(c) The Certificate of Incorporation of DEFS Corp. as in
effect immediately prior to the Effective Time shall be amended and restated in
its entirety as set forth in Exhibit A hereto (as so amended and restated, the
"Amended and Restated Charter") and as so amended and restated shall continue in
full force and effect as the certificate of incorporation of the Surviving
Corporation until the same shall thereafter be altered, amended or repealed in
accordance with applicable law and such Amended and Restated Charter.
(d) The Bylaws of DEFS Corp. as in effect immediately prior to
the Effective Time shall be amended and restated, in their entirety, as set
forth in Exhibit B hereto (as so amended and restated, the "Bylaws") and as so
amended and restated shall continue in full force and effect as the bylaws of
the Surviving Corporation, until the same shall thereafter be altered, amended
or repealed in accordance with applicable law, the Amended and Restated Charter
and such Bylaws.
(e) All shares of PGCSI Common Stock issued and outstanding
shall automatically be converted, without any action on the part of the holder
thereof, into (i) an aggregate of ___________ [1] fully paid and non-assessable
shares of Surviving Corporation Common Stock and (ii) the right to receive a
number of additional fully paid and non-assessable
- --------
[1] to equal 80% of (x) the parties' good faith estimate at the time of the
Merger of Phillips' Corporation Interest (as defined in Exhibit C) multiplied by
(y) (1) the aggregate number of shares of Surviving Corporation Common Stock to
be outstanding immediately after the Merger (including shares to be issued
pursuant to rights received in the Merger) and the IPO, plus (2) shares issued
to officers and employees of the Surviving Corporation or the Company
concurrently with the IPO pursuant to compensation or benefit plans, but
excluding any shares sold pursuant to the underwriters' over-allotment option.
-3-
<PAGE> 4
shares of Surviving Corporation Common Stock in accordance with and on the terms
and subject to the conditions set forth in Exhibit C hereto, and all such shares
of PGCSI Common Stock thereafter shall be cancelled and cease to exist.
(f) All shares of DEFS Corp. Common Stock issued and
outstanding shall automatically be converted, without any action on the part of
the holder thereof, into (i) an aggregate of _________ [2] fully paid and
non-assessable shares of Surviving Corporation Common Stock and (ii) the right
to receive a number of additional fully paid and non-assessable shares of
Surviving Corporation Common Stock in accordance with and on the terms and
subject to the conditions set forth in Exhibit D hereto.
(g) The Board of Directors of the Surviving Corporation (who
shall hold office subject to the provisions of the Bylaws from the Effective
Time until the next annual meeting of the stockholders of the Surviving
Corporation and until their successors are elected and qualified) shall be the
directors of DEFS Corp. in office immediately prior to the Effective Time.
ARTICLE IV
ACTIONS OF THE CORPORATIONS
Section 4.1 Execution of Documents. Each of the Constituent
Corporations hereby agrees that at any time, or from time to time, as and when
requested by the Surviving Corporation, or by its successors and assigns, it
will execute and deliver, or cause to be executed and delivered in its name by
its last acting officers or by the corresponding officers of the Surviving
Corporation, all such acknowledgments, assurances, conveyances, assignments,
transfers, deeds or other instruments, and will take or cause to be taken such
further or other action, as the Surviving Corporation, or its successors or
assigns, may deem necessary or desirable in order to evidence the transfer,
vesting or devolution to the Surviving Corporation of any property, right,
privilege or franchise pursuant to applicable law, or to vest or perfect in or
confirm to the Surviving Corporation, its successors and assigns, title to and
possession of all the property, rights, privileges, powers, franchises and
interests as a result of the merger referred to herein pursuant to applicable
law, and otherwise to carry out the intent and purpose hereof.
Section 4.2 Delivery of Certificates. Upon the end of the seventh day
of trading on the NYSE (excluding the pricing day), the Surviving Corporation
shall deliver to each of DENG and to PGCSI Parent, respectively, certificates
representing the number of shares of Surviving Corporation Common Stock held by
each, calculated in accordance with Sections 3.1(e) and (f) hereof.
- ----------
[2] to equal 80% of (x) the parties' good faith estimate at the time of the
Merger of Duke's Corporation Interest (as defined in Exhibit C) multiplied by
(y) (1) the aggregate number of shares of Surviving Corporation Common Stock to
be outstanding immediately after the Merger (including shares to be issued
pursuant to rights received in the Merger) and the IPO, plus (2) shares issued
to officers and employees of the Surviving Corporation or the Company
concurrently with the IPO pursuant to compensation or benefit plans, but
excluding any shares sold pursuant to the underwriters' over-allotment option.
-4-
<PAGE> 5
ARTICLE V
AMENDMENT AND TERMINATION
Section 5.1 Amendment. At any time prior to the Effective Time, the
Boards of Directors of the Constituent Corporations may, to the fullest extent
permitted by law, amend, modify or supplement this Agreement by mutual consent
in such manner as they may determine.
Section 5.2 Termination. This Agreement may be terminated, and the
Merger herein provided for may be abandoned by mutual consent of the Boards of
Directors of the Constituent Corporations at any time prior to the Effective
Time notwithstanding approval of this Agreement by the stockholders of the
Constituent Corporation.
-5-
<PAGE> 6
IN WITNESS WHEREOF, each of the undersigned have caused this
Agreement to be duly executed and delivered on the date first set forth above.
PHILLIPS GAS COMPANY SHAREHOLDER, INC.
By:
----------------------------------------
Name:
Title:
DUKE ENERGY FIELD SERVICES CORPORATION
By:
----------------------------------------
Name:
Title:
<PAGE> 7
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DUKE ENERGY FIELD SERVICES CORPORATION
The name of the corporation is "Duke Energy Field Services
Corporation" (the "Corporation").
The original Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on December 8, 1999, under the name
"DEFS Holding Corp."
This Amended and Restated Certificate of Incorporation has
been declared advisable by the board of directors of the Corporation (the
"Board"), duly adopted by the stockholders of the Corporation and duly executed
and acknowledged by the officers of the Corporation in accordance with Sections
103, 242 and 245 of the General Corporation Law of the State of Delaware (the
"DGCL").
The text of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in its entirety as follows:
ARTICLE I
NAME
The name of the Corporation is:
Duke Energy Field Services Corporation.
ARTICLE II
REGISTERED AGENT
The address of the Corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the city
of Wilmington, County of New Castle. The name of the Corporation's registered
agent at such address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purposes of the Corporation are to engage in the midstream
gas gathering, processing, transportation and marketing business in the United
States and Canada, the marketing of natural gas liquids in Mexico, the
transportation of refined petroleum products and liquefied petroleum gases and
related products and related terminaling, storage and other activities, and the
gathering, transportation, storage and marketing of crude oil (the "Designated
Business"). The Corporation may also pursue other legal businesses beyond the
Designated Business, provided that any such other business (i) is approved by
the Board pursuant to the Bylaws of the Corporation (the "Bylaws"), and (ii) if
Duke Energy Corporation, a North
<PAGE> 8
Carolina corporation ("Duke"), owns, directly or indirectly, a majority of the
Common Stock or otherwise controls the Corporation, directly or indirectly, is
approved by Duke in its sole discretion.
ARTICLE IV
CAPITAL STOCK
Section 4.1. Issuance of Shares. The Corporation shall be
authorized to issue 510,000,000 shares of capital stock, of which 500,000,000
shares shall be shares of common stock, $.01 par value ("Common Stock"), and
10,000,000 shares shall be shares of preferred stock, $.01 par value ("Preferred
Stock").
Section 4.2. Preferred Stock. The Preferred Stock may be
issued from time to time in one or more series. The Board is hereby authorized
to provide for the issuance of shares of Preferred Stock in series and, by
filing a certificate pursuant to the DGCL (hereinafter referred to as a
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the voting rights, if any,
designations, powers, privileges, preferences and other rights, if any, of the
shares of each such series and the qualifications, limitations and restrictions
thereof. The authority of the Board with respect to each series shall include,
but not be limited to, determination of the following:
(a) the designation of the series, which may be by
distinguishing number, letter or title;
(b) the number of shares of the series, which number
the Board may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding);
(c) whether dividends, if any, shall be cumulative or
noncumulative, and, in the case of shares of any series having cumulative
dividend rights, the date or dates or method of determining the date or dates
from which dividends on the shares of such series shall be cumulative;
(d) the rate of any dividends (or method of
determining such dividends) payable to the holders of the shares of such series,
any conditions upon which such dividends shall be paid and the date or dates (or
the method for determining the date or dates) upon which such dividends shall be
payable;
(e) the price or prices (or method of determining
such price or prices) at which, the form of payment of such price or prices
(which may be cash, property or rights, including securities of the same or
another corporation or other entity) for which, the period or periods within
which and the terms and conditions upon which the shares of such series may be
redeemed, in whole or in part, at the option of the Corporation or at the option
of the holder or holders thereof or upon the happening of a specified event or
events, if any;
(f) the obligation, if any, of the Corporation to
purchase or redeem shares of such series pursuant to a sinking fund or otherwise
and the price or prices at which, the form of payment of such price or prices
(which may be cash, property or rights, including
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<PAGE> 9
securities of the same or another corporation or other entity) for which, the
period or periods within which and the terms and conditions upon which the
shares of such series shall be redeemed or purchased, in whole or in part,
pursuant to such obligation;
(g) the amount payable out of the assets of the
Corporation to the holders of shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of the
Corporation;
(h) provisions, if any, for the conversion or
exchange of the shares of such series, at any time or times at the option of the
holder or holders thereof or at the option of the Corporation or upon the
happening of a specified event or events, into shares of any other class or
classes or any other series of the same or any other class or classes of stock,
or any other security, of the Corporation, or any other corporation or other
entity, and the price or prices or rate or rates of conversion or exchange and
any adjustments applicable thereto, and all other terms and conditions upon
which such conversion or exchange may be made;
(i) restrictions on the issuance of shares of the
same series or of any other class or series, if any; and
(j) the voting rights, if any, of the holders of
shares of the series.
Section 4.3. Common Stock. The Common Stock shall be subject
to the express terms of the Preferred Stock and any series thereof. The holders
of shares of Common Stock shall be entitled to one vote for each such share upon
all proposals on which the holders of Common Stock are entitled to vote and the
Common Stock shall vote together as a single class. Except as otherwise provided
by law or by the resolution or resolutions adopted by the Board designating the
rights, powers and preferences of any series of Preferred Stock, the holders of
Common Stock shall have the exclusive right to vote for the members of the Board
(the "Directors") and for all other purposes. The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of the holders of a
majority of the outstanding Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to any Preferred Stock Designation. The Corporation shall be
entitled to treat the Person in which name any share of its stock is registered
as the owner thereof for all purposes and shall not be bound to recognize any
equitable or other claim to, or interest in, such share on the part of any other
person, whether or not the Corporation shall have notice thereof, except as
expressly provided by applicable law.
ARTICLE V
THE BOARD
The number, nominations, qualifications, tenure, vacancies and
removal of the Directors shall be as set forth in the Bylaws. Except and to the
extent that the Bylaws shall so require, the election of the Directors need not
be by written ballot.
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ARTICLE VI
BYLAWS
In furtherance and not in limitation of the powers conferred
by statute, the Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board in accordance with the Bylaws.
ARTICLE VII
AMENDMENT OF CERTIFICATE OF INCORPORATION
Except as set forth in Article VI, Article X and Article XII
hereof, the Corporation reserves the right at any time and from time to time to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, and any other provisions authorized by the laws of the State of
Delaware at the time in force may be added or inserted, in the manner now or
hereafter prescribed by law; and, except as set forth in Article XI, all rights,
preferences and privileges of whatsoever nature conferred upon stockholders,
Directors or any other persons whomsoever by and pursuant to this Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
the right reserved in this Article.
ARTICLE VIII
STOCKHOLDER ACTION BY WRITTEN CONSENT
Prior to the first date (the "Trigger Date") upon which Duke
is not the holder of record (directly or through its subsidiaries) of a majority
of the outstanding voting stock of the Corporation entitled to vote generally in
the election of directors, any action required or permitted to be taken by the
stockholders of the Corporation may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. On and after the Trigger Date,
any action required or permitted to be taken by the stockholders of the
Corporation must be taken at a duly held annual or special meeting of
stockholders and may not be taken by any consent in writing of such
stockholders.
ARTICLE IX
DELAWARE ANTITAKEOVER STATUTE
The provisions of Section 203 of the Delaware General
Corporation Law shall not be applicable to the Corporation.
ARTICLE X
ANTI-DILUTION
At any time following the initial offering of shares of Common
Stock in a transaction registered under the Securities Act of 1933, as amended,
if the Corporation offers or issues additional shares of Common Stock or
additional shares of any other previously issued and outstanding capital stock
in a public offering, then, so long as Duke and Phillips Petroleum Company, a
Delaware corporation ("Phillips"), each owns at least 20%, directly or
indirectly, of all outstanding Common Stock, then each of Duke and Phillips
shall have the opportunity to
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<PAGE> 11
subscribe for and purchase such number of shares of Common Stock or such other
capital stock, as the case may be, such that the percentage ownership (direct or
indirect) of the total issued and outstanding Common Stock or such other capital
stock, as the case may be, of such party following the offering or issuance
remains equal to such party's percentage ownership (direct or indirect) of the
issued and outstanding Common Stock or such other capital stock, as the case may
be, immediately prior to the offering or issuance; provided, however, that
neither Duke nor Phillips shall have the right or opportunity hereunder to
purchase any additional Common Stock in connection with the issuance by the
Corporation of any Common Stock or options, warrants or other similar securities
in respect of Common Stock pursuant to a compensation or benefit plan or program
for officers or employees of the Corporation that has been approved by the Board
in accordance with the Bylaws. So long as Duke and Phillips each owns at least
20%, directly or indirectly, of all outstanding Common Stock, then any proposed
amendment to this Article X shall require the consent of Duke and Phillips.
ARTICLE XI
LIMITED LIABILITY; INDEMNIFICATION
Section 11.1. Limited Liability of Directors. A Director shall
not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a Director, except, if required by the
DGCL, as amended from time to time, for liability (a) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL or (d) for any
transaction from which the Director derived an improper personal benefit.
Neither the amendment nor repeal of this Section 11.1 shall eliminate or reduce
the effect of this Section 11.1 in respect of any matter occurring, or any cause
of action, suit or claim that, but for this Section 11.1, would accrue or arise,
prior to such amendment or repeal.
Section 11.2. Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or
is made a party to or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter, a "proceeding"), by reason of the fact that such
person, or a person of whom such person is the legal representative, is or was a
Director or officer of the Corporation or is or was serving at the request of
the Corporation as a Director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a Director, officer, employee or agent
or in any other capacity while serving as a Director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the DGCL, as the same exists or may hereafter be amended
(but, in the case of any such amendment, to the fullest extent permitted by law,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including, without limitation, attorneys' fees, judgments, fines, amounts paid
or to be paid in settlement and excise taxes or penalties arising under the
Employment Retirement Income Security Act of 1974, as in effect from time to
time) reasonably incurred or suffered by such person in connection therewith,
and
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<PAGE> 12
such indemnification shall continue as to a person who has ceased to be a
Director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; provided, however, that, except as
provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board. The right to indemnification conferred in this Section
11.2 shall be a contract right and shall include the right to have the
Corporation pay the expenses incurred in defending any such proceeding in
advance of its final disposition, any advance payments to be paid by the
Corporation within 20 calendar days after the receipt by the Corporation of a
statement or statements from the claimant requesting such advance or advances
from time to time; provided, however, that, if and to the extent the DGCL
requires, the payment of such expenses incurred by a Director or officer in such
person's capacity as a Director or officer (and not in any other capacity in
which service was or is rendered by such person while a Director or officer
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such Director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
Director or officer is not entitled to be indemnified under this Section 11.2 or
otherwise. The Corporation may, to the extent authorized from time to time by
the Board, grant rights to indemnification, and rights to have the Corporation
pay the expenses incurred in defending any proceeding in advance of its final
disposition, to any employee or agent of the Corporation to the fullest extent
of the provisions of this Article XI with respect to the indemnification and
advancement of expenses of Directors and officers of the Corporation.
(b) Right of Claimant to Bring Suit. If a claim under
paragraph (a) of this Section is not paid in full by the Corporation within 30
calendar days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not met the standard of
conduct which makes it permissible under the DGCL for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board, independent legal counsel or its stockholders) to have
made a determination prior to the circumstances that the claimant has met the
applicable standard of conduct set forth in the DGCL, nor an actual
determination by the Corporation (including its Board, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in this Section 11.2 shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, Bylaw,
agreement, vote of stockholders or disinterested Directors or otherwise. No
repeal or
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modification of this Article XI shall in any way diminish or adversely affect
the rights of any Director, officer, employee or agent of the Corporation
hereunder in respect of any occurrence or matter arising prior to any such
repeal or modification.
(d) Insurance. The Corporation may maintain
insurance, at its expense, to protect itself and any Director, officer, employee
or agent of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise against any such expense, liability or loss, whether
or not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the DGCL.
(e) Severability. If any provision or provisions of
this Article XI shall be held to be invalid, illegal or unenforceable for any
reason whatsoever: (i) the validity, legality and enforceability of the
remaining provisions of this Article XI (including, without limitation, each
portion of any paragraph of this Article XI containing any such provision held
to be invalid, illegal or unenforceable, that is not itself held to be invalid,
illegal or unenforceable) shall not in any way be affected or impaired thereby;
and (ii) to the fullest extent possible, the provisions of this Article XI
(including, without limitation, each such portion of any paragraph of this
Article XI containing any such provision held to be invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision or provisions held invalid, illegal or unenforceable.
ARTICLE XII
BUSINESS OPPORTUNITIES AGREEMENT
Section 12.1. Scope of Business of the Corporation and its
Subsidiaries. The Corporation hereby renounces any interest or expectancy in any
business opportunity, transaction or other matter (each, a "Business Activity")
in which Duke engages or seeks to engage that does not consist exclusively of
the Designated Business.
Section 12.2. Corporate Opportunities.
(a) In recognition that Duke is currently (at least
indirectly), and in anticipation that Duke will remain, a substantial
stockholder of the Corporation, and in anticipation that the Corporation and
Duke may engage in the same or similar activities or lines of business and have
an interest in the same or similar areas of business, and in recognition of the
benefits to be derived by the Corporation through its continued contractual,
corporate and business relations with Duke (including services of employees,
officers and directors of Duke as Directors and officers of the Corporation),
the provisions of this Article XII are set forth to regulate and define the
conduct of certain affairs of the Corporation as they may involve Duke and its
employees, officers and directors, and the powers, rights, duties, liabilities,
interests and expectancies of the Corporation in connection therewith.
(b) Duke shall have the right to engage (and shall
have no duty to refrain from engaging) in the same or similar activities or
lines of business as the Corporation, and the Corporation shall not be deemed to
have any interest or expectancy, and hereby renounces any interest or
expectancy, in any Business Activity, provided that such Business Activity is
conducted by Duke in accordance with the standards set forth in Section 12.3
hereof.
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<PAGE> 14
Neither Duke nor any employee, officer, director or agent thereof shall be
liable to the Corporation or its stockholders for breach of any fiduciary or
other duty by reason of any such Business Activity of Duke or of such person's
participation therein. In the event that Duke acquires knowledge of a potential
Business Activity, unless such Business Activity is pursued in violation of the
standards set forth in Section 12.3 hereof, Duke shall have no duty to
communicate or offer to the Corporation the opportunity to participate in such
Business Activity and shall not be liable to the Corporation or its stockholders
for breach of any fiduciary duty as a stockholder of the Corporation by reason
of the fact that Duke conducts, pursues or acquires such Business Activity for
itself, directs such Business Activity to another Person or does not communicate
information regarding such Business Activity to the Corporation, and no officer,
director, employee or other agent of Duke who serves as a Director or officer of
the Corporation or of any subsidiary of the Corporation shall have any duty to
communicate or offer the opportunity to participate in such Business Activity to
the Corporation or any liability to the Corporation or its stockholders for
breach of any fiduciary duty as a Director or officer of the Corporation by
reason of the fact that Duke conducts, pursues or acquires such Business
Activity for itself, directs such Business Activity to another Person or does
not communicate information regarding such Business Activity to the Corporation.
Section 12.3. Standards for Separate Conduct of Business. In
the event that Duke or any Director or officer of the Corporation who is also a
director, officer, employee or agent of Duke acquires knowledge of a potential
Business Activity, Duke, or any such person on behalf of Duke, may pursue such
Business Activity, and such pursuit shall be in accordance with the standards
set forth in this Section 12.3, if (i) such knowledge was acquired by Duke or
any such person other than through disclosure of information by or on behalf of
a Director, officer, employee or agent of the Corporation in or during the
course of such person's relationship with the Corporation and other than solely
in, and as a direct result of, such person's service as a Director or officer of
the Corporation (it being understood that if the opportunity to pursue such
Business Activity is separately identified by Duke or one of its officers,
directors, employees or agents or separately presented to Duke or one of its
officers, directors, employees or agents, Duke, or any such officer, director,
employee or agent on behalf of Duke, shall be free to pursue such opportunity
even if it also came to the attention of another officer, director, employee or
agent of Duke as a result of and in his or her capacity as a Director or officer
of the Corporation), and (ii) such Business Activity is developed and pursued
solely through the use of personnel and assets of Duke (including such person in
his or her capacity as a director, officer, employee or agent of Duke). The
Corporation shall renounce any interest or expectancy in any Business Activity
that is conducted by Duke or its officers, directors, employees or agents on
behalf of Duke in accordance with the foregoing standards. Nothing in this
Article XII shall allow any Director designated by Duke to pursue a Business
Activity in the Designated Business solely for his or her personal benefit (as
opposed to for the benefit of Duke).
Section 12.4. Consent. Any Person purchasing or otherwise
acquiring any interest in shares of the capital stock of the Corporation shall
be deemed to have consented to these provisions.
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<PAGE> 15
Section 12.5. Interpretation.
(a) For purposes of this Article XII, "Duke" shall
include all Subsidiaries and Affiliates of Duke Energy Corporation (other than
the Corporation and its Subsidiaries).
(b) As used in this Article XII, the following
definitions shall apply:
(i) "Affiliate" shall mean, with respect to
any Person, a Person directly or indirectly Controlling, Controlled by or under
common Control with such Person.
(ii) "Control" shall mean the possession,
directly or indirectly, through one or more intermediaries, by any Person or
group (within the meaning of Section 13(d)(3) under the Securities Exchange Act
of 1934, as amended) of both of the following: (A)(1) in the case of a
corporation, more than 25% of the direct or indirect economic interest in the
outstanding equity securities thereof; (2) in the case of a limited liability
company, partnership, limited partnership or venture, the right to more than 25%
of the distributions therefrom (including liquidating distributions); (3) in the
case of a trust or estate, including a business trust, more than 25% of the
beneficial interest therein; and (4) in the case of any other entity, more than
25% of the economic or beneficial interest therein; and (B) in the case of any
entity, the power or authority, through ownership of voting securities, by
contract or otherwise, to control or direct the management and policies of the
entity.
(iii) "Governmental Entity" shall mean any
federal, state, political subdivision or other governmental agency or
instrumentality, foreign or domestic.
(iv) "Person" shall mean any individual,
partnership, limited liability company, firm, corporation, association, joint
venture, trust or other entity or any Governmental Entity.
(v) "Subsidiary" shall mean, when used with
respect to any Person, any Affiliate of such Person that is Controlled by such
Person.
Section 12.6. Amendment. Any proposed amendment to Article III
or this Article XII shall require, in addition to the consent of Duke, the
approval of at least a majority of the Directors who are not officers, directors
or employees of Duke and who are otherwise disinterested or of a committee of
the Board consisting exclusively of Directors who are not officers, directors or
employees of Duke and who are otherwise disinterested.
Section 12.7. Term. The provisions of this Article XII shall
terminate at such time as Duke no longer owns, directly or indirectly, a
majority of the Common Stock and no longer otherwise controls the Corporation,
directly or indirectly.
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IN WITNESS WHEREOF, Duke Energy Field Services Corporation has
caused this Amended and Restated Certificate of Incorporation to be signed by
its President this ___ day of ___________, 2000.
-------------------------------
J. W. Mogg
President
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EXHIBIT B
================================================================================
AMENDED AND RESTATED BYLAWS
OF
DUKE ENERGY FIELD SERVICES CORPORATION
Dated as of ___, 2000
================================================================================
<PAGE> 18
TABLE OF CONTENTS
<TABLE>
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<S> <C> <C>
ARTICLE I
OFFICES AND RECORDS
ARTICLE II
STOCKHOLDERS
Section 2.1. Annual Meeting.............................................1
Section 2.2. Special Meeting............................................1
Section 2.3. Place of Meeting...........................................1
Section 2.4. Notice of Meeting..........................................2
Section 2.5. Quorum and Adjournment; Voting.............................2
Section 2.6. Proxies....................................................2
Section 2.7. Notice of Stockholder Business and Nominations.............2
Section 2.8. Procedure for Election of Directors; Required Vote.........4
Section 2.9. Inspectors of Elections; Opening and Closing the Polls.....5
Section 2.10. Conduct of Meetings........................................5
ARTICLE III
THE BOARD
Section 3.1. General Powers.............................................5
Section 3.2. Number; Qualifications and Tenure..........................6
Section 3.3. Regular Meetings...........................................6
Section 3.4. Special Meetings...........................................6
Section 3.5. Notice.....................................................6
Section 3.6. Action by Consent of Board.................................6
Section 3.7. Conference Telephone Meetings..............................6
Section 3.8. Quorum.....................................................6
Section 3.9. Vacancies; Increases in the Number of Directors............7
Section 3.10. Executive and Other Committees.............................7
Section 3.11. Removal....................................................7
Section 3.12. Records....................................................7
ARTICLE IV
OFFICERS
Section 4.1. Elected Officers...........................................8
Section 4.2. Election and Term of Office................................8
Section 4.3. Chairman of the Board; Chief Executive Officer.............8
Section 4.4. President..................................................8
Section 4.5. Vice Presidents............................................8
</TABLE>
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<TABLE>
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Page
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Section 4.6. Treasurer..................................................9
Section 4.7. Secretary..................................................9
Section 4.8. Removal....................................................9
Section 4.9. Vacancies..................................................9
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
Section 5.1. Stock Certificates and Transfers..........................10
Section 5.2. Lost, Stolen or Destroyed Certificates....................10
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.1. Fiscal Year...............................................10
Section 6.2. Dividends.................................................10
Section 6.3. Seal......................................................10
Section 6.4. Waiver of Notice..........................................10
Section 6.5. Audits....................................................11
Section 6.6. Resignations..............................................11
ARTICLE VII
CONTRACTS, PROXIES, ETC.
Section 7.1. Contracts.................................................11
Section 7.2. Proxies...................................................11
</TABLE>
ARTICLE VIII
AMENDMENTS
Annex A
ii
<PAGE> 20
AMENDED AND RESTATED BYLAWS
OF
DUKE ENERGY FIELD SERVICES CORPORATION
The original Bylaws of Duke Energy Field Services Corporation
(formerly known as DEFS Holding Corp.) (the "Corporation") were adopted by the
board of directors of the Corporation (the "Board") on December 8, 1999.
These Amended and Restated Bylaws have been declared advisable
by the Board, duly adopted by the stockholders of the Corporation and duly
executed and acknowledged by the officers of the Corporation in accordance with
Section 109 of the General Corporation Law of the State of Delaware ("DGCL").
The text of the Bylaws of the Corporation is hereby amended
and restated to read in its entirety as follows:
ARTICLE I
OFFICES AND RECORDS
The Corporation shall maintain a registered office in Delaware
and may maintain such other offices and keep its books, documents and records at
such places within or without Delaware as may, from time to time, be designated
by the Board.
ARTICLE II
STOCKHOLDERS
Section 2.1. Annual Meeting. The annual meeting of the
stockholders of the Corporation shall be held on such date and at such time as
may be fixed by resolution of the Board.
Section 2.2. Special Meeting. Except as otherwise required by
law and subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock, as defined in the Certificate of
Incorporation of the Corporation (the "Certificate of Incorporation"), as to
dividends or upon liquidation, special meetings of the stockholders of the
Corporation for any purpose or purposes may be called only by:
(a) the Board pursuant to a resolution stating the purpose or
purposes thereof approved by a majority of the Board, or
(b) the Chairman of the Board.
No business other than that stated in the notice shall be transacted at any
special meeting.
Section 2.3. Place of Meeting. The Board or the Chairman of
the Board, as the case may be, may designate the place of meeting for any annual
meeting or for any special meeting of the stockholders. If no designation is so
made, the place of meeting shall be the principal office of the Corporation.
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Section 2.4. Notice of Meeting. Written or printed notice,
stating the place, day and hour of the meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered by the Corporation not less than ten calendar days nor more than 60
calendar days before the date of the meeting, either personally or by mail, to
each stockholder of record entitled to vote at such meeting. Holders of
Preferred Stock, as defined in the Certificate of Incorporation, shall not be
entitled to receive notice of any meeting of stockholders at which they are not
entitled to vote. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail with postage thereon prepaid, addressed to
the stockholder at such person's address as it appears on the stock transfer
books of the Corporation. Only such business shall be conducted at a special
meeting of stockholders as shall have been included in the Corporation's notice
of meeting. Meetings may be held without notice if all stockholders entitled to
vote are present, or if notice is waived by those not present in accordance with
Section 6.4 of these Bylaws. Any previously scheduled meeting of the
stockholders may be postponed, and any special meeting of the stockholders may
be canceled, by resolution of the Board upon public notice given prior to the
date previously scheduled for such meeting of stockholders.
Section 2.5. Quorum and Adjournment; Voting. Except as
otherwise provided by law or by the Certificate of Incorporation, the holders of
a majority of the voting power of all outstanding shares of the Corporation
entitled to vote generally in the election of Directors (as hereinafter defined)
(the "Voting Stock"), represented in person or by proxy, shall constitute a
quorum at a meeting of stockholders, except that when specified business is to
be voted on by a class or series of stock voting as a class, the holders of a
majority of the shares of such class or series shall constitute a quorum of such
class or series for the transaction of such business. The chairman of the
meeting or a majority of the shares so represented may adjourn the meeting from
time to time, whether or not there is such a quorum. No notice of the time and
place of adjourned meetings need be given except as required by law. The
stockholders present at a duly called meeting at which a quorum is present may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
Section 2.6. Proxies. At all meetings of stockholders, a
stockholder may vote by proxy executed in writing (or in such other manner
permitted by the DGCL) by the stockholder or by such person's duly authorized
attorney-in-fact.
Section 2.7. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders (A) pursuant to the Corporation's notice of
meeting in accordance with Section 2.4 of these Bylaws, (B) by or at the
direction of the Board, or (C) by any stockholder of the Corporation who was a
stockholder of record at the time the notice provided for in this Bylaw was
delivered, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Bylaw.
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(ii) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (C) of
Section 2.7(a)(i) hereof, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
90th calendar day nor earlier than the close of business on the 120th calendar
day prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 120th calendar day prior to such
annual meeting and not later than the close of business on the later of the 90th
calendar day prior to such annual meeting or the 10th calendar day following the
calendar day on which public announcement of the date of such meeting is first
made by the Corporation. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth (A) as to each person whom the stockholder proposes to nominate for
election or reelection as a Director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
Directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a member of the Board (a "Director") if elected); (B) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (C) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (1) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (2) the class and number
of shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence
of paragraph (a)(ii) of this Bylaw to the contrary, in the event that the number
of Directors to be elected to the Board is increased and there is no public
announcement by the Corporation naming all of the nominees for Director or
specifying the size of the increased Board at least 100 calendar days prior to
the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this Bylaw shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth calendar day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of the Stockholders. Only such business
shall be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting under
Section 2.4 of these Bylaws. Nominations of persons for election to the Board
may be made at a special meeting of stockholders at which Directors are to be
elected pursuant to the Corporation's notice of meeting (i) by or at the
direction of the Board, (ii) provided that the Board has determined that
Directors shall be elected
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at such meeting, by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this Bylaw, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Bylaw. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more Directors to the Board, any
stockholder may nominate a person or persons (as the case may be) for election
to such position(s) as specified in the Corporation's notice of meeting pursuant
to clause (ii) if the stockholder's notice required by paragraph (a)(ii) of this
Bylaw shall be delivered to the Secretary at the principal executive offices of
the Corporation not earlier than the close of business on the 120th calendar day
prior to such special meeting and not later than the close of business on the
later of the 90th calendar day prior to such special meeting or the tenth
calendar day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
(c) General.
(i) Only such persons who are nominated in accordance
with the procedures set forth in this Bylaw shall be eligible to serve as
Directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Bylaw. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Bylaw and, if any proposed
nomination or business in not in compliance with this Bylaw, to declare that
such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Bylaw, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of
this Bylaw, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect
any rights (A) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(B) of the holders of any series of Preferred Stock to elect Directors under an
applicable Preferred Stock Designation (as defined in the Certificate of
Incorporation).
Section 2.8. Procedure for Election of Directors; Required
Vote. Election of Directors at all meetings of the stockholders at which
Directors are to be elected shall be by ballot, and, subject to the rights of
the holders of any series of Preferred Stock to elect Directors under an
applicable Preferred Stock Designation, a plurality of the votes cast thereat
shall elect Directors. Except as otherwise provided by law, the Certificate of
Incorporation, Preferred Stock Designation or these Bylaws, in all matters other
than the election of Directors, the affirmative
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vote of a majority of the voting power of the shares present in person or
represented by proxy at the meeting and entitled to vote on the matter shall be
the act of the stockholders.
Section 2.9. Inspectors of Elections; Opening and Closing the
Polls. The Board by resolution shall appoint, or shall authorize an officer of
the Corporation to appoint, one or more inspectors, which inspector or
inspectors may include individuals who serve the Corporation in other
capacities, including, without limitation, as officers, employees, agents or
representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspector(s)
to replace any inspector who fails to act. If no inspector or alternate has been
appointed to act or is able to act at a meeting of the stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging such person's duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of such person's ability. The
inspector(s) shall have the duties prescribed by law. The chairman of the
meeting shall fix and announce at the meeting the date and time of the opening
and the closing of the polls for each matter upon which the stockholders will
vote at a meeting.
Section 2.10. Conduct of Meetings. The Board may to the extent
not prohibited by law adopt such rules and regulations for the conduct of
meetings of stockholders as it shall deem appropriate. Except to the extent
inconsistent with such rules and regulations as adopted by the Board, the
chairman of any meeting of stockholders shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts as, in
the judgment of such chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board or
prescribed by the chairman of the meeting, may to the extent not prohibited by
law include, without limitation, the following: (a) the establishment of an
agenda or order of business for the meeting; (b) rules and procedures for
maintaining order at the meeting and the safety of those present; (c)
limitations on attendance at or participation in the meeting to stockholders of
record of the Corporation, their duly authorized and constituted proxies or such
other persons as the chairman of the meeting shall determine; (d) restrictions
on entry to the meeting after the time fixed for the commencement thereof; and
(e) limitations on the time allotted to questions or comments by participants.
The date and time of the opening and closing of the polls for each matter upon
which the stockholders will vote at a meeting shall be announced at the meeting
by the person presiding over the meeting. Unless and to the extent determined by
the Board or the chairman of the meeting, meetings of stockholders shall not be
required to be held in accordance with the rules of parliamentary procedure.
ARTICLE III
THE BOARD
Section 3.1. General Powers. The business and affairs of the
Corporation shall be managed under the direction of the Board. In addition to
the powers and authorities expressly conferred upon the Board by these Bylaws,
the Board may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute, by the Certificate of Incorporation or by
these Bylaws required to be exercised or done by the stockholders. Except as
provided in the following sentence with respect to actions with respect to the
matters set forth in Annex A hereto, all decisions of the Board shall require
the affirmative vote of a majority of
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the Directors present at a meeting at which a quorum is present. So long as each
of Phillips Petroleum Company, a Delaware corporation ("Phillips"), and Duke
Energy corporation, a North Carolina corporation ("Duke"), owns, directly or
indirectly, at least 20% of the Common Stock, no action shall be taken by the
Board with respect to the matters set forth in Annex A hereto without the prior
approval of at least eight of the 11 Directors of the Board.
Section 3.2. Number; Qualifications and Tenure. The number of
the Directors shall be 11. A Director need not be a stockholder of the
Corporation.
Section 3.3. Regular Meetings. The Board shall meet at least
quarterly. The Board may, by resolution and notice to each of the Directors,
provide the time and place for the holding of additional regular meetings
without other notice than such resolution and notice to the Directors.
Section 3.4. Special Meetings. A special meeting of the Board
may be called at any time on two Business Days' prior notice at the request of
(a) the Chairman of the Board or (b) any four Directors. As used in these
Bylaws, the term "Business Day" shall mean any day on which banks are generally
open to conduct business in the State of New York. The place of any special
meeting shall be the corporate headquarters of the Corporation unless otherwise
agreed by a majority of the Directors.
Section 3.5. Notice. Written notice of all regular meetings of
the Board must be given to all Directors at least 15 days prior to the regular
meeting of the Board and two Business Days prior to any special meeting of the
Board. All notices and other communications to be given to Directors shall be
sufficiently given for all purposes hereunder if in writing and delivered by
hand, courier or overnight delivery service or three days after being mailed by
certified or registered mail, return receipt requested, with appropriate postage
prepaid, or when received in the form of a telegram or facsimile, and shall be
directed to the address or facsimile number as such Director shall designate by
notice to the Corporation. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board need be specified in the
notice of such meeting, except for amendments to these Bylaws, as provided under
Article VIII. A meeting may be held at any time without notice if all the
Directors are present or if those not present waive notice of the meeting in
accordance with Section 6.4.
Section 3.6. Action by Consent of Board. To the extent
permitted by applicable law, the Board and any committee thereof may act without
a meeting so long as all members of the Board or committee shall have executed a
written consent with respect to any Board action taken in lieu of a meeting.
Section 3.7. Conference Telephone Meetings. Members of the
Board or any committee thereof may participate in a meeting of the Board or such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at such
meeting.
Section 3.8. Quorum. At least six Directors, present in
person, participating in accordance with Section 3.7 or represented by proxy,
shall constitute a quorum for the
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transaction of business, but if at any meeting of the Board there shall be less
than a quorum present, a majority of the Directors present may adjourn the
meeting from time to time without further notice. Subject to the supermajority
voting provisions of Section 3.1, the act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board.
The Directors present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough Directors
to leave less than a quorum.
Section 3.9. Vacancies; Increases in the Number of Directors.
Vacancies and newly created directorships resulting from any increase in the
authorized number of Directors may be filled by a majority of the Directors then
in office, although less than a quorum, or a sole remaining Director; and any
Director so chosen shall hold office until the next annual election and until
his successor shall be duly elected and shall qualify, unless sooner displaced.
Section 3.10. Executive and Other Committees. (a) The Board
may establish committees of the Board and, to the extent not inconsistent with
the supermajority voting provisions of Section 3.1, may delegate certain of its
responsibilities to such committees, provided that so long as each of Phillips
and Duke owns, directly or indirectly, at least 20% of the Common Stock, each
committee of the Board, other than the audit committee, shall include at least
one Director designated by Phillips who is not an Independent Director (as
hereinafter defined) and one Director designated by Duke who is not an
Independent Director.
(b) The Board shall have an audit committee comprised of three
Independent Directors, which audit committee shall establish a written audit
committee charter in accordance with the rules of the New York Stock Exchange,
Inc. (the "NYSE"), as amended from time to time. "Independent Director" shall
mean a Director meeting the independence and experience requirements, as set
forth by the NYSE as of __ , 2000 for membership on the audit committee of the
Board, with respect to each of Phillips, Duke and the Corporation.
(c) Unless the Board shall otherwise provide, a majority of
any committee may fix the time and place of its meetings and, subject to the
supermajority voting provisions of Section 3.1, may determine its action. Notice
of such meetings shall be given to each member of the committee in the manner
provided for in Section 3.5 of these Bylaws. Subject to Section 3.10(a), the
Board shall have power at any time to fill vacancies in, to change the
membership of, or to dissolve any such committee. Nothing herein shall be deemed
to prevent the Board from appointing one or more committees consisting in whole
or in part of persons who are not Directors; provided, however, that no such
committee shall have or may exercise any authority of the Board.
Section 3.11. Removal. Any Director or the entire Board may be
removed, with or without cause, by the holders of a majority of the Voting
Stock.
Section 3.12. Records. The Board shall cause to be kept a
record containing the minutes of the proceedings of the meetings of the Board
and of the stockholders, appropriate stock books and registers and such books of
records and accounts as may be necessary for the proper conduct of the business
of the Corporation.
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ARTICLE IV
OFFICERS
Section 4.1. Elected Officers. The executive officers of the
Corporation shall be selected by, and serve at the pleasure of, the Board. Such
officers shall have the authority and duties delegated to each of them,
respectively, by the Board from time to time. The elected officers of the
Corporation shall be a Chairman of the Board, a President, a Secretary, a
Treasurer, and such other officers (including, without limitation, Executive
Vice Presidents, Senior Vice Presidents and Vice Presidents) as the Board from
time to time may deem proper. The Chairman of the Board shall be chosen from
among the Directors. All officers elected by the Board shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. The Board or any committee thereof
may from time to time elect, or the Chairman of the Board may appoint, such
other officers (including one or more Vice Presidents, Controllers, Assistant
Secretaries and Assistant Treasurers), as may be necessary or desirable for the
conduct of the business of the Corporation. Such other officers and agents shall
have such duties and shall hold their offices for such terms as shall be
provided in these Bylaws or as may be prescribed by the Board or such committee
or by the Chairman of the Board, as the case may be.
Section 4.2. Election and Term of Office. The elected officers
of the Corporation shall be elected annually by the Board at the regular meeting
of the Board held after the annual meeting of the stockholders. If the election
of officers shall not be held at such meeting, such election shall be held as
soon thereafter as convenient. Each officer shall hold office until such
person's successor shall have been duly elected and shall have qualified or
until such person's death or until he shall resign or be removed pursuant to
Section 4.8.
Section 4.3. Chairman of the Board; Chief Executive Officer.
The Chairman of the Board shall preside at all meetings of the stockholders and
of the Board and shall be the Chief Executive Officer of the Corporation. The
Chairman of the Board shall be responsible for the general management of the
affairs of the Corporation and shall perform all duties incidental to such
person's office which may be required by law and all such other duties as are
properly required of him by the Board. He shall make reports to the Board and
the stockholders and shall see that all orders and resolutions of the Board and
of any committee thereof are carried into effect. The Chairman of the Board may
also serve as President, if so elected by the Board. The Directors also may
elect a vice-chairman to act in the place of the Chairman upon his or her
absence or inability to act.
Section 4.4. President. The President shall act in a general
executive capacity and shall assist the Chairman of the Board in the
administration and operation of the Corporation's business and general
supervision of its policies and affairs. The President, if he is also a
director, shall, in the absence of or because of the inability to act of the
Chairman of the Board, perform all duties of the Chairman of the Board and
preside at all meetings of stockholders and of the Board.
Section 4.5. Vice Presidents. Each Executive Vice President
and Senior Vice President and any Vice President shall have such powers and
shall perform such duties as shall be assigned to him by the Board or the
Chairman of the Board.
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Section 4.6. Treasurer. (a) The Treasurer shall exercise
general supervision over the receipt, custody and disbursement of corporate
funds. The Treasurer shall cause the funds of the Corporation to be deposited in
such banks as may be authorized by the Board, or in such banks as may be
designated as depositories in the manner provided by resolution of the Board.
The Treasurer shall, in general, perform all duties incident to the office of
the Treasurer and shall have such further powers and duties and shall be subject
to such directions as may be granted or imposed from time to time by the Board
or the Chairman of the Board.
Section 4.7. Secretary. (a) The Secretary shall keep or cause
to be kept, in one or more books provided for that purpose, the minutes of all
meetings of the Board, the committees of the Board and the stockholders. The
Secretary shall see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; shall be custodian of the
records and the seal of the Corporation and affix and attest the seal to all
stock certificates of the Corporation (unless the seal of the Corporation on
such certificates shall be a facsimile, as hereinafter provided) and affix and
attest the seal to all other documents to be executed on behalf of the
Corporation under its seal; and shall see that the books, reports, statements,
certificates and other documents and records required by law to be kept and
filed are properly kept and filed; and in general, shall perform all the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to the Secretary by the Board or the Chairman of the Board.
(b) Assistant Secretaries shall have such of the authority and
perform such of the duties of the Secretary as may be provided in these Bylaws
or assigned to them by the Board, the Chairman of the Board or the Secretary.
Assistant Secretaries shall assist the Secretary in the performance of the
duties assigned to the Secretary, and in assisting the Secretary, each Assistant
Secretary shall for such purpose have the powers of the Secretary. During the
Secretary's absence or inability, the Secretary's authority and duties shall be
possessed by such Assistant Secretary or Assistant Secretaries as the Board or
the Chairman of the Board may designate.
Section 4.8. Removal. Any officer elected, or agent appointed,
by the Board may be removed by the affirmative vote of a majority of the Board
whenever, in its judgment, the best interests of the Corporation would be served
thereby. Any officer or agent appointed by the Chairman of the Board may be
removed by him whenever, in the judgment of the Chairman of the Board, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of such person's successor,
such person's death, such person's resignation or such person's removal,
whichever event shall first occur, except as otherwise provided in an employment
contract or under an employee deferred compensation plan.
Section 4.9. Vacancies. A newly created elected office and a
vacancy in any elected office because of death, resignation or removal may be
filled by the Board for the unexpired portion of the term at any meeting of the
Board. Any vacancy in an office appointed by the Chairman of the Board because
of death, resignation or removal may be filled by the Chairman of the Board.
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ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
Section 5.1. Stock Certificates and Transfers. The interest of
each stockholder of the Corporation shall be evidenced by certificates for
shares of stock in such form as the appropriate officers of the Corporation may
from time to time prescribe. The shares of the stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof in person or
by such person's attorney, upon surrender for cancellation of certificates for
at least the same number of shares, with an assignment and power of transfer
endorsed thereon or attached thereto, duly executed, with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require. The certificates of stock shall be signed, countersigned and registered
in such manner as the Board may by resolution prescribe, which resolution may
permit all or any of the signatures on such certificates to be in facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue. Notwithstanding the foregoing
provisions regarding share certificates, the proper officers of the Corporation
may provide that some or all of any or all classes or series of the
Corporation's common or any preferred shares may be uncertificated shares.
Section 5.2. Lost, Stolen or Destroyed Certificates. No
certificate for shares of stock in the Corporation shall be issued in place of
any certificate alleged to have been lost, destroyed or stolen, except on
production of such evidence of such loss, destruction or theft and on delivery
to the Corporation of a bond of indemnity in such amount, upon such terms and
secured by such surety, as the Board or any financial officer may in its or such
person's discretion require.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.1. Fiscal Year. The fiscal year of the Corporation
shall begin on the first day of January and end on the thirty-first day of
December of each year.
Section 6.2. Dividends. The Board may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and the Certificate of
Incorporation.
Section 6.3. Seal. The corporate seal, if any, shall have
inscribed thereon the words "Corporate Seal," the year of incorporation and the
word "Delaware."
Section 6.4. Waiver of Notice. Whenever any notice is required
to be given to any stockholder or Director under the provisions of the DGCL or
these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Neither the business to be
transacted at, nor the purpose of, any annual or special meeting of the
stockholders or the Board or committee thereof need be specified in any waiver
of notice of such meeting.
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Section 6.5. Audits. The accounts, books and records of the
Corporation shall be audited upon the conclusion of each fiscal year by an
independent certified public accountant selected by the Board, and it shall be
the duty of the Board to cause such audit to be done annually.
Section 6.6. Resignations. Any Director or any officer,
whether elected or appointed, may resign at any time by giving written notice of
such resignation to the Chairman of the Board or the Secretary, and such
resignation shall be deemed to be effective as of the close of business on the
date said notice is received by the Chairman of the Board of the Secretary, or
at such later time as is specified therein. No formal action shall be required
of the Board or the stockholders to make any such resignation effective.
ARTICLE VII
CONTRACTS, PROXIES, ETC.
Section 7.1. Contracts. Except as otherwise required by law,
the Certificate of Incorporation, a Preferred Stock Designation or these Bylaws,
any contracts or other instruments may be executed and delivered in the name and
on the behalf of the Corporation by such officer or officers of the Corporation
as the Board may from time to time direct. Such authority may be general or
confined to specific instances as the Board may determine. The Chairman of the
Board, the President or any Executive Vice President, Senior Vice President or
Vice President may execute bonds, contracts, deeds, leases and other instruments
to be made or executed for or on behalf of the Corporation. Subject to any
restrictions imposed by the Board, the Chairman of the Board, the President or
any Executive Vice President, Senior Vice President or Vice President of the
Corporation may delegate contractual powers to others under such person's
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise of
such delegated power.
Section 7.2. Proxies. Unless otherwise provided by resolution
adopted by the Board, the Chairman of the Board, the President or any Executive
Vice President, Senior Vice President or Vice President may from time to time
appoint an attorney or attorneys or agent or agents of the Corporation, in the
name and on behalf of the Corporation, to cast the votes which the Corporation
may be entitled to cast as the holder of stock or other securities in any other
corporation, any of whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock or other securities of such
other corporation, or to consent in writing, in the name of the Corporation as
such holder, to any action by such other corporation, and may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on behalf
of the Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
ARTICLE VIII
AMENDMENTS
These Bylaws, including this Article VIII, may be altered,
amended or repealed and new Bylaws may be adopted (a) at any annual or special
meeting of stockholders by the affirmative vote of the holders of a majority of
the voting power of the stock issued and
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outstanding and entitled to vote thereat or (b) by the affirmative vote of a
majority of the Board; provided, however, that so long as each of Duke and
Phillips owns at least 20%, directly or indirectly, of the Common Stock, any
proposed alteration, amendment or repeal of, or the adoption of any Bylaw
inconsistent with Sections 3.1 through 3.11 or this Article VIII, by the
stockholders or the Board shall require the consent of both Duke and Phillips;
and provided, further, that, in the case of any such stockholder action at a
special meeting of stockholders, notice of the proposed alteration, amendment,
repeal or adoption of such Bylaws must be contained in the notice of such
special meeting.
-12-
<PAGE> 32
ANNEX A
SUPER-MAJORITY ITEMS
1. Compensation policies for employees of the Corporation, including
specific compensation and benefit plans and programs, to the extent
such policies are of the type that would customarily be considered by a
compensation committee of the board of directors of a comparably sized,
publicly-traded corporation; provided, however, that these policies
shall not include the hiring and firing and compensation of senior
officers and managers, evaluating their performance and planning for
their succession.
2. Entering a new line of business outside of the midstream gas gathering,
processing, marketing and transportation businesses (and directly
related activities) in the United States and Canada.
3. A change in auditors.
4. The following transactions:
a) Any merger, consolidation, recapitalization, acquisition,
divestiture, joint venture or alliance (or a related series of
such transactions) involving the acquisition or expenditure
(in the form of cash or otherwise) of in excess of
$200,000,000 in value to or from the Corporation;
b) Any shut-down of a facility having a fair market value in
excess of $100,000,000;
c) Entering into any sales contract or commitment that has a term
of 5 years or more and that involves annual revenues to the
Corporation in excess of 5% of the Corporation's total annual
sales revenues for the most recently completed fiscal year;
d) Liquidation or dissolution of the Corporation.
5. Any capital expenditure in excess of $200,000,000 (other than a capital
expenditure to effect any merger, consolidation, recapitalization,
acquisition, divestiture, joint venture or alliance).
6. Any borrowing in excess of $200,000,000.
7. The settlement of actions or claims against the Corporation involving
payment by the Corporation of in excess of $25,000,000, excluding
amounts covered or reimbursed by insurance.
8. Entering into transactions with either Duke or Phillips or Affiliates
of either on terms that are clearly less favorable than those terms
that are within the range of comparable transactions between
unaffiliated third parties.
-13-
<PAGE> 33
If a particular action that the Corporation proposes to take is reflected in an
operating or capital budget of the Corporation that has been approved by eight
or more directors, no further approval of such action is required before it may
be taken, notwithstanding the inclusion of such action in this Annex A.
-14-
<PAGE> 34
EXHIBIT C
Terms of PGCSI Parent Rights
1. Definitions. As used in this Exhibit C, the following terms shall
have the meanings set forth below (terms not defined herein shall have the
meanings specified therefor in the Agreement of Merger):
(a) "Agreement of Merger" means the Agreement of Merger to
which this Exhibit C is annexed.
(b) "Average Market Price" shall mean, with respect to the
Surviving Corporation Common Stock, the average of the closing prices,
as reported on the NYSE Composite Tape, on each of the first five days
of trading on the NYSE (exclusive of the pricing day).
(c) "Determination Date" shall mean the sixth day of trading
of the Surviving Corporation Common Stock on the NYSE (exclusive of the
pricing day).
(d) "Duke's Corporation Interest" shall mean the difference
between (x) the Parties' Corporation Interest and (y) Phillips'
Corporation Interest.
(e) "Enterprise Value" shall mean the sum of (x) the Parties'
Equity Value and (y) $2,400,000,000; provided that, if the Effective
Time is on or after the date two years after the consummation of the
Contribution Closing, "Enterprise Value" shall mean $5,500,000,000.
(f) "IPO" shall mean the initial offering of shares of
Surviving Corporation Common Stock to the public in a transaction
registered under the Securities Act of 1933, as amended.
(g) "NYSE" shall mean the New York Stock Exchange, Inc.
(h) "Parties' Corporation Interest" shall mean the difference
between (x) 100% and (y) the Public's Corporation Interest.
(i) "Parties' Equity Value" shall mean the product of (i) the
quotient of (x) the Parties' Corporation Interest divided by (y) the
Public's Actual Corporation Interest multiplied by (ii) the Public's
Equity Value.
(j) "PGCSI Parent" shall mean Phillips Petroleum Company.
(k) "Phillips' Corporation Interest" shall mean the quotient,
expressed as a percentage, of (x) Phillips Equity Value divided by (y)
Total Equity Value.
(l) "Phillips Enterprise Value" shall mean the product of (x)
the Enterprise Value and (y) .389.
<PAGE> 35
(m) "Phillips Equity Value" shall mean the difference between
(x) Phillips Enterprise Value and (y) $1,200,000,000.
(n) "Public's Actual Corporation Interest" shall mean the
quotient, expressed as a percentage, of (x) [___][1] divided by (y)
[___][2].
(o) "Public's Corporation Interest" shall mean the quotient,
expressed as a percentage, of (x) [___][3] divided by (y) [___][2].
(p) "Public's Equity Value" shall mean the product of (i) the
Average Market Price multiplied by (ii) the number of shares sold by
the Surviving Corporation in the IPO (which excludes shares issued to
officers and employees of the Surviving Corporation or the Company
concurrently with the IPO pursuant to compensation or benefit plans),
but excluding any shares sold pursuant to the underwriters'
over-allotment option.
(q) "Surviving Corporation Common Stock" shall mean the common
stock, par value $.01 per share, of the Surviving Corporation.
(r) "Total Equity Value" shall mean the quotient of (x) the
Public's Equity Value divided by (y) the Public's Actual Corporation
Interest.
2. Non-Transferability.
2.1 The right of PGCSI Parent to receive the Phillips
Additional Shares (as defined herein) will not be represented by
certificates.
2.2 The right of PGCSI Parent to receive the Phillips
Additional Shares may not be sold, assigned, conveyed, pledged,
hypothecated or otherwise transferred by PGCSI Parent, and Surviving
Corporation shall not record or recognize any such attempted transfer,
except by will or under the laws of descent and distribution, or
otherwise by operation of applicable law. Any such attempted sale,
assignment, conveyance, pledge, hypothecation or other transfer shall
be null and void and without effect.
- --------
[1] equal to the number of shares of Surviving Corporation Common Stock sold by
the Surviving Corporation in the IPO (which excludes shares issued to officers
and employees of the Surviving Corporation or the Company concurrently with the
IPO pursuant to compensation or benefit plans), but excluding any shares sold
pursuant to the underwriters' over-allotment option.
[2] equal to the number of shares of Surviving Corporation Common Stock to be
outstanding immediately after the Merger (including shares to be issued pursuant
to rights received in the Merger) and the IPO, plus shares issued to officers
and employees of the Surviving Corporation or the Company concurrently with the
IPO pursuant to compensation or benefit plans, but excluding any shares sold
pursuant to the underwriters' over-allotment option.
[3] equal to the number of shares of Surviving Corporation Common Stock sold by
the Surviving Corporation in the IPO, plus any shares issued to officers and
employees of the Surviving Corporation or the Company concurrently with the IPO
pursuant to compensation or benefit plans, but excluding any shares sold
pursuant to the underwriters' over-allotment option.
2
<PAGE> 36
3. Distribution of Phillips Additional Shares.
3.1. Phillips Additional Shares.
(a) Following the Determination Date, the Surviving
Corporation shall issue to PGCSI Parent a number of shares of the
Surviving Corporation Common Stock (which shares shall be validly
issued, fully paid and nonassessable) equal to (i) the Phillips
Corporation Interest multiplied by _______ [4], less (ii)
______________ shares [5] (the "Phillips Additional Shares").
Certificates representing the Phillips Additional Shares shall be
delivered by the Surviving Corporation to PGCSI Parent within two (2)
business days following the Determination Date.
(b) Notwithstanding the provisions of subsection 3.1(a)
hereof, the Surviving Corporation shall not issue any fractional shares
of Surviving Corporation Common Stock to PGCSI Parent. To the extent it
would otherwise be required to issue fractional shares of Surviving
Corporation Common Stock to PGCSI Parent pursuant to such subsection,
the Surviving Corporation shall in lieu thereof pay cash in an amount
equal to the fractional share percentage multiplied by the Average
Market Price. Such payment for fractional shares shall be forwarded to
PGCSI Parent simultaneously with forwarding the Phillips Additional
Shares.
3.2 Certain Adjustments. For all purposes hereof, all
calculations required to be made pursuant to this Exhibit shall be
appropriately adjusted to take into account any stock dividend, stock
split, combination of shares, or reclassification, or any merger,
consolidation, spin-off, or partial or complete liquidation of the
Surviving Corporation occurring during the period commencing on the
date hereof and terminating on the distribution of the Surviving
Corporation Common Stock pursuant hereto.
4. Notices. Except as otherwise expressly set forth herein, any notice,
request, instruction, correspondence or other document to be given thereunder by
any party to another party (herein collectively in this Section 4 called a
"Notice") shall be in writing and delivered personally or mailed by registered
or certified mail, postage prepaid and return receipt requested (except in such
case where mailing by first class mail is expressly permitted), or sent by
telecopier, as follows:
- ---------------------
[4] equal to the number of shares of Surviving Corporation Common Stock to be
outstanding immediately after the Merger (including shares to be issued pursuant
to rights received in the Merger) and the IPO, plus shares issued to officers
and employees of the Surviving Corporation or the Company concurrently with the
IPO pursuant to compensation or benefits plans, but excluding any shares sold
pursuant to the underwriters' over-allotment option.
[5] equal to the number of shares initially issued to PGCSI Parent in the Merger
(i.e., the same blank in 3.1(e) of Merger Agreement).
3
<PAGE> 37
(a) If to the Surviving Corporation, addressed to:
Duke Energy Field Services Corporation
17th Street, Suite 900
Denver, Colorado 80202
Attention: Martha B. Wyrsch
Fax No.: (303) 605-1605
With a copy to:
Duke Energy Corporation
5400 Westheimer Court, 8th Floor
Houston, Texas 77056-5310
Attention: Richard K. McGee
Fax No.: (713) 569-2491
and
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002-6760
Attention: Bruce R. Bilger
Fax No.: (713) 615-5429
(b) If to PGCSI Parent, addressed to:
Phillips Petroleum Company
1266 Adams Building
Bartlesville, Oklahoma 74004
Attention: Clyde W. Lea
Fax No.: (918) 662-2301
With a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Andrew R. Brownstein
Fax No.: (212) 403-2000
Any Notice given by personal delivery or mail shall be effective upon actual
receipt. Any Notice given by telecopier shall be effective upon actual receipt
if received during the recipient's normal business hours, or at the beginning of
the recipient's next business day after receipt if not received during the
recipient's normal business hours. Any party may change any address to which a
Notice is to be given to it by giving a Notice of such change of address as
provided above.
4
<PAGE> 38
EXHIBIT D
Terms of DENG Rights
1. Definitions. As used in this Exhibit D, the following terms shall
have the meanings set forth below (terms not defined herein shall have the
meanings specified therefor in the Agreement of Merger):
(a) "Agreement of Merger" means the Agreement of Merger to
which this Exhibit D is annexed.
(b) "Average Market Price" shall mean, with respect to the
Surviving Corporation Common Stock, the average of the closing prices,
as reported on the NYSE Composite Tape, on each of the first five days
of trading on the NYSE (exclusive of the pricing day).
(c) "DENG" shall mean Duke Energy Natural Gas Corporation.
(d) "Determination Date" shall mean the sixth day of trading
of the Surviving Corporation Common Stock on the NYSE (exclusive of the
pricing day).
(e) "Duke's Corporation Interest" shall mean the difference
between (x) the Parties' Corporation Interest and (y) Phillips'
Corporation Interest.
(f) "Enterprise Value" shall mean the sum of (x) the Parties'
Equity Value and (y) $2,400,000,000; provided that, if the Effective
Time is on or after the date two years after the consummation of the
Contribution Closing, "Enterprise Value" shall mean $5,500,000,000.
(g) "IPO" shall mean the initial offering of shares of
Surviving Corporation Common Stock to the public in a transaction
registered under the Securities Act of 1933, as amended.
(h) "NYSE" shall mean the New York Stock Exchange, Inc.
(i) "Parties' Corporation Interest" shall mean the difference
between (x) 100% and (y) the Public's Corporation Interest.
(j) "Parties' Equity Value" shall mean the product of (i) the
quotient of (x) the Parties' Corporation Interest divided by (y) the
Public's Actual Corporation Interest multiplied by (ii) the Public's
Equity Value.
(k) "Phillips' Corporation Interest" shall mean the quotient,
expressed as a percentage, of (x) Phillips Equity Value divided by (y)
Total Equity Value.
(l) "Phillips Enterprise Value" shall mean the product of (x)
the Enterprise Value and (y) .389.
<PAGE> 39
(m) "Phillips Equity Value" shall mean the difference between
(x) Phillips Enterprise Value and (y) $1,200,000,000.
(n) "Public's Actual Corporation Interest" shall mean the
quotient, expressed as a percentage, of (x) [___][1] divided by (y)
[___] [2].
(o) "Public's Corporation Interest" shall mean the quotient,
expressed as a percentage, of (x) [___] [3] divided by (y) [___] [2].
(p) "Public's Equity Value" shall mean the product of (i) the
Average Market Price multiplied by (ii) the number of shares sold by
the Surviving Corporation in the IPO (which excludes shares issued to
officers and employees of the Surviving Corporation or the Company
concurrently with the IPO pursuant to compensation or benefit plans),
but excluding any shares sold pursuant to the underwriters'
over-allotment option.
(q) "Surviving Corporation Common Stock" shall mean the common
stock, par value $.01 per share, of the Surviving Corporation.
(r) "Total Equity Value" shall mean the quotient of (x) the
Public's Equity Value divided by (y) the Public's Actual Corporation
Interest.
2. Non-Transferability.
2.1 The right of DENG to receive the Duke Additional Shares
(as defined herein) will not be represented by certificates.
2.2 The right of DENG to receive the Duke Additional Shares
may not be sold, assigned, conveyed, pledged, hypothecated or otherwise
transferred by DENG, and Surviving Corporation shall not record or
recognize any such attempted transfer, except by will or under the laws
of descent and distribution, or otherwise by operation of applicable
law. Any such attempted sale, assignment, conveyance, pledge,
hypothecation or other transfer shall be null and void and without
effect.
- ----------------
[1] equal to the number of shares of Surviving Corporation Common Stock sold by
the Surviving Corporation in the IPO (which excludes shares issued to officers
and employees of the Surviving Corporation or the Company concurrently with the
IPO pursuant to compensation or benefit plans), but excluding any shares sold
pursuant to the underwriters' over-allotment option.
[2] equal to the number of shares of Surviving Corporation Common Stock to be
outstanding immediately after the Merger (including shares to be issued pursuant
to rights received in the Merger) and the IPO, plus shares issued to officers
and employees of the Surviving Corporation or the Company concurrently with the
IPO pursuant to compensation or benefit plans, but excluding any shares sold
pursuant to the underwriters' over-allotment option.
[3] equal to the number of shares of Surviving Corporation Common Stock sold by
the Surviving Corporation in the IPO, plus any shares issued to officers and
employees of the Surviving Corporation or the Company concurrently with the IPO
pursuant to compensation or benefit plans, but excluding any shares sold
pursuant to the underwriters' over-allotment option.
2
<PAGE> 40
3. Distribution of Duke Additional Shares.
3.1. Duke Additional Shares.
(a) Following the Determination Date, the Surviving
Corporation shall issue to DENG a number of shares of the Surviving
Corporation Common Stock (which shares shall be validly issued, fully
paid and nonassessable) equal to (i) the Duke Corporation Interest
multiplied by _______ [4], less (ii) ______________ shares [5] (the
"Duke Additional Shares"). Certificates representing the Duke
Additional Shares shall be delivered by the Surviving Corporation to
DENG within two (2) business days following the Determination Date.
(b) Notwithstanding the provisions of subsection 3.1(a)
hereof, the Surviving Corporation shall not issue any fractional shares
of Surviving Corporation Common Stock to DENG. To the extent it would
otherwise be required to issue fractional shares of Surviving
Corporation Common Stock to DENG pursuant to such subsection, the
Surviving Corporation shall in lieu thereof pay cash in an amount equal
to the fractional share percentage multiplied by the Average Market
Price. Such payment for fractional shares shall be forwarded to DENG
simultaneously with forwarding the Duke Additional Shares.
3.2 Certain Adjustments. For all purposes hereof, all
calculations required to be made pursuant to this Exhibit shall be
appropriately adjusted to take into account any stock dividend, stock
split, combination of shares, or reclassification, or any merger,
consolidation, spin-off, or partial or complete liquidation of the
Surviving Corporation occurring during the period commencing on the
date hereof and terminating on the distribution of the Surviving
Corporation Common Stock pursuant hereto.
4. Notices. Except as otherwise expressly set forth herein, any notice,
request, instruction, correspondence or other document to be given thereunder by
any party to another party (herein collectively in this Section 4 called a
"Notice") shall be in writing and delivered personally or mailed by registered
or certified mail, postage prepaid and return receipt requested (except in such
case where mailing by first class mail is expressly permitted), or sent by
telecopier, as follows:
- --------------------
[4] equal to the number of shares of Surviving Corporation Common Stock to be
outstanding immediately after the Merger (including shares to be issued pursuant
to rights received in the Merger) and the IPO, plus shares issued to officers
and employees of the Surviving Corporation or the Company concurrently with the
IPO pursuant to compensation or benefits plans, but excluding any shares sold
pursuant to the underwriters' over-allotment option.
[5] equal to the number of shares initially issued to DENG in the Merger (i.e.,
the same blank in 3.1(f) of Merger Agreement).
3
<PAGE> 41
(a) If to the Surviving Corporation, addressed to:
Duke Energy Field Services Corporation
17th Street, Suite 900
Denver, Colorado 80202
Attention: Martha B. Wyrsch
Fax No.: (303) 605-1605
With a copy to:
Duke Energy Corporation
5400 Westheimer Court, 8th Floor
Houston, Texas 77056-5310
Attention: Richard K. McGee
Fax No.: (713) 569-2491
and
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002-6760
Attention: Bruce R. Bilger
Fax No.: (713) 615-5429
(b) If to DENG, addressed to:
Duke Energy Natural Gas Corporation
5400 Westheimer Court, 8th Floor
Houston, Texas 77056-5310
Attention: Richard K. McGee
Fax No.: (713) 569-2491
With a copy to:
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002-6760
Attention: Bruce R. Bilger
Fax No.: (713) 615-5429
4
<PAGE> 42
Any Notice given by personal delivery or mail shall be effective upon actual
receipt. Any Notice given by telecopier shall be effective upon actual receipt
if received during the recipient's normal business hours, or at the beginning of
the recipient's next business day after receipt if not received during the
recipient's normal business hours. Any party may change any address to which a
Notice is to be given to it by giving a Notice of such change of address as
provided above.
5
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
- ------------ ------------
NUMBER SHARES
DEF
- ------------ ------------
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
CUSIP 26439Y 10 1
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN THE CITY OF NEW YORK OR
CHARLOTTE, NORTH CAROLINA
DUKE ENERGY FIELD SERVICES CORPORATION
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
THE PAR VALUE OF $.01 PER SHARE OF
Duke Energy Field Services Corporation, transferable on the books of the
Corporation by the registered owner hereof in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate
and the shares represented hereby are issued, and shall be held, subject to all
of the provisions of the Certificate of Incorporation, as from time to time
amended, of the Corporation, to all of which provisions the holder, by
acceptance hereof, assents. This certificate is not valid until countersigned by
the Transfer Agent and registered by the Registrar.
In Witness Whereof the said Corporation has caused the facsimile
signatures of its duly authorized officers to be affixed to this certificate
this
DATED:
COUNTERSIGNED AND REGISTERED
DUKE ENERGY CORPORATION
BY TRANSFER AGENT
AND REGISTRAR /s/ MARTHA B. WYRSCH /s/ J. W. MOGG
AUTHORIZED SIGNATURE SECRETARY CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE
[SEAL] OFFICER
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-____________Custodian_________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act: ___________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated ___________________________
SIGN HERE: ____________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAMES WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: ___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 5.1
VINSON & ELKINS L.L.P.
ATTORNEYS AT LAW
2300 FIRST CITY TOWER
1001 FANNIN STREET
HOUSTON, TEXAS 77002-6760
TELEPHONE (713) 758-2222
FAX (713) 758-2346
May 23, 2000
Duke Energy Field Services Corporation
370 17th Street, Suite 900
Denver, Colorado 80202
Ladies and Gentlemen:
We are acting as counsel for Duke Energy Field Services Corporation, a
Delaware corporation (the "Company"), in connection with the proposed offer and
sale (the "Offering") by the Company to the several underwriters (the
"Underwriters") set forth in the underwriting agreement (the "Underwriting
Agreement") to be executed in connection with the Offering by the Company and
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, pursuant to the
prospectus forming a part of a Registration Statement on Form S-1, Registration
No. 333-32502, originally filed with the Securities and Exchange Commission on
March 15, 2000 (such Registration Statement, as amended at the effective date
thereof, being referred to herein as the "Registration Statement"), of an
aggregate of 26,300,000 shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock"), together with a maximum of 3,945,000 shares of Common
Stock which may be sold to the Underwriters pursuant to the over-allotment
option provided in the Underwriting Agreement. Capitalized terms used but not
defined herein have the meanings set forth in the Registration Statement.
We are rendering this opinion as of the time the Registration Statement
becomes effective in accordance with Section 8(a) of the Securities Act of 1933,
as amended.
In connection with this opinion, we have assumed that the Registration
Statement, and any amendments thereto (including post-effective amendments),
will have become effective and the shares of Common Stock will be issued and
sold in compliance with applicable federal and state securities laws and in the
manner described in the Registration Statement and the applicable prospectus.
In connection with the opinion expressed herein, we have examined,
among other things, the Certificate of Incorporation and Bylaws of the Company,
the records of corporate proceedings that have occurred prior to the date hereof
with respect to the Offering, the Registration Statement and the form of
Underwriting Agreement to be executed by the Company and Morgan Stanley & Co.
Incorporated on behalf
<PAGE> 2
Duke Energy Field Services Corporation
Page 2
May 23, 2000
of the Underwriters. We have also reviewed such questions of law as we have
deemed necessary or appropriate.
Based upon the foregoing, we are of the opinion that the shares of
Common Stock proposed to be issued and sold by the Company to the Underwriters
have been validly authorized for issuance and, upon the issuance and delivery
thereof as set forth in the Registration Statement, will be validly issued,
fully paid and nonassessable.
This opinion is limited in all respects to the Constitution of the
State of Delaware and the Delaware General Corporation Law, as interpreted by
the courts of the State of Delaware.
We hereby consent to the statements with respect to us under the
heading "Validity of the Common Stock" in the prospectus forming a part of the
Registration Statement and to the filing of this opinion as an exhibit to the
Registration Statement, but we do not thereby admit that we are within the class
of persons whose consent is required under the provisions of the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission issued thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 10.12
364-DAY CREDIT AGREEMENT
among
DUKE ENERGY FIELD SERVICES, LLC
and
DUKE ENERGY FIELD SERVICES CORPORATION
as Borrowers,
THE LENDERS IDENTIFIED HEREIN
AND
BANK OF AMERICA, N.A.,
as Agent,
MORGAN STANLEY SENIOR FUNDING, INC.,
as Syndication Agent
AND
MERRILL LYNCH CAPITAL CORPORATION
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Co-Documentation Agents
DATED AS OF MARCH 31, 2000
Arranged by:
BANC OF AMERICA SECURITIES LLC,
as Sole Lead Arranger and Sole Book Manager
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS......................................................................1
1.1 Definitions.....................................................................................1
1.2 Computation of Time Periods....................................................................11
1.3 Accounting Terms...............................................................................11
1.4 Time...........................................................................................11
SECTION 2. LOANS................................................................................................12
2.1 Revolving-A Loan Commitment....................................................................12
2.2 Revolving-B Loan Commitment....................................................................12
2.3 Method of Borrowing for Loans..................................................................12
2.4 Funding of Loans...............................................................................13
2.5 Continuations and Conversions..................................................................13
2.6 Minimum Amounts................................................................................14
2.7 Reductions of Revolving Loan Commitments.......................................................14
2.8 Notes..........................................................................................15
2.9 Joint and Several Liability of the Borrowers...................................................15
2.10 Limitation of Liability of Borrowers...........................................................16
SECTION 3. PAYMENTS.............................................................................................17
3.1 Interest.......................................................................................17
3.2 Prepayments....................................................................................18
3.3 Payment in full at Maturity....................................................................19
3.4 Facility Fees..................................................................................19
3.5 Place and Manner of Payments...................................................................19
3.6 Pro Rata Treatment.............................................................................20
3.7 Computations of Interest and Fees..............................................................20
3.8 Sharing of Payments............................................................................21
3.9 Evidence of Debt...............................................................................22
SECTION 4. ADDITIONAL PROVISIONS REGARDING LOANS................................................................22
4.1 Eurodollar Loan Provisions.....................................................................22
4.2 Capital Adequacy...............................................................................25
4.3 Compensation...................................................................................25
4.4 Taxes..........................................................................................26
SECTION 5. CONDITIONS PRECEDENT.................................................................................29
5.1 Closing Conditions.............................................................................29
5.2 Conditions to Loans............................................................................31
SECTION 6. REPRESENTATIONS AND WARRANTIES.......................................................................32
6.1 Organization and Good Standing.................................................................32
6.2 Due Authorization..............................................................................32
6.3 No Conflicts...................................................................................32
6.4 Consents.......................................................................................32
</TABLE>
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<TABLE>
<S> <C> <C>
6.5 Enforceable Obligations........................................................................33
6.6 Financial Condition............................................................................33
6.7 Taxes..........................................................................................33
6.8 Compliance with Law............................................................................33
6.9 Use of Proceeds; Margin Stock..................................................................33
6.10 Government Regulation..........................................................................34
6.11 Solvency.......................................................................................34
6.12 Environmental Matters..........................................................................34
6.13 Material Subsidiaries..........................................................................34
SECTION 7. AFFIRMATIVE COVENANTS................................................................................34
7.1 Information Covenants..........................................................................34
7.2 Preservation of Existence and Franchises.......................................................37
7.3 Books and Records..............................................................................37
7.4 Compliance with Law............................................................................37
7.5 Payment of Taxes and Other Indebtedness........................................................37
7.6 Maintenance of Property; Insurance.............................................................37
7.7 Use of Proceeds................................................................................38
7.8 Audits/Inspections.............................................................................38
7.9 Maintenance of Ownership.......................................................................38
SECTION 8. NEGATIVE COVENANTS...................................................................................38
8.1 Nature of Business.............................................................................39
8.2 Liens..........................................................................................39
8.3 Consolidation and Merger.......................................................................41
8.4 Sale or Lease of Assets........................................................................41
8.5 Transactions with Affiliates...................................................................41
SECTION 9. EVENTS OF DEFAULT....................................................................................42
9.1 Events of Default..............................................................................42
9.2 Acceleration; Remedies.........................................................................44
9.3 Allocation of Payments After Event of Default..................................................45
SECTION 10 AGENCY PROVISIONS....................................................................................45
10.1 Appointment....................................................................................45
10.2 Delegation of Duties...........................................................................46
10.3 Exculpatory Provisions.........................................................................46
10.4 Reliance on Communications.....................................................................47
10.5 Notice of Default..............................................................................47
10.6 Non-Reliance on Agent and Other Lenders........................................................47
10.7 Indemnification................................................................................48
10.8 Agent in Its Individual Capacity...............................................................48
10.9 Successor Agent................................................................................48
SECTION 11. MISCELLANEOUS.......................................................................................49
11.1 Notices........................................................................................49
11.2 Right of Set-Off...............................................................................49
</TABLE>
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<TABLE>
<S> <C> <C>
11.3 Benefit of Agreement...........................................................................50
11.4 No Waiver; Remedies Cumulative.................................................................52
11.5 Payment of Expenses, etc. .....................................................................53
11.6 Amendments, Waivers and Consents...............................................................53
11.7 Counterparts/Telecopy..........................................................................54
11.8 Headings.......................................................................................54
11.9 Defaulting Lender..............................................................................55
11.10 Survival of Indemnification and Representations and Warranties.................................55
11.11 Governing Law; Venue...........................................................................55
11.12 Waiver of Jury Trial; Waiver of Consequential Damages..........................................55
11.13 Severability...................................................................................56
11.14 Further Assurances.............................................................................56
11.15 Entirety.......................................................................................56
11.16 Binding Effect; Continuing Agreement...........................................................56
</TABLE>
SCHEDULES
Schedule 1.1 Commitment Percentages
Schedule 6.13 Material Subsidiaries
Schedule 8.2 Liens
Schedule 8.4 Scheduled Asset Sales
Schedule 11.1 Notices
EXHIBITS
Exhibit 2.3 Form of Notice of Borrowing
Exhibit 2.5 Form of Notice of Continuation/Conversion
Exhibit 2.8(a) Form of Revolving-A Loan Note
Exhibit 2.8(b) Form of Revolving-B Loan Note
Exhibit 11.3(b) Form of Assignment Agreement
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<PAGE> 5
364-DAY CREDIT AGREEMENT
THIS 364-DAY CREDIT AGREEMENT (this "Credit Agreement"), dated as of
March 31, 2000, is entered into among DUKE ENERGY FIELD SERVICES, LLC, a
Delaware limited liability company and DUKE ENERGY FIELD SERVICES CORPORATION, a
Delaware corporation (individually, a "Borrower" and collectively, the
"Borrowers"), the Lenders (as defined herein) and BANK OF AMERICA, N.A., as
administrative agent for the Lenders (in such capacity, the "Agent").
RECITALS
WHEREAS, the Borrowers have requested that the Lenders make available
to them a revolving credit facility in the aggregate amount of $2.8 billion for
the purposes set forth herein; and
WHEREAS, the Lenders have agreed to provide the requested revolving
credit facility to the Borrowers on the terms, and subject to the conditions,
set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1.
DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINITIONS.
As used herein, the following terms shall have the meanings herein
specified unless the context otherwise requires. Defined terms herein shall
include in the singular number the plural and in the plural the singular:
"Adjusted Eurodollar Rate" means the Eurodollar Rate plus (a)
from the Closing Date until 90 days subsequent to the Closing Date,
.50% per annum and (b) from the date 91 days subsequent to the Closing
Date and thereafter, .625% per annum.
"Affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under
direct or indirect common control with such Person. A Person shall be
deemed to control a corporation if such Person possesses, directly or
indirectly, the power to direct or cause direction of the management
and policies of such corporation, whether through the ownership of
voting securities, by contract or otherwise.
"Agency Services Address" means Bank of America, N.A., 901
Main Street, 14th Floor, Dallas, Texas 75202, or such other address as
may be identified by written notice from the Agent to the Borrowers and
the Lenders.
<PAGE> 6
"Agent" means Bank of America, N.A. and any successors and
assigns in such capacity.
"Approved Officer" means the president, a vice president, the
treasurer or the assistant treasurer of the Borrowers or such other
representative of the Borrowers as may be designated by any one of the
foregoing with consent of the Agent.
"Bankruptcy Code" means the Bankruptcy Code in Title 11 of the
United States Code, as amended, modified, succeeded or replaced from
time to time.
"Base Rate" means, for any day, the rate per annum equal to
the greater of (a) the Federal Funds Rate in effect on such day plus
1/2 of 1% or (b) the Prime Rate in effect on such day. If for any
reason the Agent shall have determined (which determination shall be
conclusive absent manifest error) that it is unable after due inquiry
to ascertain the Federal Funds Rate for any reason, including the
inability or failure of the Agent to obtain sufficient quotations in
accordance with the terms hereof, the Base Rate shall be determined
without regard to clause (a) of the first sentence of this definition
until the circumstances giving rise to such inability no longer exist.
Any change in the Base Rate due to a change in the Prime Rate or the
Federal Funds Rate shall be effective on the effective date of such
change in the Prime Rate or the Federal Funds Rate, respectively.
"Base Rate Loan" means a Loan which bears interest based on
the Base Rate.
"Borrowers" means, subject to Section 2.10, Duke Energy Field
Services, LLC, a Delaware limited liability company and Duke Energy
Field Services Corporation, a Delaware corporation and "Borrower" means
either of them.
"Borrowers Obligations" means, without duplication, all of the
obligations of the Borrowers to the Lenders and the Agent, whenever
arising, under this Credit Agreement, the Notes or any of the other
Credit Documents.
"Business Day" means any day other than a Saturday, a Sunday,
a legal holiday or a day on which banking institutions are authorized
or required by law or other governmental action to close in Dallas,
Texas or New York, New York; provided that in the case of Eurodollar
Loans, such day is also a day on which dealings between banks are
carried on in U.S. dollar deposits in the London interbank market.
"Capital Stock" means (a) in the case of a corporation, all
classes of capital stock of such corporation, (b) in the case of a
partnership, partnership interests (whether general or limited), (c) in
the case of a limited liability company, membership interests and (d)
any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
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<PAGE> 7
"Change of Control" means the acquisition, directly or
indirectly, beneficially or of record by any person or group (within
the meaning of the Exchange Act), other than Duke Energy Corporation or
Phillips Petroleum, of more than 50% of the Voting Stock of either
Borrower.
"Closing Date" means the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Commitment Percentages" means the Revolving-A Loan Commitment
Percentage and the Revolving-B Loan Commitment Percentage, individually
or collectively, as appropriate.
"Commitments" means, collectively, the Revolving-A Loan
Commitment and the Revolving-B Loan Commitment of each Lender.
"Credit Documents" means this Credit Agreement, the Notes, any
Notice of Borrowing and all other related agreements and documents
issued or delivered hereunder or thereunder or pursuant hereto or
thereto.
"Credit Exposure" means, as applied to each Lender (a) at any
time prior to the termination of the Commitments, the Revolving-A Loan
Commitment Percentage of such Lender multiplied by the Revolving-A Loan
Commitment plus the Revolving-B Loan Commitment Percentage of such
Lender multiplied by the Revolving-B Loan Commitment and (b) at any
time after the termination of the Commitments, the sum of the principal
balance of the outstanding Loans of such Lender.
"Debt Issuance" means the issuance of any Indebtedness for
borrowed money by a Borrower, other than the issuance of commercial
paper.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Defaulting Lender" means, at any time, any Lender that, at
such time (a) has failed to make a Loan required pursuant to the term
of this Credit Agreement, (b) has failed to pay to the Agent or any
Lender an amount owed by such Lender pursuant to the terms of this
Credit Agreement or (c) has been deemed insolvent by a court of
competent jurisdiction or has become subject to a bankruptcy or
insolvency proceeding or to a receiver, trustee or similar official.
"Dollars" and "$" means dollars in lawful currency of the
United States of America.
"Effective Date" means the date on which the conditions set
forth in Section 5.1 shall have been fulfilled (or waived in the sole
discretion of the Lenders).
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<PAGE> 8
"Eligible Assignee" means (a) a Lender and (b) any other
Person approved by (i) the Borrowers in their sole discretion (or if
subsequent to August 1, 2000, there remains any outstanding Revolving-B
Loans or the Revolving-B Loan Commitment has not been terminated,
approved by the Borrowers, such approval not to be unreasonably
withheld or delayed) and (ii) the Agent (such approval not to be
unreasonably withheld or delayed); provided that (A) the Borrowers'
consent is not required during the existence and continuation of an
Event of Default and (B) neither a Borrower nor an Affiliate of a
Borrower shall qualify as an Eligible Assignee.
"Environmental Laws" means any legal requirement of any
Governmental Authority pertaining to (a) the protection of health,
safety, and the indoor or outdoor environment, (b) the conservation,
management, or use of natural resources and wildlife, (c) the
protection or use of surface water and groundwater or (d) the
management, manufacture, possession, presence, use, generation,
transportation, treatment, storage, disposal, release, threatened
release, abatement, removal, remediation or handling of, or exposure
to, any hazardous or toxic substance or material or (e) pollution
(including any release to land surface water and groundwater) and
includes, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 USC 9601 et seq., Solid
Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976 and Hazardous and Solid Waste Amendment of 1984,
42 USC 6901 et seq., Federal Water Pollution Control Act, as amended by
the Clean Water Act of 1977, 33 USC 1251 et seq., Clean Air Act, as
amended, 42 USC 7401 et seq., Toxic Substances Control Act of 1976, 15
USC 2601 et seq., Hazardous Materials Transportation Act, 49 USC App.
1801 et seq., Occupational Safety and Health Act of 1970, as amended,
29 USC 651 et seq., Oil Pollution Act of 1990, 33 USC 2701 et seq.,
Emergency Planning and Community Right-to-Know Act of 1986, 42 USC
11001 et seq., National Environmental Policy Act of 1969, 42 USC 4321
et seq., Safe Drinking Water Act of 1974, as amended, 42 USC 300(f) et
seq., any analogous implementing or successor law, and any amendment,
rule, regulation, order, or directive issued thereunder.
"Equity Issuance" means any issuance by a Borrower of Capital
Stock, including, without limitation, pursuant to the exercise of
options (other than employee stock options in the ordinary course of
business) or warrants or pursuant to the conversion of debt securities
to equity but excluding, if any, any issuance of Capital Stock to a
Subsidiary of Phillips Petroleum Company as a result of and at the time
of the merger of a Subsidiary of Phillips Petroleum into Duke Energy
Field Services Corporation.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor statute thereto, as interpreted by
the rules and regulations thereunder, all as the same may be in effect
from time to time. References to sections of ERISA shall be construed
also to refer to any successor sections.
"ERISA Affiliate" means an entity, whether or not
incorporated, which is under common control with a Borrower or any of
its Subsidiaries within the meaning of
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<PAGE> 9
Section 4001(a)(14) of ERISA, or is a member of a group which includes
a Borrower or any of its Subsidiaries and which is treated as a single
employer under Sections 414(b), (c), (m), or (o) of the Code.
"Eurodollar Loan" means a Loan bearing interest at the
Adjusted Eurodollar Rate.
"Eurodollar Rate" means with respect to any Eurodollar Loan,
for the Interest Period applicable thereto, a rate per annum equal to
the London Interbank Offered Rate.
"Eurodollar Reserve Percentage" means, for any day, that
percentage (expressed as a decimal) which is in effect from time to
time under Regulation D of the Board of Governors of the Federal
Reserve System (or any successor), as such regulation may be amended
from time to time or any successor regulation, as the maximum reserve
requirement (including, without limitation, any basic, supplemental,
emergency, special, or marginal reserves) applicable with respect to
Eurocurrency liabilities, as that term is defined in Regulation D (or
against any other category of liabilities that includes deposits by
reference to which the interest rate of Eurodollar Loans is
determined).
"Event of Default" has the meaning specified in Section 9.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, as
amended, modified, succeeded or replaced from time to time.
"Extension of Credit" means, as to any Lender, the making of a
Loan by such Lender (or a participation therein by a Lender).
"Facility Fees" has the meaning specified in Section 3.4.
"Fee Letter" means that certain letter agreement, dated as of
the Closing Date, between the Agent and the Borrower, as amended,
modified, supplemented or replaced from time to time.
"Federal Funds Rate" means for any day the rate per annum
(rounded upward to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers
on such day, as published by the Federal Reserve Bank of New York on
the Business Day next succeeding such day; provided that (a) if such
day is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day and
(b) if no such rate is so published on such next succeeding Business
Day, the Federal Funds Rate for such day shall be the average rate
quoted to the Agent on such day on such transactions as determined by
the Agent.
"Floating Eurodollar Rate" means, on any date of
determination, the Eurodollar Rate for a one-month period plus .50% per
annum.
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<PAGE> 10
"Floating Eurodollar Rate Loan" means a Loan accruing interest
at the Floating Eurodollar Rate.
"GAAP" means generally accepted accounting principles in the
United States applied on a consistent basis and subject to Section 1.3.
"Governmental Authority" means any Federal, state, local or
foreign court, monetary authority or governmental agency, authority,
instrumentality or regulatory body.
"Indebtedness" of any Person means, without duplication, (a)
all obligations of such Person for borrowed money, (b) all obligations
of such Person for the deferred purchase price of property or services
purchased, (c) all obligations of such Person created or arising under
any conditional sale or other title retention agreement with respect to
the property acquired, (d) all obligations of such Person under lease
obligations which shall have been, or should be, in accordance with
GAAP, recorded as capital leases in respect of which such Person is
liable as lessee, (e) the face amount of all letter of credit
indebtedness available to be drawn (other than letter of credit
obligations relating to indebtedness included in Indebtedness pursuant
to another clause of this definition) and, without duplication, the
unreimbursed amount of all drafts drawn thereunder, (f) obligations
secured by a Lien on property or assets of such Person, whether or not
assumed (but in any event not exceeding the fair market value of the
property or asset), (g) all guarantees of Indebtedness referred to in
clauses (a) through (f) above, (h) all amounts payable by such Person
in connection with mandatory redemptions or repurchases of preferred
stock, and (i) any obligations of such Person (in the nature of
principal or interest) in respect of acceptances or similar obligations
issued or created for the account of such Person.
"Interest Payment Date" means (a) as to Base Rate Loans and
Floating Eurodollar Rate Loans, the first day of each fiscal quarter of
the Borrowers and the Maturity Date and (b) as to Eurodollar Loans, the
last day of each applicable Interest Period and the Maturity Date and,
in addition, where the applicable Interest Period for a Eurodollar Loan
is greater than three months, then also on the last day of each
three-month period during such Interest Period. If an Interest Payment
Date falls on a date which is not a Business Day, such Interest Payment
Date shall be deemed to be the next succeeding Business Day, except
that in the case of Eurodollar Loans where the next succeeding Business
Day falls in the next succeeding calendar month, then on the next
preceding Business Day.
"Interest Period" means, with respect to Eurodollar Loans, a
period of one, two, three or six months' duration, as the Borrowers may
elect, commencing, in each case, on the date of the borrowing
(including continuations and conversions of Eurodollar Loans);
provided, however, (a) if any Interest Period would end on a day which
is not a Business Day, such Interest Period shall be extended to the
next succeeding Business Day (except that where the next succeeding
Business Day falls in the next succeeding calendar month, then on the
next preceding Business Day), (b) no Interest Period shall extend
beyond the
6
<PAGE> 11
Maturity Date and (c) where an Interest Period begins on a day for
which there is no numerically corresponding day in the calendar month
in which the Interest Period is to end, such Interest Period shall end
on the last Business Day of such calendar month.
"Lender" means any of the Revolving-A Lenders or the
Revolving-B Lenders.
"Lien" means any mortgage, pledge, hypothecation, assignment,
deposit arrangement, security interest, encumbrance, lien (statutory or
otherwise), preference, priority or charge of any kind (including any
agreement to give any of the foregoing, any conditional sale or other
title retention agreement, any financing or similar statement or notice
filed under the Uniform Commercial Code as adopted and in effect in the
relevant jurisdiction or other similar recording or notice statute, and
any lease in the nature thereof).
"Loans" means the Revolving-A Loans and the Revolving-B Loans.
"London Interbank Offered Rate" means, with respect to any
Eurodollar Loan for the Interest Period applicable thereto, the rate of
interest per annum appearing on Telerate Page 3750 (or any successor
page) as the London interbank offered rate for deposits in Dollars at
approximately 11:00 A.M. (London time) two Business Days prior to the
first day of such Interest Period for a term comparable to such
Interest Period; provided, however, if more than one rate is specified
on Telerate Page 3750, the applicable rate shall be the arithmetic mean
of all such rates. If, for any reason, such rate is not available, the
term "London Interbank Offered Rate" shall mean, with respect to any
Eurodollar Loan for the Interest Period applicable thereto, the rate of
interest per annum appearing on such other service as may be nominated
by the British Bankers' Association as the London interbank offered
rate for deposits in Dollars at approximately 11:00 A.M. (London time)
two Business Days prior to the first day of such Interest Period for a
term comparable to such Interest Period; provided, however, if more
than one rate is specified, the applicable rate shall be the arithmetic
mean of all such rates.
"Material Adverse Effect" means a material adverse effect on
the business, financial positions or results of operations of the
Borrowers and their Subsidiaries taken as a whole.
"Material Subsidiary" means any Subsidiary of the Borrowers
that, together with its Subsidiaries, owns in excess of 10% of the
consolidated assets of the Borrowers and their Subsidiaries.
"Maturity Date" means March 30, 2001.
"Multiemployer Plan" means a Plan covered by Title IV of ERISA
which is a multiemployer plan as defined in Section 3(37) or 4001(a)(3)
of ERISA.
"Multiple Employer Plan" means a Plan covered by Title IV of
ERISA, other than a Multiemployer Plan, which a Borrower or any ERISA
Affiliate and at least one employer other than a Borrower or any ERISA
Affiliate are contributing sponsors.
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<PAGE> 12
"Net Cash Proceeds" means the gross cash proceeds received
from a Debt Issuance or an Equity Issuance, net of transaction costs
payable to third parties (rounded downward to the nearest $1,000,000).
"Notes" means the Revolving-A Loan Notes and the Revolving-B
Loan Notes, individually or collectively, as appropriate.
"Notice of Borrowing" means a request by the Borrowers for a
Loan in the form of Exhibit 2.3.
"Notice of Continuation/Conversion" means a request by the
Borrowers for the continuation or conversion of a Loan in the form of
Exhibit 2.5.
"Off Balance Sheet Indebtedness" means any obligation of a
Person that would be considered indebtedness for tax purposes but is
not set forth on the balance sheet of such Person, including, but not
limited to, (a) any synthetic lease, tax retention operating lease, off
balance sheet loan or similar off-balance sheet financing product of
such Person, (b) the aggregate amount of uncollected accounts
receivables of such Person subject at such time to a sale of
receivables (or similar transaction) and (c) obligations of any
partnership or joint venture that is recourse to such Person.
"Participation Interest" means the Extension of Credit by a
Lender by way of a purchase of a participation in any Loans as provided
in Section 3.8.
"PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and any
successor thereto.
"Person" means any individual, partnership, joint venture,
firm, corporation, association, trust, limited liability company or
other enterprise (whether or not incorporated), or any government or
political subdivision or any agency, department or instrumentality
thereof.
"Plan" means any employee pension benefit plan (as defined in
Section 3(2) of ERISA) which is covered by ERISA and with respect to
which a Borrower or any ERISA Affiliate is (or, if such plan were
terminated at such time, would under Section 4069 of ERISA be deemed to
be) an "employer" within the meaning of Section 3(5) of ERISA.
"Prime Rate" means the per annum rate of interest established
from time to time by the Agent at its principal office in Charlotte,
North Carolina (or such other principal office as communicated by the
Agent to the Borrowers and the Lenders) as its Prime Rate. Any change
in the interest rate resulting from a change in the Prime Rate shall
become effective as of 12:01 a.m. of the Business Day on which each
change in the Prime Rate is announced by the Agent. The Prime Rate is a
reference rate used by the Agent in determining interest
8
<PAGE> 13
rates on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit to any debtor.
"Register" has the meaning set forth in Section 11.3(c).
"Regulation A, D, T, U, or X" means Regulation A, D, T, U or
X, respectively, of the Board of Governors of the Federal Reserve
System as from time to time in effect and any successor to all or a
portion thereof.
"Reportable Event" means a "reportable event" as defined in
Section 4043 of ERISA with respect to which the notice requirements to
the PBGC have not been waived.
"Required Lenders" means Lenders whose aggregate Credit
Exposure (as hereinafter defined) constitutes more than 50% of the
aggregate Credit Exposure of all Lenders at such time; provided,
however, that if any Lender shall be a Defaulting Lender at such time
then there shall be excluded from the determination of Required Lenders
the aggregate principal amount of Credit Exposure of such Lender at
such time.
"Revolving-A Lender" means any Person who has a Revolving-A
Loan Commitment Percentage greater than zero, including any Eligible
Assignee which may become a Revolving-A Lender by way of assignment in
accordance with the terms hereof, together with their successors and
permitted assigns.
"Revolving-A Loan Commitment" means ONE BILLION Dollars
($1,000,000,000) as such amount may be otherwise reduced in accordance
with Section 2.7.
"Revolving-A Loan Commitment Percentage" means, for each
Lender, the percentage identified as its Revolving-A Loan Commitment
Percentage opposite such Lender's name on Schedule 1.1, as such
percentage may be modified by assignment in accordance with the terms
of this Credit Agreement.
"Revolving-A Loan Notes" means the promissory notes of the
Borrowers in favor of each of the Lenders evidencing the Revolving-A
Loans provided pursuant to Section 2.1, individually or collectively,
as appropriate, as such notes may be amended or modified from time to
time and substantially in the form of Exhibit 2.8(a).
"Revolving-A Loans" means the loans made by the Lenders to the
Borrowers pursuant to Section 2.1
"Revolving-B Lender" means any Person who has a Revolving-B
Loan Commitment Percentage greater than zero, including any Eligible
Assignee which may become a Revolving-B Lender by way of assignment in
accordance with the terms hereof, together with their successors and
permitted assigns.
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<PAGE> 14
"Revolving-B Loan Commitment" means ONE BILLION EIGHT HUNDRED
MILLION DOLLARS ($1,800,000,000) as such amount may be otherwise
reduced in accordance with Section 2.7.
"Revolving-B Loan Commitment Percentage" means, for each
Lender, the percentage identified as its Revolving-B Loan Commitment
Percentage opposite such Lender's name on Schedule 1.1, as such
percentage may be modified by assignment in accordance with the terms
of this Credit Agreement.
"Revolving-B Loan Notes" means the promissory notes of the
Borrowers in the favor of each of the Lenders evidencing the
Revolving-B Loans provided pursuant to Section 2.2, individually or
collectively, as appropriate, as such notes may be amended or modified
from time to time and substantially in the form of Exhibit 2.8(b).
"Revolving-B Loans" means the loans made by the Lenders to the
Borrowers pursuant to Section 2.2.
"Single Employer Plan" means any Plan which is covered by
Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple
Employer Plan.
"Solvent" means, with respect to any Person as of a particular
date, that on such date (a) such Person is able to pay its debts and
other liabilities, contingent obligations and other commitments as they
mature in the normal course of business, (b) such Person does not
intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and
liabilities mature in their ordinary course, (c) such Person is not
engaged in a business or a transaction, and is not about to engage in a
business or a transaction, for which such Person's assets would
constitute unreasonably small capital after giving due consideration to
the prevailing practice in the industry in which such Person is engaged
or is to engage, (d) the fair value of the assets of such Person is
greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such Person and (e) the present
fair saleable value of the assets of such Person is not less than the
amount that will be required to pay the probable liability of such
Person on its debts as they become absolute and matured. In computing
the amount of contingent liabilities at any time, it is intended that
such liabilities will be computed as the amount which, in light of all
the facts and circumstances existing at such time, represents the
amount that can reasonably be expected to become an actual or matured
liability.
"Subsidiary" means, as to any Person, (a) any corporation more
than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time, any class
or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by
such Person directly or indirectly through Subsidiaries and (b) any
partnership, association, joint venture, limited liability company or
other entity in which such person directly or indirectly through
Subsidiaries has more than 50% equity interest at any time.
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"Super Required Lenders" means Lenders whose aggregate Credit
Exposure (as hereinafter defined) constitutes more than 66.67% of the
aggregate Credit Exposure of all Lenders at such time; provided,
however, that if any Lender shall be a Defaulting Lender at such time
then there shall be excluded from the determination of Super Required
Lenders the aggregate principal amount of Credit Exposure of such
Lender at such time.
"Termination Event" means (a) with respect to any Single
Employer Plan, the occurrence of a Reportable Event or the substantial
cessation of operations (within the meaning of Section 4062(e) of
ERISA), (b) the withdrawal of a Borrower or any ERISA Affiliate from a
Multiple Employer Plan during a plan year in which it was a substantial
employer (as such term is defined in Section 4001(a)(2) of ERISA), or
the termination of a Multiple Employer Plan, (c) the distribution of a
notice of intent to terminate or the actual termination of a Plan
pursuant to Section 4041(a)(2) or 4041A of ERISA, (d) the institution
of proceedings to terminate or the actual termination of a Plan by the
PBGC under Section 4042 of ERISA, (e) any event or condition which
might reasonably constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any
Plan, or (f) the complete or partial withdrawal of a Borrower or any
ERISA Affiliate from a Multiemployer Plan.
"Voting Stock" means all classes of the Capital Stock (or
other voting interests) of such Person then outstanding and normally
entitled to vote in the election of directors or other governing body
of such Person.
1.2 COMPUTATION OF TIME PERIODS.
For purposes of computation of periods of time hereunder, the word
"from" means "from and including" and the words "to" and "until" each mean "to
but excluding." References in this Credit Agreement to "Articles", "Sections",
"Schedules" or "Exhibits" shall be to Articles, Sections, Schedules or Exhibits
of or to this Credit Agreement unless otherwise specifically provided.
1.3 ACCOUNTING TERMS.
Except as otherwise expressly provided herein, all accounting terms
used herein shall be interpreted, and all financial statements and certificates
and reports as to financial matters required to be delivered to the Lenders
hereunder shall be prepared, in accordance with GAAP applied on a consistent
basis.
1.4 TIME.
All references to time herein shall be references to Central Standard
Time or Central Daylight time, as the case may be, unless specified otherwise.
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SECTION 2.
LOANS
2.1 REVOLVING-A LOAN COMMITMENT.
Subject to the terms and conditions set forth herein, each Revolving-A
Lender severally agrees to make revolving loans to the Borrowers in Dollars, at
any time and from time to time, during the period from the Effective Date to the
Maturity Date (each a "Revolving-A Loan" and collectively the "Revolving-A
Loans"); provided, however, that (a) the aggregate amount of Revolving-A Loans
outstanding shall not exceed the Revolving-A Loan Commitment and (b) with
respect to each individual Revolving-A Lender, such Revolving-A Lender's pro
rata share of outstanding Revolving-A Loans shall not exceed such Revolving-A
Lender's Revolving-A Loan Commitment Percentage of the Revolving-A Loan
Commitment. Subject to the terms of this Credit Agreement, the Borrowers may
borrow, repay and reborrow Revolving-A Loans.
2.2 REVOLVING-B LOAN COMMITMENT.
Subject to the terms and conditions set forth herein, each Revolving-B
Lender severally agrees to make revolving loans to the Borrowers in Dollars, at
any time and from time to time, during the period from the Effective Date to the
Maturity Date (each a "Revolving-B Loan" and collectively the "Revolving-B
Loans"); provided, however, that (a) the aggregate amount of Revolving-B Loans
outstanding shall not exceed the Revolving-B Loan Commitment and (b) with
respect to each individual Revolving-B Lender, such Revolving-B Lender's pro
rata share of outstanding Revolving-B Loans shall not exceed such Revolving-B
Lender's Revolving-B Loan Commitment Percentage of the Revolving-B Loan
Commitment. Subject to the terms of this Credit Agreement, the Borrowers may
borrow, repay and reborrow Revolving-B Loans.
2.3 METHOD OF BORROWING FOR LOANS.
By no later than 11:00 a.m. (a) on the date of the requested borrowing
of Loans that will be Base Rate Loans or Floating Eurodollar Rate Loans or (b)
three Business Days prior to the date of the requested borrowing of Loans that
will be Eurodollar Loans, the Borrowers shall submit a written Notice of
Borrowing in the form of Exhibit 2.3 to the Agent setting forth (i) the amount
requested, (ii) whether such Loans shall accrue interest at the Base Rate, the
Floating Eurodollar Rate or the Adjusted Eurodollar Rate, (iii) whether such
Loans will be Revolving-A Loans or Revolving-B Loans, (iv) with respect to Loans
that will be Eurodollar Loans, the Interest Period applicable thereto and (v)
certification that the Borrowers have complied in all respects with Section 5.2.
Notwithstanding anything herein to the contrary, the Borrowers shall be able to
choose to have a Loan accrue interest at the Floating Eurodollar Rate only
during the period from the Closing Date to and through sixty (60) days following
the Closing Date.
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2.4 FUNDING OF LOANS.
Upon receipt of a Notice of Borrowing, the Agent shall promptly inform
the Revolving-A Lenders or the Revolving-B Lenders, as applicable, as to the
terms thereof. Each such Lender shall make its Revolving-A Loan Commitment
Percentage or its Revolving-B Loan Commitment Percentage, as applicable, of the
requested Loans available to the Agent by 1:00 p.m. on the date specified in the
Notice of Borrowing by deposit, in Dollars, of immediately available funds at
the Agency Services Address. The amount of the requested Loans will then be made
available to the Borrowers by the Agent by crediting the account of the
Borrowers on the books of such office of the Agent, to the extent the amount of
such Loans are made available to the Agent.
No Lender shall be responsible for the failure or delay by any other
Lender in its obligation to make Loans hereunder; provided, however, that the
failure of any Lender to fulfill its obligations hereunder shall not relieve any
other Lender of its obligations hereunder. Unless the Agent shall have been
notified by any Lender prior to the date of any such Loan that such Lender does
not intend to make available to the Agent its portion of the Loans to be made on
such date, the Agent may assume that such Lender has made such amount available
to the Agent on the date of such Loans, and the Agent in reliance upon such
assumption, may (in its sole discretion but without any obligation to do so)
make available to the Borrowers a corresponding amount. If such corresponding
amount is not in fact made available to the Agent, the Agent shall be able to
recover such corresponding amount from such Lender. If such Lender does not pay
such corresponding amount forthwith upon the Agent's demand therefor, the Agent
will promptly notify the Borrowers and the Borrowers shall immediately pay such
corresponding amount within two Business Days to the Agent. The Agent shall also
be entitled to recover from the Lender or the Borrowers, as the case may be,
interest on such corresponding amount in respect of each day from the date such
corresponding amount was made available by the Agent to the Borrowers to the
date such corresponding amount is recovered by the Agent at a per annum rate
equal to (a) from the Borrowers at the applicable rate for such Loan pursuant to
the Notice of Borrowing and (b) from a Lender at the Federal Funds Rate.
2.5 CONTINUATIONS AND CONVERSIONS.
The Borrowers shall have the option (subject to the limitations set
forth below), on any Business Day, to continue existing Eurodollar Loans for a
subsequent Interest Period, to convert Base Rate Loans or Floating Eurodollar
Rate Loans into Eurodollar Loans or to convert Eurodollar Loans into Base Rate
Loans or Floating Eurodollar Rate Loans or to convert Base Rate Loans into
Floating Eurodollar Rate Loans or to convert Floating Eurodollar Rate Loans into
Base Rate Loans; provided, however, that (a) each such continuation or
conversion must be requested by the Borrowers pursuant to a written Notice of
Continuation/Conversion, in the form of Exhibit 2.5, in compliance with the
terms set forth below, (b) if a Eurodollar Loan is continued or converted into a
Base Rate Loan or a Floating Eurodollar Rate Loan on any day other than the last
day of the Interest Period applicable thereto, then the Borrowers shall be
subject to the provisions set forth in Section 4.3, (c) Eurodollar Loans may not
be continued nor may Base Rate Loans or Floating Eurodollar Rate Loans be
converted into Eurodollar Loans during the existence and continuation of a
Default or Event of Default and (d) any request to
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extend a Eurodollar Loan that fails to comply with the terms hereof or any
failure to request an extension of a Eurodollar Loan at the end of an Interest
Period shall constitute a conversion to a Base Rate Loan on the last day of the
applicable Interest Period. Each continuation or conversion must be requested by
the Borrowers no later than 11:00 a.m. (i) on the date for a requested
conversion of a Eurodollar Loan to a Base Rate Loan or a Floating Eurodollar
Rate Loan or (ii) three Business Days prior to the date for a requested
continuation of a Eurodollar Loan or conversion of a Base Rate Loan or Floating
Eurodollar Rate Loan to a Eurodollar Loan, in each case pursuant to a written
Notice of Continuation/Conversion submitted to the Agent which shall set forth
(A) whether the Borrowers wish to continue or convert such Loans and (B) if the
request is to continue a Eurodollar Loan or convert a Base Rate Loan or a
Floating Eurodollar Rate Loan to a Eurodollar Loan, the Interest Period
applicable thereto. Notwithstanding anything herein to the contrary, unless a
Notice of Continuation/Conversion to the contrary has been timely received all
Floating Eurodollar Rate Loans outstanding on the date sixty (60) days after the
Closing Date shall automatically be converted into Base Rate Loans in accordance
with the terms hereof. Subsequent to the date sixty (60) days after the Closing
Date, the Borrowers may no longer convert Base Rate Loans or Eurodollar Loans
into Floating Eurodollar Rate Loans.
2.6 MINIMUM AMOUNTS.
Each request for a Loan or a conversion or continuation hereunder shall
be subject to the following requirements: (a) each Eurodollar Loan shall be in a
minimum amount of $10,000,000 (and in integral multiples of $1,000,000 in excess
thereof), (b) each Base Rate Loan and each Floating Rate Eurodollar Loan shall
be in a minimum amount of the lesser of $10,000,000 (and in integral multiples
of $1,000,000 in excess thereof) or the remaining amount available to be
borrowed and (c) no more than ten Eurodollar Loans shall be outstanding
hereunder at any one time. For the purposes of this Section, all Eurodollar
Loans with the same Interest Periods that begin and end on the same date shall
be considered as one Eurodollar Loan, but Eurodollar Loans with different
Interest Periods, even if they begin on the same date, shall be considered
separate Eurodollar Loans.
2.7 REDUCTIONS OF REVOLVING LOAN COMMITMENTS.
(a) Upon at least five Business Days' notice, the Borrowers
shall have the right to permanently terminate or reduce the aggregate
unused amount of the Revolving-A Loan Commitment or the Revolving-B
Loan Commitment at any time or from time to time; provided that (a)
each partial reduction shall be in an aggregate amount at least equal
to $10,000,000 and in integral multiples of $1,000,000 above such
amount, (b) no reduction shall be made which would reduce the
Revolving-A Loan Commitment to an amount less than the sum of the then
outstanding Revolving-A Loans and (c) no reduction shall be made which
would reduce the Revolving-B Loan Commitment to an amount less than the
sum of the then outstanding Revolving-B Loans.
(b) The Revolving-B Loan Commitment shall be automatically
reduced at the time and by the amount of any prepayment of the
Revolving-B Loans required by
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Sections 3.2(b)(ii) and (iii). Any reduction in (or termination of) the
Revolving-A Loan Commitment or the Revolving-B Loan Commitment shall be
permanent and may not be reinstated.
2.8 NOTES.
(a) Revolving-A Loan Notes. The Revolving-A Loans made by the
Lenders shall be evidenced by a duly executed promissory note of the
Borrowers payable to each Lender in substantially the form of Exhibit
2.8(a) (the "Revolving-A Loan Notes").
(b) Revolving-B Loan Notes. The Revolving-B Loans made by the
Lenders shall be evidenced by a duly executed promissory note of the
Borrowers payable to each Lender in substantially the form of Exhibit
2.8(b) (the "Revolving-B Loan Notes").
2.9 JOINT AND SEVERAL LIABILITY OF THE BORROWERS.
Subject to Section 2.10:
(a) Each of the Borrowers is accepting joint and several
liability hereunder in consideration of the financial accommodation to
be provided by the Lenders under this Credit Agreement, for the mutual
benefit, directly and indirectly, of each of the Borrowers and in
consideration of the undertakings of each of the Borrowers to accept
joint and several liability for the obligations of each of them.
(b) Each of the Borrowers jointly and severally hereby
irrevocably and unconditionally accepts, not merely as a surety but
also as a co-debtor, joint and several liability with the other
Borrower with respect to the payment and performance of all of the
obligations arising under this Credit Agreement and the other Credit
Documents, it being the intention of the parties hereto that all of the
Borrowers Obligations shall be the joint and several obligations of
each of the Borrowers without preferences or distinction between them.
(c) If and to the extent that either of the Borrowers shall
fail to make any payment with respect to any of the obligations
hereunder as and when due or to perform any of such obligations in
accordance with the terms thereof, then in each such event, the other
Borrower will make such payment with respect to, or perform, such
obligation.
(d) The provisions of this Section 2.9 are made for the
benefit of the Lenders and their successors and assigns, and may be
enforced by them from time to time against either of the Borrowers as
often as occasion therefor may arise and without requirement on the
part of the Lenders first to marshall any of its claims or to exercise
any of its rights against the other Borrower or to exhaust any remedies
available to it against the other Borrower or to resort to any other
source or means of obtaining payment of any of the Borrowers
Obligations hereunder or to elect any other remedy. The provisions of
this
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Section 2.9 shall remain in effect until all the Borrowers Obligations
hereunder shall have been paid in full or otherwise fully satisfied. If
at any time, any payment, or any part thereof, made in respect of any
of the Borrowers Obligations, is rescinded or must otherwise be
restored or returned by the Lenders upon the insolvency, bankruptcy or
reorganization of any of the Borrowers, or otherwise, the provisions of
this Section 2.9 will forthwith be reinstated and in effect as though
such payment had not been made.
(e) Notwithstanding any provision to the contrary contained
herein or in any of the other Credit Documents, to the extent the
obligations of either Borrower shall be adjudicated to be invalid or
unenforceable for any reason (including, without limitation, because of
any applicable state or federal law relating to fraudulent conveyances
or transfers) then the obligations of such Borrower hereunder shall be
limited to the maximum amount that is permissible under applicable law
(whether federal or state and including, without limitation, the
Bankruptcy Code).
(f) Each Borrower hereby appoints the other Borrower to act as
its agent for all purposes under this Credit Agreement (including,
without limitation, with respect to all matters relating to the
borrowing and repayment of Loans) and agrees that (i) a Borrower may
execute such documents on behalf of the other Borrower as it deems
appropriate and the other Borrower shall be obligated by all of the
terms of any such document executed on its behalf, (ii) any notice or
communication delivered by the Agent or a Lender to a Borrower shall be
deemed delivered to both Borrowers and (iii) the Agent and the Lenders
may accept, and be permitted to rely on, any document, instrument or
agreement executed by one Borrower on behalf of the other Borrower.
2.10 LIMITATION OF LIABILITY OF BORROWERS.
Notwithstanding anything in this Credit Agreement or in the Notes to
the contrary, including without limitation, Section 2.9:
(a) Duke Energy Field Services Corporation shall have no
rights or obligations as a Borrower, and will not be subject to the
terms of the Credit Documents, until (i) consummation of the merger of
Phillips Gas Company Shareholder, Inc., a Subsidiary of Phillips
Petroleum Company, with and into Duke Energy Field Services Corporation
and (ii) notification from the Borrowers to the Lenders that such
merger has occurred and that, going forward, Duke Energy Field Services
Corporation will irrevocably have all of the rights and obligations of
a Borrower, jointly and severally with Duke Energy Field Services, LLC,
under the Credit Documents (including, without limitation, any Loans
made prior to such notification) and will be subject to the terms of
the Credit Documents.
(b) The agreement by Duke Energy Field Services Corporation to
become jointly and severally liable with Duke Energy Field Services,
LLC for the indebtedness under the Credit Documents pursuant to
subsection (a) above shall be accomplished in two phases: (i)
initially, Duke Energy Field Services Corporation shall become directly
liable for 69.7% of such indebtedness and shall become indirectly
liable for 30.3% of such
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indebtedness through Phillips Gas Company ("PGC"), a Delaware
corporation and a wholly-owned Subsidiary of Duke Energy Field Services
Corporation (PGC being directly liable for such 30.3%), in each case
jointly and severally with Duke Energy Field Services, LLC, which shall
remain jointly and severally liable for 100% of such indebtedness; and
(ii) immediately thereafter, Duke Energy Field Services Corporation
shall become directly liable for the 30.3% of such indebtedness
theretofore attributed to PGC and, thereafter, PGC shall no longer be
liable, directly or indirectly, for any such indebtedness.
(c) On or after the date that, pursuant to subsections (a) and
(b) above, Duke Energy Field Services Corporation has become directly
liable for 100% of the indebtedness, rights and obligations of a
Borrower under the Credit Documents, the Borrowers may, upon written
notice to the Lenders, release Duke Energy Field Services, LLC from its
joint and several obligations under the Credit Documents. Thereafter,
Duke Energy Field Services, LLC will have no rights or obligations
under the Credit Documents, will no longer be subject to the terms of
the Credit Documents and all obligations owing pursuant to the Credit
Documents shall be the sole responsibility of Duke Energy Field
Services Corporation.
(d) Notwithstanding the use of the term "Borrowers" as set
forth in the Credit Documents: (i) prior to Duke Energy Field Services
Corporation having any rights or obligations as a Borrower, as set
forth in clause (a) above, the terms "Borrowers" or "a Borrower" as
used in the Credit Documents shall only mean a reference to Duke Energy
Field Services, LLC and (ii) on and after the date that Duke Energy
Field Services, LLC is released from liability, in accordance with
clause (c) above, the terms "Borrowers" or "a Borrower" as used in the
Credit Documents shall only mean a reference to Duke Energy Field
Services Corporation.
SECTION 3.
PAYMENTS
3.1 INTEREST.
(a) Interest Rate.
(i) All Base Rate Loans shall accrue interest at the
Base Rate.
(ii) All Eurodollar Loans shall accrue interest at
the Adjusted Eurodollar Rate applicable to such Eurodollar
Loan.
(iii) all Floating Eurodollar Rate Loans shall accrue
interest at the Floating Eurodollar Rate.
(b) Default Rate of Interest. Upon the occurrence, and during
the continuation, of an Event of Default, all past due principal of
and, to the extent permitted by law, past due
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interest on, the Loans and any other past due amounts owing hereunder
or under the other Credit Documents shall bear interest, payable on
demand, at a per annum rate equal to one percent (1%) plus the rate
which would otherwise be applicable (or if no rate is applicable, then
the rate for Loans that are Base Rate Loans plus one percent (1%) per
annum).
(c) Interest Payments. Interest on Loans shall be due and
payable in arrears on each Interest Payment Date.
3.2 PREPAYMENTS.
(a) Voluntary Prepayments. The Borrowers shall have the right
to prepay Loans in whole or in part from time to time without premium
or penalty; provided, however, that (i) Eurodollar Loans may only be
prepaid on three Business Days' prior written notice to the Agent and
any prepayment of Eurodollar Loans will be subject to Section 4.3; and
(ii) each such partial prepayment of Loans shall be in the minimum
principal amount of $10,000,000. Any payments made under this Section
3.2(a) shall be applied as the Borrowers may elect; provided that if
the Borrowers fail to specify how a voluntary prepayment should be
applied then such prepayment shall be applied first to Base Rate Loans,
second to Floating Eurodollar Rate Loans and third to Eurodollar Loans
in direct order of Interest Period maturities, in each case, pro rata
between Revolving-A Loans and Revolving-B Loans.
(b) Mandatory Prepayments.
(i) Revolving-A Committed Amount; Revolving-B
Committed Amount. If at any time the amount of Revolving-A
Loans outstanding exceeds the Revolving-A Loan Commitment, the
Borrowers shall immediately make a principal payment to the
Agent in a manner and in an amount such that the outstanding
Revolving-A Loans are less than or equal to the Revolving-A
Loan Commitment. If at any time the amount of Revolving-B
Loans outstanding exceeds the Revolving-B Loan Commitment, the
Borrowers shall immediately make a principal payment to the
Agent in a manner and in an amount such that the outstanding
Revolving-B Loans are less than or equal to the Revolving-B
Loan Commitment.
(ii) Debt Issuance. Promptly upon receipt by a
Borrower of proceeds from any Debt Issuance, such Borrower
shall forward 100% of the Net Cash Proceeds of such Debt
Issuance to the Lenders as a prepayment of the Revolving-B
Loans (to be applied as set forth in Section 3.2(c) below).
(iii) Equity Issuance. Promptly upon receipt by a
Borrower of proceeds from an Equity Issuance, such Borrower
shall forward 100% of the Net Cash Proceeds of such Equity
Issuance to the Lenders as a prepayment of the Revolving-B
Loans (to be applied as set forth in Section 3.2(c) below).
(c) Applications of Prepayments. All amounts required to be
paid pursuant to Section 3.2(b)(i) shall be applied to Revolving-A
Loans or Revolving-B Loans, as
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applicable. All amounts required to be paid pursuant to Sections
3.2(b)(ii) and (iii) shall be applied to Revolving-B Loans (with a
corresponding permanent reduction in the Revolving-B Loan Commitment).
All amounts payable pursuant to Section 3.2(b) shall be applied, to the
extent applicable, first to Base Rate Loans, then to Floating
Eurodollar Rate Loans and then to Eurodollar Loans in the direct order
of Interest Period maturities.
3.3 PAYMENT IN FULL AT MATURITY.
On the Maturity Date, the entire outstanding principal balance of all
Loans, together with accrued but unpaid interest and all other sums owing under
this Credit Agreement, shall be due and payable in full, unless accelerated
sooner pursuant to Section 9.2.
3.4 FACILITY FEES.
(a) In consideration of the Revolving-A Loan Commitment being
made available by the Revolving-A Lenders, the Borrowers agree to pay
to the Agent, for the pro rata benefit of each Revolving-A Lender, a
fee equal to .125% multiplied by the daily average Revolving-A Loan
Commitment during the applicable period of determination (the
"Revolving-A Facility Fees").
(b) In consideration of the Revolving-B Loan Commitment being
made available by the Revolving-B Lenders, the Borrowers agree to pay
to the Agent, for the pro rata benefit of each Revolving-B Lender, a
fee equal to .125% multiplied by the daily average Revolving-B Loan
Commitment during the applicable period of determination (the
"Revolving-B Facility Fees").
(c) The accrued Revolving-A Facility Fees and the accrued
Revolving-B Facility Fees (collectively, the "Facility Fees") shall be
due and payable in arrears on the first Business Day after the end of
each fiscal quarter of the Borrowers (as well as on the Maturity Date)
for the immediately preceding fiscal quarter (or portion thereof),
beginning with the first of such dates to occur after the Closing Date.
3.5 PLACE AND MANNER OF PAYMENTS.
All payments of principal, interest, fees, expenses and other amounts
to be made by a Borrower under this Credit Agreement shall be made without
setoff, deduction or counterclaim and received not later than 2:00 p.m. on the
date when due in Dollars and in immediately available funds by the Agent at the
Agency Services Address. A Borrower shall, at the time it makes any payment
under this Credit Agreement, specify to the Agent the Loans, fees or other
amounts payable by a Borrower hereunder to which such payment is to be applied
(and in the event that it fails to specify, or if such application would be
inconsistent with the terms hereof, the Agent shall distribute such payment to
the Lenders in such manner as it reasonably determines in its sole discretion).
The Agent will distribute such payments to the applicable Lenders on the same
Business Day if any such payment is received prior to 2:00 p.m.; otherwise the
Agent will distribute each payment to the applicable Lenders prior to 12:00 noon
on the next succeeding Business Day. Whenever any
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payment hereunder shall be stated to be due on a day which is not a Business
Day, the due date thereof shall be extended to the next succeeding Business Day
(subject to accrual of interest and fees for the period of such extension),
except that in the case of Eurodollar Loans, if the extension would cause the
payment to be made in the next following calendar month, then such payment shall
be made on the next preceding Business Day.
3.6 PRO RATA TREATMENT.
Except to the extent otherwise provided herein, all Loans, each payment
or prepayment of principal of any Loan, each payment of interest on the Loans,
each payment of Facility Fees, each reduction of the Revolving-A Loan
Commitment, each reduction of the Revolving-B Loan Commitment and each
conversion or continuation of any Loans, shall be allocated pro rata among the
applicable Lenders in accordance with their respective Revolving-A Loan
Commitment Percentages or Revolving-B Loan Commitment Percentages; provided
that, if any Lender shall have failed to pay its applicable pro rata share of
any Loan, then any amount to which such Lender would otherwise be entitled
pursuant to this Section 3.6 shall instead be payable to the Agent until the
share of such Loan not funded by such Lender has been repaid and any interest
owed by such Lender as result of such failure to fund has been paid; and
provided further, that in the event any amount paid to any Lender pursuant to
this Section 3.6 is rescinded or must otherwise be returned by the Agent, each
Lender shall, upon the request of the Agent, repay to the Agent the amount so
paid to such Lender, with interest for the period commencing on the date such
payment is returned by the Agent until the date the Agent receives such
repayment at a rate per annum equal to, during the period to but excluding the
date two Business Days after such request, the Federal Funds Rate, and
thereafter, the Base Rate plus one percent (1%) per annum.
3.7 COMPUTATIONS OF INTEREST AND FEES.
(a) Except for Base Rate Loans that are based upon the Prime
Rate, on which interest shall be computed on the basis of a 365 or 366
day year as the case may be, all computations of interest and fees
hereunder shall be made on the basis of the actual number of days
elapsed over a year of 360 days.
(b) It is the intent of the Lenders and the Borrowers to
conform to and contract in strict compliance with applicable usury law
from time to time in effect. All agreements between the Lenders and the
Borrowers are hereby limited by the provisions of this paragraph which
shall override and control all such agreements, whether now existing or
hereafter arising and whether written or oral. In no way, nor in any
event or contingency (including but not limited to prepayment or
acceleration of the maturity of any obligation), shall the interest
taken, reserved, contracted for, charged, or received under this Credit
Agreement, under the Notes or otherwise, exceed the maximum nonusurious
amount permissible under applicable law. If, from any possible
construction of any of the Credit Documents or any other document,
interest would otherwise be payable in excess of the maximum
nonusurious amount, any such construction shall be subject to the
provisions of this paragraph and interest owing pursuant to such
documents shall be automatically reduced to the maximum nonusurious
amount permitted under applicable law, without the
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necessity of execution of any amendment or new document. If any Lender
shall ever receive anything of value which is characterized as interest
on the Loans under applicable law and which would, apart from this
provision, be in excess of the maximum lawful amount, an amount equal
to the amount which would have been excessive interest shall, without
penalty, be applied to the reduction of the principal amount owing on
the Loans and not to the payment of interest, or refunded to the
Borrowers or the other payor thereof if and to the extent such amount
which would have been excessive exceeds such unpaid principal amount of
the Loans. The right to demand payment of the Loans or any other
indebtedness evidenced by any of the Credit Documents does not include
the right to receive any interest which has not otherwise accrued on
the date of such demand, and the Lenders do not intend to charge or
receive any unearned interest in the event of such demand. All interest
paid or agreed to be paid to the Lenders with respect to the Loans
shall, to the extent permitted by applicable law, be amortized,
prorated, allocated, and spread throughout the full stated term
(including any renewal or extension) of the Loans so that the amount of
interest on account of such indebtedness does not exceed the maximum
nonusurious amount permitted by applicable law.
3.8 SHARING OF PAYMENTS.
Each Lender agrees that, in the event that any Lender shall
obtain payment in respect of any Loan or any other obligation owing to
such Lender under this Credit Agreement through the exercise of a right
of set-off, banker's lien, counterclaim or otherwise (including, but
not limited to, pursuant to the Bankruptcy Code) in excess of its pro
rata share as provided for in this Credit Agreement, such Lender shall
promptly purchase from the other Lenders a participation in such Loans
and other obligations, in such amounts and with such other adjustments
from time to time, as shall be equitable in order that all Lenders
share such payment in accordance with their respective ratable shares
as provided for in this Credit Agreement. Each Lender further agrees
that if a payment to a Lender (which is obtained by such Lender through
the exercise of a right of set-off, banker's lien, counterclaim or
otherwise) shall be rescinded or must otherwise be restored, each
Lender which shall have shared the benefit of such payment shall, by
repurchase of a participation theretofore sold, return its share of
that benefit to each Lender whose payment shall have been rescinded or
otherwise restored. The Borrowers agree that any Lender so purchasing
such a participation may, to the fullest extent permitted by law,
exercise all rights of payment, including set-off, banker's lien or
counterclaim, with respect to such participation as fully as if such
Lender were a holder of such Loan or other obligation in the amount of
such participation. Except as otherwise expressly provided in this
Credit Agreement, if any Lender shall fail to remit to the Agent or any
other Lender an amount payable by such Lender to the Agent or such
other Lender pursuant to this Credit Agreement on the date when such
amount is due, such payments shall accrue interest thereon, for each
day from the date such amount is due until the day such amount is paid
to the Agent or such other Lender, at a rate per annum equal to the
Federal Funds Rate. If under any applicable bankruptcy, insolvency or
other similar law, any Lender receives a secured claim in lieu of a
setoff to which this Section 3.8 applies, such Lender shall, to the
extent practicable, exercise its rights
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in respect of such secured claim in a manner consistent with the rights
of the Lenders under this Section 3.8 to share in the benefits of any
recovery on such secured claim.
3.9 EVIDENCE OF DEBT.
(a) Each Lender shall maintain an account or accounts
evidencing each Loan made by such Lender to the Borrowers from time to
time, including the amounts of principal and interest payable and paid
to such Lender from time to time under this Credit Agreement. Each
Lender will make reasonable efforts to maintain the accuracy of its
account or accounts and to promptly update its account or accounts from
time to time, as necessary.
(b) The Agent shall maintain the Register pursuant to Section
11.3(c), and a subaccount for each Lender, in which Register and
subaccounts (taken together) shall be recorded (i) the amount, type and
Interest Period of each such Loan hereunder, (ii) the amount of any
principal or interest due and payable or to become due and payable to
each Lender hereunder and (iii) the amount of any sum received by the
Agent hereunder from or for the account of the Borrowers and each
Lender's share thereof. The Agent will make reasonable efforts to
maintain the accuracy of the subaccounts referred to in the preceding
sentence and to promptly update such subaccounts from time to time, as
necessary.
(c) The entries made in the Register and subaccounts
maintained pursuant to subsection (b) of this Section 3.9, and the
entries made in the accounts maintained pursuant to subsection (a) of
this Section 3.9, if consistent with the entries of the Agent, shall be
prima facie evidence of the existence and amounts of the obligations of
the Borrowers therein recorded; provided, however, that the failure of
any Lender or the Agent to maintain any such account, such Register or
such subaccount, as applicable, or any error therein, shall not in any
manner affect the obligation of the Borrowers to repay the Loans made
by such Lender in accordance with the terms hereof.
SECTION 4.
ADDITIONAL PROVISIONS REGARDING LOANS
4.1 EURODOLLAR LOAN PROVISIONS.
(a) Unavailability. If, on or prior to the first day of any
Interest Period, (i) the Agent shall have determined in good faith
(which determination shall be conclusive and binding upon the
Borrowers) that (A) Dollar deposits are not generally available in the
London interbank Eurodollar market in the applicable principal amounts
and Interest Period of a requested Eurodollar Loan or (B) by reason of
circumstances affecting the relevant market, adequate and reasonable
means do not exist for ascertaining the Eurodollar Rate for such
Interest Period or for the Floating Eurodollar Rate, or (ii) the Agent
shall have received
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notice from the Required Lenders that the Eurodollar Rate determined or
to be determined for such Interest Period or the Floating Eurodollar
Rate, as the case may be, will not adequately and fairly reflect the
cost to the Lenders of making or maintaining Eurodollar Loans for such
Interest Period or Floating Eurodollar Rate Loans, as the case may be,
(as conclusively certified by such Lenders), the Agent shall give
notice thereof to the Borrowers and the Lenders as soon as practicable
thereafter. Upon delivery of such notice, (A) any Eurodollar Loans
requested to be made on the first day of such Interest Period or any
requested Floating Rate Eurodollar Loans, as the case may be, shall be
made as Base Rate Loans, (B) any Loans that were to have been converted
to or continued as Eurodollar Loans or Floating Eurodollar Rate Loans,
as the case may be, shall be prepaid by the Borrowers or converted to
or continued as Base Rate Loans and (C) any outstanding Eurodollar
Loans shall be converted, on the first day of such Interest Period, to
Base Rate Loans and any Floating Rate Eurodollar Loans shall be
converted, on the next succeeding Business Day, to Base Rate Loans.
Until the Agent has withdrawn such notice, no further Eurodollar Loans
or Floating Eurodollar Rate Loans, as the case may be, shall be made or
continued as such, nor shall the Borrowers have the right to convert
Base Rate Loans to Eurodollar Loans or Floating Eurodollar Rate Loans,
as the case may be.
(b) Change in Legality. Notwithstanding any other provision
herein, if any change, after the date hereof, in any law, governmental
rule, regulation, guideline or order (including the introduction of any
new law or governmental rule, regulation, guideline or order) or in the
interpretation or administration thereof by any Governmental Authority
charged with the interpretation or administration thereof shall make it
unlawful for any Lender to make or maintain any Eurodollar Loan or
Floating Eurodollar Rate Loan then, by written notice to the Borrowers
and to the Agent, such Lender may:
(i) declare that Eurodollar Loans and Floating
Eurodollar Rate Loans, and conversions to or continuations of
Eurodollar Loans and Floating Eurodollar Rate Loans, will not
thereafter be made by such Lender hereunder, whereupon any
request by the Borrowers for, or for conversion into or
continuation of, Eurodollar Loans or Floating Eurodollar Rate
Loans shall, as to such Lender only, be deemed a request for,
or for conversion into or continuation of, Base Rate Loans,
unless such declaration shall be subsequently withdrawn; and
(ii) require that all outstanding Eurodollar Loans
and Floating Eurodollar Rate Loans made by it be converted to
Base Rate Loans in which event all such Eurodollar Loans and
Floating Eurodollar Rate Loans shall be converted to Base Rate
Loans either (A) on the last day of the then current Interest
Period applicable to such Eurodollar Loan if such Lender can
lawfully continue to maintain and fund such Eurodollar Loan or
(B) immediately if such Lender shall determine that it may not
lawfully continue to maintain and fund such Eurodollar Loan to
such day.
(c) Requirements of Law. If at any time a Lender shall incur
increased costs or reductions in the amounts received or receivable
hereunder with respect to the making, the commitment to make or the
maintaining of any Eurodollar Loan or Floating Rate Eurodollar
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Loan because of (i) any change after the date hereof in any law,
governmental rule, regulation, guideline or order (including the
introduction of any new law or governmental rule, regulation, guideline
or order) or in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or
administration thereof, including, without limitation, the imposition,
modification or deemed applicability of any reserves, deposits or
similar requirements (such as, for example, but not limited to, a
change in official reserve requirements) or (ii) other circumstances
affecting the London interbank Eurodollar market; then the Borrowers
shall pay to such Lender promptly upon written demand therefor, such
additional amounts (in the form of an increased rate of, or a different
method of calculating, interest or otherwise as such Lender may
determine in its sole discretion) as may be required to compensate such
Lender for such increased costs or reductions in amounts receivable
hereunder. If any Lender becomes entitled to claim any additional
amounts pursuant to this Section 4.1(c), it shall provide prompt notice
thereof to the Borrowers, through the Agent, certifying (A) that one of
the events described in this Section 4.1(c) has occurred and describing
in reasonable detail the nature of such event, (B) as to the increased
cost or reduced amount resulting from such event and (C) as to the
additional amount demanded by such Lender and a reasonably detailed
explanation of the calculation thereof provided that no such amount
shall be payable with respect to any period commencing more than 90
days prior to the date such Lender first notifies the Borrowers of its
intention to demand compensation therefor under this Section.
(d) Regulation D Compensation. In the event that a Lender is
required to maintain reserves of the type contemplated by the
definition of "Eurodollar Reserve Percentage", such Lender may require
the Borrowers to pay, contemporaneously with each payment of interest
on the Eurodollar Loans, additional interest on the related Eurodollar
Loan of such Lender at a rate per annum determined by such Lender up to
but not exceeding the excess of (i)(A) the applicable London Interbank
Offered Rate divided by (B) one minus the Eurodollar Reserve Percentage
over (ii) the applicable London Interbank Offered Rate. Any Lender
wishing to require payment of such additional interest (x) shall so
notify the Borrowers and the Agent, in which case such additional
interest on the Eurodollar Loans of such Lender shall be payable to
such Lender at the place indicated in such notice with respect to each
Interest Period commencing at least three Business Days after the
giving of such notice and (y) shall notify the Borrowers at least three
Business Days prior to each date on which interest is payable on the
Eurodollar Loans of the amount then due it under this Section. Each
such notification shall be accompanied by such information as the
Borrowers may reasonably request.
Each determination and calculation made by a Lender under this Section
4.1 shall, absent manifest error, be binding and conclusive on the parties
hereto. Any conversions of Eurodollar Loans, or Floating Eurodollar Rate Loans,
as the case may be, made pursuant to this Section 4.1 shall subject the
Borrowers to the payments required by Section 4.3 to the extent applicable. This
Section shall survive termination of this Credit Agreement and the other Credit
Documents and payment of the Loans and all other amounts payable hereunder.
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4.2 CAPITAL ADEQUACY.
If any Lender has determined that the adoption or becoming effective,
after the date hereof, of any applicable law, rule or regulation regarding
capital adequacy, or any change therein (after the date hereof), or any change
in the interpretation or administration thereof by any Governmental Authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by such Lender (or its parent corporation)
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such Governmental Authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on such
Lender's (or parent corporation's) capital or assets as a consequence of its
commitments or obligations hereunder to a level below that which such Lender (or
its parent corporation) could have achieved but for such adoption,
effectiveness, change or compliance (taking into consideration such Lender's (or
parent corporation's) policies with respect to capital adequacy), then, upon
notice from such Lender (which shall include the basis and calculations in
reasonable detail supporting the compensation requested in such notice), and
receipt by the Borrowers of such written notice from such Lender (with a copy to
the Agent) the Borrowers shall be obligated to pay to such Lender such
additional amount or amounts as will compensate such Lender on an after tax
basis (after taking into account applicable deductions and credits in respect of
the amount so indemnified) for such reduction provided that no such amount shall
be payable with respect to any period commencing more than 90 days prior to the
date such Lender first notifies the Borrowers of its intention to demand
compensation therefor under this Section. Each determination by any Lender of
amounts owing under this Section 4.2 shall, absent manifest error, be conclusive
and binding on the parties hereto. The covenants of this Section 4.2 shall
survive termination of this Credit Agreement and the other Credit Documents and
the payment of the Loans and all other amounts payable hereunder.
4.3 COMPENSATION.
The Borrowers promise to indemnify each Lender and to hold each Lender
harmless from any loss or expense which such Lender may sustain or incur as a
consequence of (a) default by the Borrowers in making a borrowing of, conversion
into or continuation of Eurodollar Loans after the Borrowers have given a notice
requesting the same in accordance with the provisions of this Credit Agreement,
(b) default by the Borrowers in making any prepayment of a Eurodollar Loan after
the Borrowers have given a notice thereof in accordance with the provisions of
this Credit Agreement, (c) the making of a prepayment of Eurodollar Loans on a
day which is not the last day of an Interest Period with respect thereto and (d)
the payment, continuation or conversion of a Eurodollar Loan on a day which is
not the last day of the Interest Period applicable thereto or the failure to
repay a Eurodollar Loan when required by the terms of this Credit Agreement.
Such indemnification may include an amount equal to (i) an amount of interest
calculated at the Eurodollar Rate which would have accrued on the amount in
question, for the period from the date of such prepayment or of such failure to
borrow, convert, continue or repay to the last day of the applicable Interest
Period (or, in the case of a failure to borrow, convert or continue, the
Interest Period that would have commenced on the date of such failure) in each
case at the applicable rate of interest for such Eurodollar Loans provided for
herein minus (ii) the amount of interest (as reasonably determined by such
Lender) which would have
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accrued to such Lender on such amount by placing such amount on deposit for a
comparable period with leading banks in the interbank Eurocurrency market. If
any Lender becomes entitled to claim any additional amounts pursuant to this
Section 4.3, it shall provide prompt notice thereof to the Borrower, through the
Agent, as to the additional amount demanded by such Lender and a reasonably
detailed explanation of the calculation thereof. The covenants in this Section
4.3 shall survive the termination of this Credit Agreement and the payment of
the Loans and all other amounts payable hereunder.
4.4 TAXES.
(a) Except as provided below in this Section 4.4, all payments
made by the Borrowers under this Credit Agreement and any Notes shall
be made free and clear of, and without deduction or withholding for or
on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now
or hereafter imposed, levied, collected, withheld or assessed by any
court, or governmental body, agency or other official, excluding taxes
measured by or imposed upon the net income of any Lender or its
applicable lending office, or any branch or affiliate thereof, and all
franchise taxes, branch taxes, taxes on doing business or taxes on the
capital or net worth of any Lender or its applicable lending office, or
any branch or affiliate thereof, in each case imposed in lieu of net
income taxes: (i) by the jurisdiction under the laws of which such
Lender, applicable lending office, branch or affiliate is organized or
is located, or in which its principal executive office is located, or
any nation within which such jurisdiction is located or any political
subdivision thereof; or (ii) by reason of any connection between the
jurisdiction imposing such tax and such Lender, applicable lending
office, branch or affiliate other than a connection arising solely from
such Lender having executed, delivered or performed its obligations, or
received payment under or enforced, this Credit Agreement or any Notes.
If any such non-excluded taxes, levies, imposts, duties, charges, fees,
deductions or withholdings ("Non-Excluded Taxes") are required to be
withheld from any amounts payable to an Agent or any Lender hereunder
or under any Notes, (A) the amounts so payable to the Agent or such
Lender shall be increased to the extent necessary to yield to the Agent
or such Lender (after payment of all Non-Excluded Taxes) interest or
any such other amounts payable hereunder at the rates or in the amounts
specified in this Credit Agreement and any Notes, provided, however,
that the Borrowers shall be entitled to deduct and withhold any Non-
Excluded Taxes and shall not be required to increase any such amounts
payable to any Lender that is not organized under the laws of the
United States of America or a state thereof if such Lender fails to
comply with the requirements of paragraph (b) of this Section 4.4
whenever any Non-Excluded Taxes are payable by the Borrowers, and (B)
as promptly as possible after requested, the Borrowers shall send to
the Agent for its own account or for the account of such Lender, as the
case may be, a certified copy of an original official receipt received
by the Borrowers showing payment thereof. If the Borrowers fail to pay
any Non-Excluded Taxes when due to the appropriate taxing authority or
fails to remit to the Agent the required receipts or other required
documentary evidence, the Borrowers shall indemnify the Agent and any
Lender for any incremental Non-Excluded Taxes, interest or penalties
that may become payable by the
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Agent or any Lender as a result of any such failure. The agreements in
this Section 4.4 shall survive the termination of this Credit Agreement
and the payment of the Loans and all other amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall:
(i) (A) on or before the date of any payment
by the Borrowers under this Credit Agreement
or the Notes to such Lender, deliver to the
Borrowers and the Agent (x) two duly
completed copies of United States Internal
Revenue Service Form 1001 or 4224, or
successor applicable form, as the case may
be, certifying that it is entitled to
receive payments under this Credit Agreement
and any Notes without deduction or
withholding of any United States federal
income taxes and (y) an Internal Revenue
Service Form W-8 or W-9, or successor
applicable form, as the case may be,
certifying that it is entitled to an
exemption from United States backup
withholding tax;
(B) deliver to the Borrowers and the
Agent two further copies of any such form or
certification on or before the date that any
such form or certification expires or
becomes obsolete and after the occurrence of
any event requiring a change in the most
recent form previously delivered by it to
the Borrower; and
(C) obtain such extensions of time
for filing and complete such forms or
certifications as may reasonably be
requested by the Borrowers or the Agent; or
(ii) in the case of any such Lender that is not a
"bank" within the meaning of Section 881(c)(3)(A) of the
Internal Revenue Code, (A) represent to the Borrowers (for the
benefit of the Borrowers and the Agent) that it is not a bank
within the meaning of Section 881 (c)(3)(A) of the Internal
Revenue Code, (B) agree to furnish to the Borrowers, on or
before the date of any payment by the Borrowers, with a copy
to the Agent, two accurate and complete original signed copies
of Internal Revenue Service Form W-8, or successor applicable
form, certifying to such Lender's legal entitlement at the
date of such certificate to an exemption from U.S. withholding
tax under the provisions of Section 881(c) of the Internal
Revenue Code with respect to payments to be made under this
Credit Agreement and any Notes (and to deliver to the
Borrowers and the Agent two further copies of such form on or
before the date it expires or becomes obsolete and after the
occurrence of any event requiring a change in the most
recently provided form and, if necessary, obtain any
extensions of time reasonably requested by the Borrowers or
the Agent for filing and completing such forms), and (C)
agree, to the extent legally entitled to do so, upon
reasonable request by
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the Borrowers, to provide to the Borrowers (for the benefit of
the Borrowers and the Agent) such other forms as may be
reasonably required in order to establish the legal
entitlement of such Lender to an exemption from withholding
with respect to payments under this Credit Agreement and any
Notes.
Notwithstanding the above, if any change in treaty,
law or regulation has occurred after the date such Person
becomes a Lender hereunder which renders all such forms
inapplicable or which would prevent such Lender from duly
completing and delivering any such form with respect to it and
such Lender so advises the Borrowers and the Agent, then such
Lender shall be exempt from such requirements. Each Person
that shall become a Lender or a participant of a Lender
pursuant to Section 11.3 shall, upon the effectiveness of the
related transfer, be required to provide all of the forms,
certifications and statements required pursuant to this
subsection (b); provided that in the case of a participant of
a Lender, the obligations of such participant of a Lender
pursuant to this subsection (b) shall be determined as if the
participant of a Lender were a Lender except that such
participant of a Lender shall furnish all such required forms,
certifications and statements to the Lender from which the
related participation shall have been purchased.
4.5 REPLACEMENT OF LENDERS.
The Agent and each Lender shall use reasonable efforts to avoid or
mitigate any increased cost or suspension of the availability of an interest
rate under Sections 4.1 through 4.4 above to the greatest extent practicable
(including transferring the Loans to another lending office or Affiliate of a
Lender) unless, in the opinion of the Agent or such Lender, such efforts would
be likely to have an adverse effect upon it. In the event a Lender makes a
request to the Borrowers for additional payments in accordance with Section 4.1,
4.2 or 4.4, or suspends Eurodollar Loans under Section 4.1, then, provided that
no Default or Event of Default has occurred and is continuing at such time, the
Borrowers may, at their own expense (such expense to include any transfer fee
payable to the Agent under Section 11.3(b) and any expense pursuant to Section
4) and in its sole discretion, require such Lender to transfer and assign in
whole (but not in part), without recourse (in accordance with and subject to the
terms and conditions of Section 11.3(b)), all of its interests, rights and
obligations under this Credit Agreement to an Eligible Assignee which shall
assume such assigned obligations (which assignee may be another Lender, if a
Lender accepts such assignment); provided that (a) such assignment shall not
conflict with any law, rule or regulation or order of any court or other
Governmental Authority and (b) the Borrowers or such assignee shall have paid to
the assigning Lender in immediately available funds the principal of and
interest accrued to the date of such payment on the portion of the Loans
hereunder held by such assigning Lender and all other amounts owed to such
assigning Lender hereunder, including amounts owed pursuant to Sections 4.1
through 4.4.
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SECTION 5.
CONDITIONS PRECEDENT
5.1 CLOSING CONDITIONS.
The obligation of the Lenders to enter into this Credit Agreement is
subject to satisfaction (or waiver) of the following conditions:
(a) Executed Credit Documents. Receipt by the Agent of duly
executed copies of (i) this Credit Agreement, (ii) the Notes and (iii)
all other Credit Documents, each in form and substance acceptable to
the Lenders.
(b) Organizational Documents.
(i) Receipt by the Agent of the following with
respect to Duke Energy Field Services, LLC:
(A) Certificate of Formation. A copy of the
certificate of formation of such Borrower certified
to be true and complete by the appropriate
Governmental Authority of the State of Delaware and
certified by an authorized officer of such Borrower
to be true and correct as of the Effective Date.
(B) LLC Agreement. A copy of the LLC
Agreement of such Borrower certified by an authorized
officer of such Borrower to be true and correct as of
the Effective Date.
(C) Resolutions. Copies of resolutions of
the members of such Borrower approving and adopting
the Credit Documents to which such Borrower is a
party, the transactions contemplated therein and
authorizing execution and delivery thereof and
certified by an authorized officer of such Borrower
to be in full force and effect as of the Effective
Date.
(D) Good Standing. Copies of certificates of
good standing, existence or their equivalent with
respect to such Borrower certified as of a recent
date by the appropriate Governmental Authorities of
the State of Delaware.
(E) Incumbency. An incumbency certificate
certified by an authorized officer to be true and
correct as of the Effective Date.
(ii) Receipt by the Agent of the following with
respect to Duke Energy Field Services Corporation:
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(A) Charter Documents. Copies of the
articles or certificates of incorporation or other
charter documents of such Borrower certified to be
true and complete as of a recent date by the
appropriate Governmental Authority of the State of
Delaware and certified by a secretary or assistant
secretary of such Borrower to be true and correct as
of the Effective Date.
(B) Bylaws. A copy of the bylaws or other
governing documents of such Borrower certified by a
secretary or assistant secretary of such Borrower to
be true and correct as of the Effective Date.
(C) Resolutions. Copies of resolutions of
the Board of Directors of such Borrower approving and
adopting the Credit Documents to which it is a party,
the transactions contemplated therein and authorizing
execution and delivery thereof, certified by a
secretary or assistant secretary of such Borrower to
be true and correct and in force and effect as of the
Effective Date.
(D) Good Standing. Copies of certificates of
good standing, existence or its equivalent with
respect to such Borrower certified as of a recent
date by the appropriate Governmental Authorities of
the State of Delaware.
(E) Incumbency. An incumbency certificate of
such Borrower certified by a secretary or assistant
secretary to be true and correct as of the Effective
Date.
(c) Opinion of Counsel. Receipt by the Agent of an opinion
from legal counsel to the Borrowers, addressed to the Agent on behalf
of the Lenders and dated as of the Effective Date, in form and
substance satisfactory to the Agent.
(d) Financial Statements. Receipt by the Lenders of such
financial information regarding the Borrowers as the Lenders may
reasonably request.
(e) Fees and Expenses. Payment by the Borrowers of all fees
and expenses owed by it to the Lenders and the Agent, including,
without limitation, (i) payment to each Lender of an upfront fee equal
to 5 bps on its total Commitment and (ii) payment to the Agent of the
fees set forth in the Fee Letter.
(f) Litigation. As of the Closing Date, there shall be no
material actions, suits, investigations or legal, equitable,
arbitration or administrative proceedings pending or threatened against
a Borrower which are likely to be decided adversely to such Borrower
and if so decided would have a Material Adverse Effect.
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(g) Material Adverse Effect. As of the Closing Date, no event
or condition shall have occurred since December 31, 1999 that would
have or would be reasonably expected to have a Material Adverse Effect.
(h) Borrowers' Certificate. The Agent shall have received a
certificate or certificates executed by an Approved Officer of the
Borrowers, on behalf of the Borrowers, as of the Closing Date stating
that (i) the Borrowers are in compliance with all existing financial
obligations, unless such non-compliance would not have a Material
Adverse Effect, (ii) no action, suit, investigation or proceeding is
pending or, to such officer's knowledge, threatened in any court or
before any arbitrator or governmental instrumentality that purports to
affect a Borrower or any transaction contemplated by the Credit
Documents, if such action, suit, investigation or proceeding is likely
to be adversely determined and if adversely determined would have a
Material Adverse Effect, (iii) the financial statements and information
delivered to the Agent on or before the Closing Date were prepared in
good faith and in accordance with GAAP and (iv) immediately after
giving effect to this Credit Agreement, the other Credit Documents and
all the transactions contemplated herein and therein to occur on such
date, (A) no Default or Event of Default exists and (B) all
representations and warranties contained herein and in the other Credit
Documents are true and correct in all material respects on and as of
the date made.
(i) Other. Receipt by the Lenders of such other documents,
instruments, agreements or information as reasonably requested by any
Lender.
5.2 CONDITIONS TO LOANS.
In addition to the conditions precedent stated elsewhere herein, the
Lenders shall not be obligated to make new Loans unless:
(a) Request. The Borrowers shall have timely delivered a duly
executed and completed Notice of Borrowing in conformance with all the
terms and conditions of this Credit Agreement.
(b) Representations and Warranties. The representations and
warranties made by the Borrowers in this Credit Agreement are true and
correct in all material respects at and as if made as of the date of
the funding of the Loans (except to the extent such representations and
warranties expressly and exclusively relate to an earlier date).
(c) No Default. No Default or Event of Default shall exist or
be continuing either prior to or after giving effect thereto.
(d) Availability. Immediately after giving effect to the
making of a Revolving-A Loan the Revolving-A Loans outstanding shall
not exceed the Revolving-A Loan Commitment. Immediately after giving
effect to the making of a Revolving-B Loan the Revolving-B Loans
outstanding shall not exceed the Revolving-B Loan Commitment.
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The delivery of each Notice of Borrowing shall constitute a representation and
warranty by the Borrowers of the correctness of the matters specified in
subsections (b), (c) and (d) above.
SECTION 6.
REPRESENTATIONS AND WARRANTIES
The Borrowers hereby represents and warrants to each Lender that:
6.1 ORGANIZATION AND GOOD STANDING.
Each Borrower (a) is a limited liability company or a corporation duly
formed, validly existing and in good standing under the laws of the State of
Delaware, (b) is duly qualified and in good standing as a foreign limited
liability company or corporation authorized to do business in every jurisdiction
where the failure to so qualify would have a Material Adverse Effect and (c) has
the requisite corporate power and authority to own its properties and to carry
on its business as now conducted and as proposed to be conducted.
6.2 DUE AUTHORIZATION.
Each Borrower (a) has the requisite corporate power and authority to
execute, deliver and perform this Credit Agreement and the other Credit
Documents and to incur the obligations herein and therein provided for and (b)
has been authorized by all necessary corporate action to execute, deliver and
perform this Credit Agreement and the other Credit Documents.
6.3 NO CONFLICTS.
Neither the execution and delivery of the Credit Documents, nor the
consummation of the transactions contemplated herein and therein, nor
performance of and compliance with the terms and provisions hereof and thereof
by each Borrower will (a) violate or conflict with any provision of its
organizational documents or bylaws, (b) materially violate, contravene or
conflict with any law (including without limitation, the Public Utility Holding
Company Act of 1935, as amended), regulation (including without limitation,
Regulation U or Regulation X), order, writ, judgment, injunction, decree or
permit applicable to it, (c) materially violate, contravene or conflict with
contractual provisions of, or cause an event of default under, any indenture,
loan agreement, mortgage, deed of trust, contract or other agreement or
instrument to which it is a party or by which it may be bound or (d) result in
or require the creation of any Lien upon or with respect to its properties.
6.4 CONSENTS.
No consent, approval, authorization or order of, or filing,
registration or qualification with, any court or Governmental Authority or third
party is required in connection with the execution,
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delivery or performance of this Credit Agreement or any of the other Credit
Documents that has not been obtained.
6.5 ENFORCEABLE OBLIGATIONS.
This Credit Agreement and the other Credit Documents have been duly
executed and delivered and constitute legal, valid and binding obligations of
the Borrowers enforceable against the Borrowers in accordance with their
respective terms, except as may be limited by bankruptcy or insolvency laws or
similar laws affecting creditors' rights generally or by general equitable
principles.
6.6 FINANCIAL CONDITION.
The financial statements delivered to the Lenders pursuant to Section
5.1(d) and pursuant to Section 7.1(a) and (b): (i) have been prepared in
accordance with GAAP (subject to the provisions of Section 1.3) and (ii) present
fairly the financial condition, results of operations and cash flows of the
Borrowers as of such date and for such periods (subject, in the case of interim
statements, to normal year-end adjustments and the absence of footnotes).
6.7 TAXES.
Each Borrower and each of its Material Subsidiaries has filed, or
caused to be filed, all material tax returns (federal, state, local and foreign)
required to be filed and paid all amounts of taxes shown thereon to be due
(including interest and penalties) and has paid all other taxes, fees,
assessments and other governmental charges (including mortgage recording taxes,
documentary stamp taxes and intangibles taxes) owing by it, except (a) for such
taxes which are not yet delinquent or that are being contested in good faith and
by proper proceedings, and against which adequate reserves are being maintained
in accordance with GAAP or (b) where such nonfiling or nonpayment would not have
a Material Adverse Effect.
6.8 COMPLIANCE WITH LAW.
Each Borrower and each of its Material Subsidiaries is in compliance
with all laws, rules, regulations, orders, decrees and requirements of
Governmental Authorities applicable to it or to its properties (including,
without limitation, ERISA, the Code and Environmental Laws), except (a) where
the necessity of compliance therewith is being contested in good faith by
appropriate proceedings or (b) such failure to comply would not have or would
not be reasonably expected to have a Material Adverse Effect.
6.9 USE OF PROCEEDS; MARGIN STOCK.
The proceeds of the Loans hereunder will be used solely for the
purposes specified in Section 7.7. None of such proceeds will be used for the
purpose of (a) purchasing or carrying any "margin stock" as defined in
Regulation U or Regulation X, (b) for the purpose of reducing or retiring any
Indebtedness which was originally incurred to purchase or carry "margin stock",
(c) for
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any other purpose which might constitute this transaction a "purpose credit"
within the meaning of Regulation U or Regulation X or (d) for the acquisition of
another Person unless the board of directors (or other comparable governing
body) or stockholders, as appropriate, of such Person has approved such
acquisition.
6.10 GOVERNMENT REGULATION.
Each Borrower is exempt from the provisions of the Public Utility
Holding Company Act of 1935, as amended. Neither Borrower is an "investment
company" registered or required to be registered under the Investment Company
Act of 1940, as amended, or controlled by such a company.
6.11 SOLVENCY.
Each Borrower is and, after the consummation of the transactions
contemplated by this Credit Agreement, will be Solvent.
6.12 ENVIRONMENTAL MATTERS.
Except as would not result or be reasonably expected to result in a
Material Adverse Effect: (a) each of the properties of the Borrowers (the
"Properties") and all operations at the Properties are in compliance with all
applicable Environmental Laws, (b) there is no violation of any Environmental
Law with respect to the Properties or the businesses operated by the Borrowers
(the "Businesses"), and (c) there are no conditions relating to the Businesses
or Properties that would reasonably be expected to give rise to a liability
under any applicable Environmental Laws.
6.13 MATERIAL SUBSIDIARIES.
As of the Closing Date, set forth on Schedule 6.13 is a list of all
Material Subsidiaries of the Borrowers.
SECTION 7.
AFFIRMATIVE COVENANTS
Each Borrower hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loans, together with interest, fees and
other obligations hereunder, have been paid in full and the Commitments shall
have terminated:
7.1 INFORMATION COVENANTS.
The Borrowers will furnish, or cause to be furnished, to the Agent and
each of the Lenders:
(a) Annual Financial Statements. As soon as available, and in
any event within 120 days after the close of each fiscal year of the
Borrowers, a consolidated balance sheet of
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the Borrowers and their Subsidiaries as of the end of such fiscal year,
together with a related consolidated income statement and related
statements of cash flows, capitalization and retained earnings for such
fiscal year, setting forth in comparative form figures for the
preceding fiscal year, all such financial information described above
to be audited by independent certified public accountants of recognized
national standing and whose opinion, which shall be furnished to the
Agent, shall be to the effect that such financial statements have been
prepared in accordance with GAAP (except for changes with which such
accountants concur); provided that the Borrowers' Form 10-K Annual
Report as filed with the Securities and Exchange Commission, without
exhibits, will satisfy the requirements of this Section 7.1(a).
(b) Quarterly Financial Statements. As soon as available, and
in any event within 60 days after the close of each fiscal quarter of
the Borrowers (other than the fourth fiscal quarter) a consolidated
balance sheet of the Borrowers and their Subsidiaries as of the end of
such fiscal quarter, together with a related consolidated income
statement and related statement of cash flows for such fiscal quarter
in each case setting forth in comparative form figures for the
corresponding period of the preceding fiscal year, and accompanied by a
certificate of an Approved Officer of the Borrowers to the effect that
such quarterly financial statements fairly present in all material
respects the financial condition of the Borrowers and have been
prepared in accordance with GAAP, subject to changes resulting from
audit and normal year-end audit adjustments to same; provided that the
Borrowers' Form 10-Q Quarterly Report as filed with the Securities and
Exchange Commission, without exhibits, will satisfy the requirements of
this Section 7.1(b).
(c) Officer's Certificate. At the time of delivery of the
financial statements provided for in Sections 7.1(a) and 7.1(b) above,
a certificate of an Approved Officer of the Borrowers (i) stating that
no Default or Event of Default exists, or if any Default or Event of
Default does exist, specifying the nature and extent thereof and what
action the Borrowers propose to take with respect thereto and (ii)
updating Schedule 6.13, if appropriate.
(d) Reports. Promptly upon transmission or receipt thereof,
copies of any filings and registrations with, and reports to or from,
the Securities and Exchange Commission, or any successor agency, and
copies of all financial statements, proxy statements, notices and
reports as a Borrower shall send to its equityholders.
(e) Notices. Within five days after any officer of a Borrower
with responsibility relating thereto obtaining knowledge thereof, the
Borrowers will give written notice to the Agent immediately of (i) the
occurrence of a Default or Event of Default, specifying the nature and
existence thereof and what action the Borrowers propose to take with
respect thereto, and (ii) the occurrence of any of the following with
respect to the Borrowers: (A) the pendency or commencement of any
litigation, arbitral or governmental proceeding against a Borrower the
claim of which is likely to be decided adversely to such Borrower and,
if adversely determined, would have or would be reasonably expected to
have a Material Adverse Effect or (B) the institution of any
proceedings against a Borrower with respect to, or the receipt of
notice by such Person of potential liability or responsibility for
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violation or alleged violation of, any federal, state or local law,
rule or regulation (including, without limitation, any Environmental
Law) that is likely to be decided adversely to a Borrower and, if
adversely decided, would have a Material Adverse Effect.
(f) ERISA. Upon a Borrower or any ERISA Affiliate obtaining
knowledge thereof, the Borrowers will give written notice to the Agent
promptly (and in any event within five Business Days) of: (i) any event
or condition, including, but not limited to, any Reportable Event, that
constitutes, or would be reasonably expected to lead to, a Termination
Event if such Termination Event would have a Material Adverse Effect;
(ii) with respect to any Multiemployer Plan, the receipt of notice as
prescribed in ERISA or otherwise of any withdrawal liability assessed
against a Borrower or any ERISA Affiliate, or of a determination that
any Multiemployer Plan is in reorganization or insolvent (both within
the meaning of Title IV of ERISA); (iii) the failure to make full
payment on or before the due date (including extensions) thereof of all
amounts which a Borrower or any of its Subsidiaries or ERISA Affiliates
is required to contribute to each Plan pursuant to its terms and as
required to meet the minimum funding standard set forth in ERISA and
the Code with respect thereto; or (iv) any change in the funding status
of any Plan that would have or would be reasonably expected to have a
Material Adverse Effect; together, with a description of any such event
or condition or a copy of any such notice and a statement by an officer
of a Borrower briefly setting forth the details regarding such event,
condition, or notice, and the action, if any, which has been or is
being taken or is proposed to be taken with respect thereto. Promptly
upon request, each Borrower shall furnish the Agent and each of the
Lenders with such additional information concerning any Plan as may be
reasonably requested, including, but not limited to, copies of each
annual report/return (Form 5500 series), as well as all schedules and
attachments thereto required to be filed with the Department of Labor
and/or the Internal Revenue Service pursuant to ERISA and the Code,
respectively, for each "plan year" (within the meaning of Section 3(39)
of ERISA).
(g) Other Information. With reasonable promptness upon any
such request, such other information regarding the business, properties
or financial condition of the Borrowers and their Subsidiaries as the
Agent or the Required Lenders may reasonably request.
Information required to be delivered pursuant to this Sections 7.1(a),
7.1(b) and 7.1(d) shall be deemed to have been delivered on the date on which
the Borrowers provide notice to the Lenders that such information has been
posted on the Securities and Exchange Commission website on the Internet at
sec.gov/edaux/searches.htm or at another website identified in such notice and
accessible by the Lenders without charge; provided that (i) such notice may be
included in a certificate delivered pursuant to Section 7.1(c) and (ii) the
Borrowers shall deliver paper copies of the information referred to in Sections
7.1(a), 7.1(b) and 7.1(d), to any Lender that requests such delivery.
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7.2 PRESERVATION OF EXISTENCE AND FRANCHISES.
Each Borrower will, and will cause each Material Subsidiary to, do all
things necessary to preserve and keep in full force and effect its existence and
rights, franchises and authority; provided, however, that, subject to Section
8.3, a Borrower shall not be required to preserve any such existence, right or
franchise if it in good faith determines that preservation thereof is no longer
necessary or desirable in the conduct of its business and that the loss thereof
is not disadvantageous in any material respect to the Lenders.
7.3 BOOKS AND RECORDS.
Each Borrower will keep, and will cause its Material Subsidiaries to
keep, complete and accurate books and records of its transactions in accordance
with good accounting practices on the basis of GAAP (including the establishment
and maintenance of appropriate reserves).
7.4 COMPLIANCE WITH LAW.
Each Borrower will comply, and will cause each Material Subsidiary to
comply, with all laws (including, without limitation, all Environmental Laws and
ERISA laws), rules, regulations and orders, and all applicable restrictions
imposed by all Governmental Authorities, applicable to it and its property, if
(a) the failure to comply would have or would be reasonably expected to have a
Material Adverse Effect or (b) the necessity of compliance therewith is being
contested in good faith by appropriate proceedings.
7.5 PAYMENT OF TAXES AND OTHER INDEBTEDNESS.
Each Borrower will, and will cause each Material Subsidiary to, pay,
settle or discharge (a) all taxes, assessments and governmental charges or
levies imposed upon it, or upon its income or profits, or upon any of its
properties, before they shall become delinquent, (b) all lawful claims
(including claims for labor, materials and supplies) which, if unpaid, might
give rise to a Lien upon any of its properties, and (c) all of its other
Indebtedness as it shall become due; provided, however, that no Borrower shall
be required to pay any such tax, assessment, charge, levy, claim or Indebtedness
which (i) is being contested in good faith by appropriate proceedings and as to
which adequate reserves therefor have been established in accordance with GAAP
or (ii) the nonpayment of which would not have a Material Adverse Effect.
7.6 MAINTENANCE OF PROPERTY; INSURANCE.
(a) Each Borrower will keep, and will cause each Material
Subsidiary to keep, all property useful and necessary in its business
in good working order and condition, ordinary wear and tear excepted.
(b) Each Borrower will, and will cause each of its Material
Subsidiaries to, maintain (either in the name of such Borrower or in
such Material Subsidiary's own name) with financially sound and
responsible insurance companies, insurance on all their
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respective properties in at least such amounts and against at least
such risks (and with such risk retention) as are usually insured
against in the same general area by companies of established repute
engaged in the same or a similar business; provided that self-insurance
by a Borrower or any such Material Subsidiary shall not be deemed a
violation of this covenant to the extent that companies engaged in
similar businesses and owning similar properties in the same general
areas in which the Borrowers or such Material Subsidiary operates
self-insure.
7.7 USE OF PROCEEDS.
The proceeds of the Loans may be used solely (a) to make a special
one-time distribution to Duke Energy Corporation and Phillips Petroleum Company
and for transaction costs in connection therewith, (b) to provide credit support
for each Borrower's commercial paper and (c) for other general corporate
purposes of each Borrower.
7.8 AUDITS/INSPECTIONS.
Upon reasonable notice and during normal business hours, each Borrower
will, and will cause its Material Subsidiaries to, permit representatives
appointed by the Agent, including, without limitation, independent accountants,
agents, attorneys, and appraisers to visit and inspect each Borrower's and its
Material Subsidiaries' property, including its books and records, its accounts
receivable and inventory, each Borrower's and its Material Subsidiaries'
facilities and its other business assets, and to make photocopies or photographs
thereof and to write down and record any information such representatives obtain
and shall permit the Agent or its representatives to investigate and verify the
accuracy of information provided to the Lenders and to discuss all such matters
with the officers, employees and representatives of each Borrower and its
Material Subsidiaries.
7.9 MAINTENANCE OF OWNERSHIP.
Each Borrower will maintain ownership of all Capital Stock of each
Material Subsidiary, directly or indirectly, free and clear of all Liens except
as permitted by Section 8.3. The Borrowers will take such action as necessary to
ensure that, on and after the date that a Subsidiary of Phillips Petroleum is
merged into Duke Energy Field Services Corporation, Duke Energy Field Services,
LLC will be (and will remain) a wholly owned Subsidiary, direct or indirect, of
Duke Energy Field Services Corporation unless Duke Energy Field Services, LLC is
merged with and into Duke Energy Field Services Corporation.
SECTION 8.
NEGATIVE COVENANTS
Each Borrower hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loans, together with interest, fees and
other obligations hereunder, have been paid in full and the Commitments shall
have terminated:
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8.1 NATURE OF BUSINESS.
The Borrowers will not, and will not permit any of their Materials
Subsidiaries to, materially alter the character of their business on a
consolidated basis from that conducted as of the Closing Date.
8.2. LIENS.
A Borrower will not create, assume or suffer to exist any Lien on any
asset now owned or hereafter acquired by it or any of its Material Subsidiaries,
except for the following:
(a) Liens granted by such Borrower or any Material Subsidiary
existing on the date of this Credit Agreement securing Indebtedness
outstanding on the date of this Credit Agreement as set forth on
Schedule 8.2.
(b) any Lien on any asset of any Person existing at the time
such Person is merged or consolidated with or into a Borrower or any
Material Subsidiary and not created in contemplation of such event.
(c) any Lien existing on any asset prior to the acquisition
thereof by a Borrower or any Material Subsidiary and not created in
contemplation of such acquisition.
(d) any Lien on any asset securing Indebtedness incurred or
assumed for the purpose of financing all or any part of the cost of
acquiring such asset; provided that such Lien attaches to such asset
concurrently with or within 180 days after the acquisition thereof.
(e) any Lien arising out of the refinancing, extension,
renewal or refunding of any Indebtedness secured by any Lien permitted
by any of the foregoing clauses of this Section 8.2; provided that such
Indebtedness is not increased and is not secured by any additional
assets.
(f) Liens for taxes, assessments or other governmental charges
or levies not yet due or which are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves or
other appropriate provisions are being maintained in accordance with
GAAP.
(g) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen and interest owners of oil and gas
production and other Liens imposed by law, created in the ordinary
course of business and for amounts not past due for more than 60 days
or which are being contested in good faith by appropriate proceedings
which are sufficient to prevent imminent foreclosure of such Liens, are
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promptly instituted and diligently conducted and with respect to which
adequate reserves or other appropriate provisions are being maintained
in accordance with GAAP.
(h) Liens incurred or deposits made in the ordinary course of
business (including, without limitation, surety bonds and appeal bonds)
in connection with workers' compensation, unemployment insurance and
other types of social security benefits or to secure the performance of
tenders, bids, leases, contracts (other than for the repayment of
Indebtedness), statutory obligations and other similar obligations or
arising as a result of progress payments under government contracts.
(i) easements (including, without limitation, reciprocal
easement agreements and utility agreements), rights-of-way, covenants,
consents, reservations, encroachments, variations and other
restrictions, charges or encumbrances (whether or not recorded)
affecting the use of real property.
(j) Liens with respect to judgments and attachments which do
not result in an Event of Default.
(k) Liens, deposits or pledges to secure the performance of
bids, tenders, contracts (other than contracts for the payment of
money), leases (permitted under the terms of this Agreement), public or
statutory obligations, surety, stay, appeal, indemnity, performance or
other obligations arising in the ordinary course of business.
(l) rights of first refusal entered into in the ordinary
course of business.
(m) Liens consisting of any (i) rights reserved to or vested
in any municipality or governmental, statutory or public authority to
control or regulate any property of a Borrower or any Material
Subsidiary or to use such property in any manner which does not
materially impair the use of such property for the purpose for which it
is held by a Borrower or any such Material Subsidiary, (ii) obligations
or duties to any municipality or public authority with respect to any
franchise, grant, license, lease or permit and the rights reserved or
vested in any Governmental Authority or public utility to terminate any
such franchise, grant, license, lease or permit or to condemn or
expropriate any property, or (iii) zoning laws, ordinances or municipal
regulations.
(n) liens on deposits required by any Person with whom a
Borrower or any Material Subsidiary enters into forward contracts,
futures contracts, swap agreements or other commodities contracts in
the ordinary course of business.
(o) other Liens, including Liens imposed by Environmental
Laws, arising in the ordinary course of its business which (i) do not
secure Indebtedness, (ii) do not secure any obligation in an amount
exceeding $100,000,000 at any time, (iii) do not in the aggregate
materially detract from the value of its assets or materially impair
the use thereof in the operation of its business or (iv) in addition to
those Liens described in
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clause (ii) above, secure reimbursement obligations under letters of
credit not exceeding $100,000,000 outstanding at any one time.
8.3 CONSOLIDATION AND MERGER.
A Borrower will not, and will not permit any of its Material
Subsidiaries to, (a) enter into any transaction of merger or (b) consolidate,
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution); provided that, so long as no Default or Event of Default shall
exist or be caused thereby: (i) a Person (including a Subsidiary of a Borrower)
may be merged or consolidated with or into a Borrower so long as such Borrower
shall be the continuing or surviving corporation and (ii) a Material Subsidiary
may merge with or into another Subsidiary of a Borrower.
8.4 SALE OR LEASE OF ASSETS.
During the term of this Credit Agreement, a Borrower will not, directly
or indirectly, convey, sell, lease, transfer or otherwise dispose of assets,
business or operations (other than the assets set forth on Schedule 8.4) with an
aggregate book value in excess of twenty-five percent (25%) of its consolidated
total assets, as determined in accordance with GAAP, as calculated as of the end
of the most recent fiscal quarter.
8.5. TRANSACTIONS WITH AFFILIATES.
A Borrower will not, and will not permit any Material Subsidiary to,
directly or indirectly, pay any funds to or for the account of, make any
investment in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect, any transaction with,
any officer, director, employee or Affiliate unless all such transactions
between such Borrower and its Material Subsidiaries on the one hand and any
officer, director, employee or Affiliate on the other, taken in the aggregate
and not individually, shall be on an arms-length basis and on terms no less
favorable to such Borrower or such Material Subsidiary than could have been
obtained from a third party who was not an officer, director, employee or
Affiliate; provided that the foregoing provisions of this Section shall not
prohibit a Borrower and each Material Subsidiary from declaring or paying any
lawful dividend so long as, after giving effect thereto, no Default or Event of
Default shall have occurred and be continuing.
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SECTION 9.
EVENTS OF DEFAULT
9.1 EVENTS OF DEFAULT.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. A Borrower shall: (i) default in the payment when
due of any principal of any of the Loans; or (ii) default, and such
default shall continue for five or more Business Days, in the payment
when due of any interest on the Loans or of any fees or other amounts
owing hereunder, under any of the other Credit Documents or in
connection herewith.
(b) Representations. Any representation, warranty or statement
made or deemed to be made by a Borrower herein, in any of the other
Credit Documents, or in any statement or certificate delivered or
required to be delivered pursuant hereto or thereto shall prove to have
been untrue in any material respect on the date as of which it was
deemed to have been made.
(c) Covenants. A Borrower shall:
(i) default in the due performance or observance of
any term, covenant or agreement contained in Section 7.1(e),
7.8, 8.1, 8.2, 8.3, 8.4 and 8.5.
(ii) default in the due performance or observance by
it of any term, covenant or agreement (other than those
referred to in subsections (a), (b), or (c)(i) of this Section
9.1) contained in this Credit Agreement or any other Credit
Document and such default shall continue unremedied for a
period of at least 30 days after notice thereof given by the
Agent.
(d) Credit Documents. Any Credit Document shall fail to be in
full force and effect or a Borrower shall so assert or any Credit
Document shall fail to give the Agent and/or the Lenders the rights,
powers and privileges purported to be created thereby.
(e) Bankruptcy, etc. The occurrence of any of the following
with respect to a Borrower or a Material Subsidiary (i) a court or
governmental agency having jurisdiction in the premises shall enter a
decree or order for relief in respect of a Borrower or a Material
Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or appoint
a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of a Borrower or a Material Subsidiary or for any
substantial part of its property or ordering the winding up or
liquidation of its affairs; or (ii) an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect is commenced against a Borrower or a Material Subsidiary and
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such petition remains unstayed and in effect for a period of 90
consecutive days; or (iii) a Borrower or a Material Subsidiary shall
commence a voluntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or consent to the
entry of an order for relief in an involuntary case under any such law,
or consent to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of such Person or any substantial part of its property or make
any general assignment for the benefit of creditors; or (iv) a Borrower
or a Material Subsidiary shall admit in writing its inability to pay
its debts generally as they become due or any action shall be taken by
such Person in furtherance of any of the aforesaid purposes.
(f) Defaults under Other Agreements. With respect to any
Indebtedness or any Off Balance Sheet Indebtedness in excess of
$100,000,000 (other than Indebtedness outstanding under this Credit
Agreement) of a Borrower or any Material Subsidiary, such Borrower or
such Material Subsidiary shall (A) default in any payment (beyond the
applicable grace period with respect thereto, if any) with respect to
any such Indebtedness or fail to timely pay such Indebtedness at
maturity, or (B) default (after giving effect to any applicable grace
period) in the observance or performance of any covenant or agreement
relating to such Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event
or condition shall occur or condition exist, the effect of which
default or other event or condition is to cause any such Indebtedness
to become due prior to its stated maturity.
(g) Judgments. One or more judgments, orders, or decrees shall
be entered against a Borrower or a Material Subsidiary involving a
liability of $50,000,000 or more, in the aggregate, (to the extent not
paid or covered by insurance provided by a carrier who has acknowledged
coverage) and such judgments, orders or decrees shall continue
unsatisfied, undischarged and unstayed for a period ending on the first
to occur of (i) the last day on which such judgment, order or decree
becomes final and unappealable and, where applicable, with the status
of a judicial lien or (ii) 45 days.
(h) ERISA. The occurrence of any of the following events or
conditions which could result in a liability of a Borrower or an ERISA
Affiliate of $50,000,000 or more in the aggregate: (i) any "accumulated
funding deficiency," as such term is defined in Section 302 of ERISA
and Section 412 of the Code, whether or not waived, shall exist with
respect to any Plan, or any lien shall arise on the assets of a
Borrower or any ERISA Affiliate in favor of the PBGC or a Plan; (ii) a
Termination Event shall occur with respect to a Single Employer Plan
which is, in the reasonable opinion of the Agent, likely to result in
the termination of such Plan for purposes of Title IV of ERISA; (iii) a
Termination Event shall occur with respect to a Multiemployer Plan or
Multiple Employer Plan which is, in the reasonable opinion of the
Agent, likely to result in (A) the termination of such Plan for
purposes of Title IV of ERISA, or (B) a Borrower or any ERISA Affiliate
incurring any liability in connection with a withdrawal from,
reorganization of (within the meaning of Section 4241 of ERISA), or
insolvency (within the meaning of Section 4245 of ERISA) of such Plan;
or (iv) any prohibited transaction (within the meaning of Section 406
of ERISA or Section 4975 of the Code) or breach of fiduciary
responsibility shall occur which would
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be reasonably expected to subject a Borrower or any ERISA Affiliate to
any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or
Section 4975 of the Code, or under any agreement or other instrument
pursuant to which a Borrower or any ERISA Affiliate has agreed or is
required to indemnify any person against any such liability.
(i) Change of Control. The occurrence of any Change of
Control.
9.2 ACCELERATION; REMEDIES.
Upon the occurrence of an Event of Default, and at any time thereafter
unless and until such Event of Default has been waived by the Required Lenders
(or the Lenders as may be required hereunder), the Agent may, with the consent
of the Super Required Lenders, and shall, upon the request and direction of the
Super Required Lenders, by written notice to the Borrowers take any of the
following actions without prejudice to the rights of the Agent or any Lender to
enforce its claims against the Borrowers, except as otherwise specifically
provided for herein:
(i) Termination of Commitments. Declare the Commitments
terminated whereupon the Commitments shall be immediately terminated.
(ii) Acceleration of Loans. Declare the unpaid amount of all
Borrowers Obligations to be due whereupon the same shall be immediately
due and payable without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower.
(iii) Enforcement of Rights. Enforce any and all rights and
interests created and existing under the Credit Documents, including,
without limitation, all rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section
9.1(e) shall occur, then the Commitments shall automatically terminate and all
Loans, all accrued interest in respect thereof, all accrued and unpaid fees and
other indebtedness or obligations owing to the Lenders and the Agent hereunder
shall immediately become due and payable without the giving of any notice or
other action by the Agent or the Lenders.
Notwithstanding the fact that enforcement powers reside primarily with the
Agent, each Lender has, to the extent permitted by law, a separate right of
payment and shall be considered a separate "creditor" holding a separate "claim"
within the meaning of Section 101(5) of the Bankruptcy Code or any other
insolvency statute.
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9.3 ALLOCATION OF PAYMENTS AFTER EVENT OF DEFAULT.
Notwithstanding any other provision of this Credit Agreement, after the
occurrence of an Event of Default, all amounts collected or received by the
Agent or any Lender on account of amounts outstanding under any of the Credit
Documents shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable out-of-pocket costs
and expenses (including without limitation reasonable attorneys' fees)
of the Agent and the Lenders in connection with enforcing the rights of
the Lenders under the Credit Documents, pro rata as set forth below;
SECOND, to payment of any fees owed to the Agent, or any
Lender, pro rata as set forth below;
THIRD, to the payment of all accrued interest payable to the
Lenders hereunder, pro rata as set forth below;
FOURTH, to the payment of the outstanding principal amount of
the Loans, pro rata as set forth below;
FIFTH, to all other obligations which shall have become due
and payable under the Credit Documents and not repaid pursuant to
clauses "FIRST" through "FOURTH" above; and
SIXTH, to the payment of the surplus, if any, to whomever may
be lawfully entitled to receive such surplus.
In carrying out the foregoing, (a) amounts received shall be applied in the
numerical order provided until exhausted prior to application to the next
succeeding category and (b) each of the Lenders shall receive an amount equal to
its pro rata share (based on the proportion that the then outstanding Loans held
by such Lender bears to the aggregate then outstanding Loans), of amounts
available to be applied.
SECTION 10
AGENCY PROVISIONS
10.1 APPOINTMENT.
Each Lender hereby designates and appoints Bank of America, N.A. as
agent of such Lender to act as specified herein and the other Credit Documents,
and each such Lender hereby authorizes the Agent, as the agent for such Lender,
to take such action on its behalf under the provisions of this Credit Agreement
and the other Credit Documents and to exercise such powers
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and perform such duties as are expressly delegated by the terms hereof and of
the other Credit Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere
herein and in the other Credit Documents, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein and therein, or any
fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Credit Agreement or any of the other Credit Documents, or shall otherwise exist
against the Agent. The provisions of this Section are solely for the benefit of
the Agent and the Lenders and the Borrowers shall not have any rights as a third
party beneficiary of the provisions hereof. In performing its functions and
duties under this Credit Agreement and the other Credit Documents, the Agent
shall act solely as agent of the Lenders and does not assume and shall not be
deemed to have assumed any obligation or relationship of agency or trust with or
for a Borrower.
10.2 DELEGATION OF DUTIES.
The Agent may execute any of its duties hereunder or under the other
Credit Documents by or through agents or attorneys-in-fact and shall be entitled
to advice of counsel concerning all matters pertaining to such duties. The Agent
shall not be responsible to the Lenders for the negligence or misconduct of any
agents or attorneys-in-fact selected by it with reasonable care.
10.3 EXCULPATORY PROVISIONS.
Neither the Agent nor any of its officers, directors, employees,
agents, attorneys-in-fact or Affiliates shall be liable for any action lawfully
taken or omitted to be taken by it or such Person under or in connection
herewith or in connection with any of the other Credit Documents (except for its
or such Person's own gross negligence or willful misconduct), or responsible in
any manner to any of the Lenders for any recitals, statements, representations
or warranties made by a Borrower contained herein or in any of the other Credit
Documents or in any certificate, report, statement or other document referred to
or provided for in, or received by the Agent under or in connection herewith or
in connection with the other Credit Documents, or enforceability or sufficiency
therefor of any of the other Credit Documents, or for any failure of a Borrower
to perform its obligations hereunder or thereunder. The Agent shall not be
responsible to any Lender for the effectiveness, genuineness, validity,
enforceability, collectibility or sufficiency of this Credit Agreement, or any
of the other Credit Documents or for any representations, warranties, recitals
or statements made herein or therein or made by a Borrower in any written or
oral statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith
furnished or made by the Agent to the Lenders or by or on behalf of a Borrower
to the Agent or any Lender or be required to ascertain or inquire as to the
performance or observance of any of the terms, conditions, provisions, covenants
or agreements contained herein or therein or as to the use of the proceeds of
the Loans or of the existence or possible existence of any Default or Event of
Default or to inspect the properties, books or records of a Borrower. The Agent
is not a trustee for the Lenders and owes no fiduciary duty to the Lenders.
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10.4 RELIANCE ON COMMUNICATIONS.
The Agent shall be entitled to rely, and shall be fully protected in
relying, upon any note, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrowers, independent accountants and other experts
selected by the Agent with reasonable care). The Agent may deem and treat the
Lenders as the owner of its interests hereunder for all purposes unless a
written notice of assignment, negotiation or transfer thereof shall have been
filed with the Agent in accordance with Section 11.3(b). The Agent shall be
fully justified in failing or refusing to take any action under this Credit
Agreement or under any of the other Credit Documents unless it shall first
receive such advice or concurrence of the Required Lenders as it deems
appropriate or it shall first be indemnified to its satisfaction by the Lenders
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, hereunder or under any
of the other Credit Documents in accordance with a request of the Required
Lenders (or to the extent specifically provided in Section 11.6, all the
Lenders) and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Lenders (including their successors and
assigns).
10.5 NOTICE OF DEFAULT.
The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default hereunder unless the Agent has
received notice from a Lender or the Borrowers referring to the Credit Document,
describing such Default or Event of Default and stating that such notice is a
"notice of default." In the event that the Agent receives such a notice, the
Agent shall give prompt notice thereof to the Lenders. The Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders.
10.6 NON-RELIANCE ON AGENT AND OTHER LENDERS.
Each Lender expressly acknowledges that neither the Agent nor any of
its officers, directors, employees, agents, attorneys-in-fact or Affiliates has
made any representations or warranties to it and that no act by the Agent or any
Affiliate thereof hereinafter taken, including any review of the affairs of the
Borrowers, shall be deemed to constitute any representation or warranty by the
Agent to any Lender. Each Lender represents to the Agent that it has,
independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrowers
and made its own decision to make its Extensions of Credit hereunder and enter
into this Credit Agreement. Each Lender also represents that it will,
independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Credit Agreement, and to make such investigation as
it deems
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necessary to inform itself as to the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrowers.
Except for notices, reports and other documents expressly required to be
furnished to the Lenders by the Agent hereunder, the Agent shall not have any
duty or responsibility to provide any Lender with any credit or other
information concerning the business, operations, assets, property, financial or
other conditions, prospects or creditworthiness of the Borrowers which may come
into the possession of the Agent or any of its officers, directors, employees,
agents, attorneys-in-fact or Affiliates.
10.7 INDEMNIFICATION.
Each Lender agrees to indemnify the Agent in its capacity as such (to
the extent not reimbursed by the Borrowers and without limiting the obligation
of the Borrowers to do so), ratably according to its Commitment Percentage, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind
whatsoever which may at any time (including without limitation at any time
following the payment in full of the Borrowers Obligations) be imposed on,
incurred by or asserted against the Agent in its capacity as such in any way
relating to or arising out of this Credit Agreement or the other Credit
Documents or any documents contemplated by or referred to herein or therein or
the transactions contemplated hereby or thereby or any action taken or omitted
by the Agent under or in connection with any of the foregoing; provided that no
Lender shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the gross negligence or willful
misconduct of the Agent. If any indemnity furnished to the Agent for any purpose
shall, in the opinion of the Agent, be insufficient or become impaired, the
Agent may call for additional indemnity and cease, or not commence, to do the
acts indemnified against until such additional indemnity is furnished. The
agreements in this Section 10.7 shall survive the payment of the Borrowers
Obligations and all other amounts payable hereunder and under the other Credit
Documents and the termination of the Commitments.
10.8 AGENT IN ITS INDIVIDUAL CAPACITY.
The Agent and its Affiliates may make loans to, accept deposits from
and generally engage in any kind of business with the Borrowers as though the
Agent were not Agent hereunder. With respect to the Loans made and all Borrowers
Obligations owing to it, the Agent shall have the same rights and powers under
this Credit Agreement as any Lender and may exercise the same as though it were
not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in
its individual capacity.
10.9 SUCCESSOR AGENT.
The Agent may, at any time, resign upon 30 days written notice to the
Lenders and the Borrowers. Upon any such resignation, the Borrowers with the
consent of the Required Lenders (such consent of the Required Lenders not to be
unreasonably withheld or delayed) shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed and shall have
accepted such appointment within 30 days after the notice of resignation, then
the retiring Agent shall select a successor Agent provided such successor is a
Lender hereunder or qualifies as
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an Eligible Assignee (or if no Eligible Assignee shall have been so appointed by
the retiring Agent and shall have accepted such appointment, then the Lenders
shall perform all obligations of the retiring Agent hereunder until such time,
if any, as a successor Agent shall have been appointed and shall have accepted
such appointment as provided for above). Upon the acceptance of any appointment
as Agent hereunder by a successor, such successor Agent shall thereupon succeed
to and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations as Agent, as appropriate, under this Credit Agreement and the other
Credit Documents and the provisions of this Section 10.9 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Credit Agreement.
SECTION 11.
MISCELLANEOUS
11.1 NOTICES.
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (a) when
delivered, (b) when transmitted via telecopy (or other facsimile device), (c)
the Business Day following the day on which the same has been delivered prepaid
(or pursuant to an invoice arrangement) to a reputable national overnight air
courier service, or (d) the third Business Day following the day on which the
same is sent by certified or registered mail, postage prepaid, in each case to
the respective parties at the address or telecopy numbers set forth on Schedule
11.1, or at such other address as such party may specify by written notice to
the other parties hereto.
11.2 RIGHT OF SET-OFF.
In addition to any rights now or hereafter granted under applicable law
or otherwise, and not by way of limitation of any such rights, upon the
occurrence of an Event of Default and the commencement of remedies described in
Section 9.2, each Lender is authorized at any time and from time to time,
without presentment, demand, protest or other notice of any kind (all of which
rights being hereby expressly waived), to set-off and to appropriate and apply
any and all deposits (general or special) and any other indebtedness at any time
held or owing by such Lender (including, without limitation branches, agencies
or Affiliates of such Lender wherever located) to or for the credit or the
account of a Borrower against obligations and liabilities of such Borrower to
the Lenders hereunder, under the Notes, the other Credit Documents or otherwise,
irrespective of whether the Agent or the Lenders shall have made any demand
hereunder and although such obligations, liabilities or claims, or any of them,
may be contingent or unmatured, and any such set-off shall be deemed to have
been made immediately upon the occurrence of an Event of Default even though
such charge is made or entered on the books of such Lender subsequent thereto.
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11.3 BENEFIT OF AGREEMENT.
(a) Generally. This Credit Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors
and assigns of the parties hereto; provided that, except as set forth
in Section 2.10, a Borrower may not assign and transfer any of its
interests without the prior written consent of the Lenders; and
provided further that the rights of each Lender to transfer, assign or
grant participations in its rights and/or obligations hereunder shall
be limited as set forth below in this Section 11.3.
(b) Assignments. Each Lender may assign to one or more
Eligible Assignees all or a portion of its rights and obligations under
this Credit Agreement (including, without limitation, all or a portion
of its Loans, its Notes, and its Commitment); provided, however, that:
(i) each such assignment shall be to an Eligible
Assignee;
(ii) except in the case of an assignment to another
Lender or an assignment of all of a Lender's rights and
obligations under this Credit Agreement, any such partial
assignment shall be in an amount at least equal to $20,000,000
(or, if less, the remaining amount of the Commitment being
assigned by such Lender) and an integral multiple of
$1,000,000 in excess thereof; and
(iii) the parties to such assignment shall execute
and deliver to the Agent for its acceptance an Assignment
Agreement in substantially the form of Exhibit 11.3(b),
together with a processing fee from the assignor of $3,500.
Upon execution, delivery, and acceptance of such Assignment Agreement,
the assignee thereunder shall be a party hereto and, to the extent of
such assignment, have the obligations, rights, and benefits of a Lender
hereunder and the assigning Lender shall, to the extent of such
assignment, relinquish its rights and be released from its obligations
under this Credit Agreement. Upon the consummation of any assignment
pursuant to this Section 11.3(b), the assignor, the Agent and the
Borrowers shall make appropriate arrangements so that, if required, new
Notes are issued to the assignor and the assignee. If the assignee is
not incorporated under the laws of the United States of America or a
state thereof, it shall deliver to the Borrowers and the Agent
certification as to exemption from deduction or withholding of taxes in
accordance with Section 4.4.
By executing and delivering an assignment agreement in
accordance with this Section 11.3(b), the assigning Lender thereunder
and the assignee thereunder shall be deemed to confirm to and agree
with each other and the other parties hereto as follows: (A) such
assigning Lender warrants that it is the legal and beneficial owner of
the interest being assigned thereby free and clear of any adverse claim
created by such assigning Lender and the assignee warrants that it is
an Eligible Assignee; (B) except as set forth in clause (A) above, such
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations
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made in or in connection with this Credit Agreement, any of the other
Credit Documents or any other instrument or document furnished pursuant
hereto or thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit
Agreement, any of the other Credit Documents or any other instrument or
document furnished pursuant hereto or thereto or the financial
condition of the Borrowers or the performance or observance by the
Borrowers of any of their obligations under this Credit Agreement, any
of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto; (C) such assignee represents and
warrants that it is legally authorized to enter into such assignment
agreement; (D) such assignee confirms that it has received a copy of
this Credit Agreement, the other Credit Documents and such other
documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such assignment agreement;
(E) such assignee will independently and without reliance upon the
Agent, such assigning Lender or any other Lender, and based on such
documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking
action under this Credit Agreement and the other Credit Documents; (F)
such assignee appoints and authorizes the Agent to take such action on
its behalf and to exercise such powers under this Credit Agreement or
any other Credit Document as are delegated to the Agent by the terms
hereof or thereof, together with such powers as are reasonably
incidental thereto; and (G) such assignee agrees that it will perform
in accordance with their terms all the obligations which by the terms
of this Credit Agreement and the other Credit Documents are required to
be performed by it as a Lender.
(c) Register. The Agent shall maintain a copy of each
Assignment Agreement delivered to and accepted by it and a register for
the recordation of the names and addresses of the Lenders and the
Commitment of, and principal amount of the Loans owing to, each Lender
from time to time (the "Register"). The entries in the Register shall
be conclusive and binding for all purposes, absent manifest error, and
the Borrowers, the Agent and the Lenders may treat each Person whose
name is recorded in the Register as a Lender hereunder for all purposes
of this Credit Agreement. The Register shall be available for
inspection by the Borrowers or any Lender at any reasonable time and
from time to time upon reasonable prior notice.
(d) Acceptance. Upon its receipt of an Assignment Agreement
executed by the parties thereto, together with any Note subject to such
assignment and payment of the processing fee, the Agent shall, if such
Assignment Agreement has been completed and is in substantially the
form of Exhibit 11.3(b) hereto, (i) accept such Assignment Agreement,
(ii) record the information contained therein in the Register and (iii)
give prompt notice thereof to the parties thereto.
(e) Participations. Each Lender may sell participations to one
or more Persons in all or a portion of its rights, obligations or
rights and obligations under this Credit Agreement (including all or a
portion of its Commitment, its Notes and its Loans); provided, however,
that (i) such Lender's obligations under this Credit Agreement shall
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remain unchanged, (ii) such Lender shall remain solely responsible to
the other parties hereto for the performance of such obligations, (iii)
the participant shall be entitled to the benefit of the yield
protection provisions contained in Sections 4.1 through 4.4, inclusive,
but shall not be entitled to receive any amount greater than such
Lender would have been able to receive, and (iv) the Borrowers shall
continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under this Credit Agreement,
and such Lender shall retain the sole right to enforce the obligations
of the Borrowers relating to its Loans and its Notes and to approve any
amendment, modification, or waiver of any provision of this Credit
Agreement (other than amendments, modifications, or waivers decreasing
the amount of principal of or the rate at which interest is payable on
such Loans or Notes, extending any scheduled principal payment date or
date fixed for the payment of interest on such Loans or Notes, or
extending its Commitment).
(f) Nonrestricted Assignments. Notwithstanding any other
provision set forth in this Credit Agreement, any Lender may at any
time assign and pledge all or any portion of its Loans and its Notes to
any Federal Reserve Bank as collateral security pursuant to Regulation
A and any Operating Circular issued by such Federal Reserve Bank. No
such assignment shall release the assigning Lender from its obligations
hereunder.
(g) Information. Any Lender may furnish any information
concerning the Borrowers in the possession of such Lender from time to
time to assignees and participants (including prospective assignees and
participants).
(h) Costs Associated With Assignment. All reasonable
out-of-pocket costs and expenses of the Agent, the assigning Lender and
the assignee Lender associated with the preparation, execution and
delivery of an Assignment Agreement and any documents related thereto
(including, without limitation, the reasonable fees and disbursements
of counsel) shall be paid by the assigning Lender (or such other Person
as agreed to by the assigning Lender, the assignee Lender and the
Agent).
11.4 NO WAIVER; REMEDIES CUMULATIVE.
No failure or delay on the part of the Agent or any Lender in
exercising any right, power or privilege hereunder or under any other Credit
Document and no course of dealing between the Borrowers and the Agent or any
Lender shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or under any other Credit
Document preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder or thereunder. The rights and remedies
provided herein are cumulative and not exclusive of any rights or remedies which
the Agent or any Lender would otherwise have. No notice to or demand on the
Borrowers in any case shall entitle the Borrowers to any other or further notice
or demand in similar or other circumstances or constitute a waiver of the rights
of the Agent or the Lenders to any other or further action in any circumstances
without notice or demand.
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11.5 PAYMENT OF EXPENSES, ETC.
The Borrowers agree to: (i) pay all reasonable out-of-pocket costs and
expenses of the Agent and Banc of America Securities LLC ("BAS") in connection
with (A) the negotiation, preparation, execution and delivery, syndication and
administration of this Credit Agreement and the other Credit Documents and the
documents and instruments referred to therein (including, without limitation,
the reasonable fees and expenses of Moore & Van Allen, PLLC, special counsel to
the Agent) and (B) any amendment, waiver or consent relating hereto and thereto
including, but not limited to, any such amendments, waivers or consents
resulting from or related to any work-out, renegotiation or restructure relating
to the performance by the Borrowers under this Credit Agreement, (ii) pay all
reasonable out-of-pocket costs and expenses of the Agent and the Lenders in
connection with (A) enforcement of the Credit Documents and the documents and
instruments referred to therein (including, without limitation, in connection
with any such enforcement, the reasonable fees and disbursements of counsel for
the Agent and each of the Lenders (including the allocated cost of internal
counsel)) and (B) any bankruptcy or insolvency proceeding of a Borrower and
(iii) indemnify the Agent, BAS and each Lender, its officers, directors,
employees, representatives and agents from and hold each of them harmless
against any and all losses, liabilities, claims, damages or expenses incurred by
any of them as a result of, or arising out of, or in any way related to, or by
reason of, any investigation, litigation or other proceeding (whether or not the
Agent, BAS or any Lender is a party thereto) related to the entering into and/or
performance of any Credit Document or the use of proceeds of any Loans
(including other extensions of credit) hereunder or the consummation of any
other transactions contemplated in any Credit Document, including, without
limitation, the reasonable fees and disbursements of counsel and settlement
costs incurred in connection with any such investigation, litigation or other
proceeding (but excluding any such losses, liabilities, claims, damages or
expenses to the extent incurred by reason of gross negligence or willful
misconduct on the part of the Person to be indemnified).
11.6 AMENDMENTS, WAIVERS AND CONSENTS.
Neither this Credit Agreement, nor any other Credit Document nor any of
the terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing and signed by the Required Lenders and the Borrowers; provided that no
such amendment, change, waiver, discharge or termination shall without the
consent of each Lender affected thereby:
(a) extend the Maturity Date, or postpone or extend the time
for any payment or prepayment of principal;
(b) reduce the rate or extend the time of payment of interest
(other than as a result of waiving the applicability of any
post-default increase in interest rates) thereon or fees or other
amounts payable hereunder;
(c) reduce or waive the principal amount of any Loan;
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(d) increase or extend the Commitment of a Lender (it being
understood and agreed that a waiver of any Default or Event of Default
or a waiver of any mandatory reduction in the Commitments shall not
constitute a change in the terms of any Commitment of any Lender);
(e) except as permitted by Section 2.10, consent to the
assignment or transfer by a Borrower of any of its rights and
obligations under (or in respect of) the Credit Documents or release a
Borrower from its obligations under the Credit Documents;
(f) amend, modify or waive any provision of this Section 11.6
or Section 3.6, 3.8, 9.1(a), 11.2, 11.3 or 11.5; or
(g) reduce any percentage specified in, or otherwise modify,
the definition of Required Lenders.
No amendment or change that affects the application of prepayments pursuant to
Section 3.2(c) or the allocation of payments between the Revolving-A Loans and
the Revolving-B Loans shall be effective unless Lenders holding in the aggregate
at least 51% of the Revolving-A Loan Commitment and at least 51% of the
Revolving-B Loan Commitment shall consent to such amendment or change in
allocation of payments.
No provision of Section 10 may be amended or modified without the consent of the
Agent.
Notwithstanding the fact that the consent of all the Lenders is required in
certain circumstances as set forth above, (x) each Lender is entitled to vote as
such Lender sees fit on any reorganization plan that affects the Loans, and each
Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy
Code supersede the unanimous consent provisions set forth herein and (y) the
Required Lenders may consent to allow the Borrowers to use cash collateral in
the context of a bankruptcy or insolvency proceeding.
11.7 COUNTERPARTS/TELECOPY.
This Credit Agreement may be executed in any number of counterparts,
each of which where so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument. Delivery of executed
counterparts by telecopy shall be as effective as an original and shall
constitute a representation that an original will be delivered.
11.8 HEADINGS.
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
54
<PAGE> 59
11.9 DEFAULTING LENDER.
Each Lender understands and agrees that if such Lender is a Defaulting
Lender then it shall not be entitled to vote on any matter requiring the consent
of the Required Lenders or to object to any matter requiring the consent of all
the Lenders; provided, however, that all other benefits and obligations under
the Loan Documents shall apply to such Defaulting Lender.
11.10 SURVIVAL OF INDEMNIFICATION AND REPRESENTATIONS AND WARRANTIES.
All indemnities set forth herein and all representations and warranties
made herein shall survive the execution and delivery of this Credit Agreement,
the making of the Loans, and the repayment of the Loans and other obligations
and the termination of the Commitments hereunder.
11.11 GOVERNING LAW; VENUE.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER
SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK. Any legal action or proceeding with
respect to this Credit Agreement or any other Credit Document may be
brought in the courts of the State of New York, or of the United States
for the Southern District of New York, and, by execution and delivery
of this Credit Agreement, each Borrower hereby irrevocably accepts for
itself and in respect of its property, generally and unconditionally,
the jurisdiction of such courts. Each Borrower further irrevocably
consents to the service of process out of any of the aforementioned
courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to it at the
address for notices pursuant to Section 11.1, such service to become
effective 30 days after such mailing. Nothing herein shall affect the
right of a Lender to serve process in any other manner permitted by law
or to commence legal proceedings or to otherwise proceed against a
Borrower in any other jurisdiction.
(b) Each Borrower hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with
this Credit Agreement or any other Credit Document brought in the
courts referred to in subsection (a) hereof and hereby further
irrevocably waives and agrees not to plead or claim in any such court
that any such action or proceeding brought in any such court has been
brought in an inconvenient forum.
11.12 WAIVER OF JURY TRIAL; WAIVER OF CONSEQUENTIAL DAMAGES.
EACH OF THE PARTIES TO THIS CREDIT AGREEMENT HEREBY IRREVOCABLY WAIVES
ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
55
<PAGE> 60
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE
OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. Each Borrower
agrees not to assert any claim against the Agent, any Lender, any of their
Affiliates, or any of their respective directors, officers, employees, attorneys
or agents, on any theory of liability, for special, indirect, consequential or
punitive damages arising out of or otherwise relating to any of the transactions
contemplated hereby or by the other Credit Documents.
11.13 SEVERABILITY.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
11.14 FURTHER ASSURANCES.
Each Borrower agrees, upon the request of the Agent, to promptly take
such actions, as reasonably requested, as are necessary to carry out the intent
of this Credit Agreement and the other Credit Documents.
11.15 ENTIRETY.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and supersede
all prior agreements and understandings, oral or written, if any, including any
commitment letters or correspondence relating to the Credit Documents or the
transactions contemplated herein and therein.
11.16 BINDING EFFECT; CONTINUING AGREEMENT.
(a) This Credit Agreement shall become effective at such time
when all of the conditions set forth in Section 5.1 have been satisfied
or waived by the Lenders and it shall have been executed by the
Borrowers, the Agent and the Lenders, and thereafter this Credit
Agreement shall be binding upon and inure to the benefit of the
Borrowers, the Agent and each Lender and their respective successors
and permitted assigns.
(b) This Credit Agreement shall be a continuing agreement and
shall remain in full force and effect until all Loans, interest, fees
and other Borrowers Obligations have been paid in full and all
Commitments have been terminated. Upon such termination, the Borrowers
shall have no further obligations (other than those provisions that
expressly survive the termination thereof) under the Credit Documents;
provided that should any payment, in whole or in part, of the Borrowers
Obligations be rescinded or otherwise required to be restored or
returned by the Agent or any Lender, whether as a result of any
proceedings in bankruptcy or reorganization or otherwise, then the
Credit Documents shall automatically be reinstated and all amounts
required to be restored or returned and all costs and expenses incurred
by the Agent or any Lender in connection therewith shall be deemed
included as part of the Borrowers Obligations.
[Remainder of Page Intentionally Left Blank]
56
<PAGE> 61
Signature Page to Duke Energy Field Services 364-Day Credit Agreement
Each of the parties hereto has caused a counterpart of this Credit
Agreement to be duly executed and delivered as of the date first above written.
BORROWERS: DUKE ENERGY FIELD SERVICES, LLC
a Delaware limited liability company
By: /s/ DAVID D. FREDERICK
-------------------------------------------------
Name: David D. Frederick
------------------------------------------------
Title: Senior Vice President/Chief Financial Officer
-----------------------------------------------
DUKE ENERGY FIELD SERVICES CORPORATION,
a Delaware corporation
By: /s/ DAVID D. FREDERICK
-------------------------------------------------
Name: David D. Frederick
------------------------------------------------
Title: Senior Vice President/Chief Financial Officer
-----------------------------------------------
<PAGE> 62
Signature Page to Duke Energy Field Services 364-Day Credit Agreement
LENDERS: BANK OF AMERICA, N.A., individually in its
capacity as a Lender and in its capacity as Agent
By: /s/ GRETCHEN P. BURUD
----------------------------------------------------
Name: Gretchen P. Burud
--------------------------------------------------
Title: Principal
-------------------------------------------------
<PAGE> 63
Signature Page to Duke Energy Field Services 364-Day Credit Agreement
LEHMAN COMMERCIAL PAPER INC.
By: /s/ MICHELE SWANSON
----------------------------------------------------
Name: Michele Swanson
--------------------------------------------------
Title: Authorized Signatory
-------------------------------------------------
<PAGE> 64
Signature Page to Duke Energy Field Services 364-Day Credit Agreement
MERRILL LYNCH CAPITAL CORPORATION
By: /s/ CAROL J.E. FEELEY
----------------------------------------------------
Name: Carol J.E. Feeley
--------------------------------------------------
Title: Vice President
-------------------------------------------------
Merrill Lynch Capital Corp.
<PAGE> 65
Signature Page to Duke Energy Field Services 364-Day Credit Agreement
THE CHASE MANHATTAN BANK
By: /s/ STEVEN WOOD
----------------------------------------------------
Name: Steven Wood
--------------------------------------------------
Title: Vice President
-------------------------------------------------
<PAGE> 66
Signature Page to Duke Energy Field Services 364-Day Credit Agreement
MORGAN STANLEY SENIOR FUNDING, INC.
By: /s/ MICHAEL T. MCLAUGHLIN
----------------------------------------------------
Name: Michael T. McLaughlin
--------------------------------------------------
Title: Principal
-------------------------------------------------
<PAGE> 67
Signature Page to Duke Energy Field Services 364-Day Credit Agreement
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: /s/ ROBERT BOTTAMEDI
----------------------------------------------------
Name: Robert Bottamedi
--------------------------------------------------
Title: Vice President
-------------------------------------------------
<PAGE> 1
EXHIBIT 10.13
================================================================================
REVOLVING CREDIT AGREEMENT
BETWEEN
DUKE ENERGY FIELD SERVICES, LLC,
AS BORROWER
AND
DUKE CAPITAL CORPORATION
AS LENDER
------------------------------
DATED AS OF APRIL 4, 2000
------------------------------
================================================================================
<PAGE> 2
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS, CHANGE OF OBLIGOR........................1
1.1 Definitions...............................................1
1.2 Change of Obligor.........................................3
SECTION 2. THE LOANS.............................................3
2.1 Commitment to Lend........................................3
2.2 Method of Borrowing.......................................4
2.3 Repayment of the Loans....................................4
2.4 Evidence of the Loans.....................................4
2.5 Interest Rate and Payments................................5
2.6 Reduction and Cancellation of the Commitment..............5
2.7 General Provisions as to Payments.........................5
2.8 Computation of Interest and Fees..........................5
2.9 No Deduction..............................................5
2.10 Use of Proceeds...........................................5
SECTION 3. CONDITIONS OF LENDING.................................6
SECTION 4. REPRESENTATIONS AND WARRANTIES........................6
4.1 Corporate Existence and Power.............................6
4.2 Corporate Authorization...................................6
4.3 Binding Effect............................................7
4.4 No Contravention..........................................7
4.5 Financial Statements......................................7
4.6 Litigation................................................7
4.7 No Default................................................7
4.8 No Event of Default.......................................8
4.9 Adverse Change............................................8
4.10 Liens.....................................................8
4.11 Compliance with Laws......................................8
4.12 Taxes.....................................................8
4.13 Labor Matters.............................................8
4.14 Completeness..............................................9
i
<PAGE> 3
SECTION 5. EVENTS OF DEFAULT.....................................9
SECTION 6. MISCELLANEOUS........................................10
6.1 Notices..................................................10
6.2 Successors and Assigns...................................11
6.3 Counterparts.............................................11
6.4 Headings; Table of Contents..............................11
6.5 Governing Law............................................11
ii
<PAGE> 4
REVOLVING CREDIT AGREEMENT
REVOLVING CREDIT AGREEMENT, dated as of April 4, 2000, between Duke
Energy Field Services, LLC, a Delaware limited liability company (the
"Borrower"), and DUKE CAPITAL CORPORATION, a Delaware corporation (the
"Lender").
SECTION 1. DEFINITIONS, CHANGE OF OBLIGOR.
------------------------------
1.1 Definitions. Capitalized terms used and not defined herein shall
have the meanings given to them in the 364-Day Credit Agreement among the
Borrower, Duke Energy Field Services Corporation ("DEFS Corp."), the Lenders
identified therein, and Bank of America, N.A., as Agent, dated as of March 31,
2000 (the "364-Day Credit Agreement"). The following terms, as used herein,
shall have the following respective meanings:
"Agreement" means this Revolving Credit Agreement, as amended,
restated, extended or otherwise modified from time to time in accordance with
the terms hereof.
"Base Rate" means the 30-day London Interbank Offered Rate, as defined
in the 364-Day Credit Agreement, plus .50% per annum.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or directed to
close.
"Commitment" means $100,000,000, as such amount may be reduced from
time to time pursuant to Section 2.7 hereof.
"Consolidated" refers to the results obtained by the consolidation of
the accounts of the Borrower and its Subsidiaries in accordance with Generally
Accepted Accounting Principles.
"Consolidated Subsidiaries" means the Subsidiaries of Borrower which
are consolidated with Borrower for financial reporting purposes.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of
business, (iv) all obligations of such Person as lessee under capital leases,
(v) all Debt of others secured by a Lien on any asset of such Person, whether or
not such Debt is assumed by such Person, and (vi) all Debt of others Guaranteed
by such Person.
"Default" means any event or condition, which constitutes an Event of
Default or which with the giving of notice or lapse of time, or both, would
become an Event of Default.
"Dollars" and the sign "$" mean lawful money of the United States.
<PAGE> 5
"Events of Default" shall have the meaning given to that term in
Section 5 hereof.
"Generally Accepted Accounting Principles" means generally accepted
accounting principles set forth from time to time in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and statements and promulgations of the Financial
Accounting Standards Board (or agencies with similar functions of comparable
stature and authority within the accounting profession), or in such other
statements by such other entity as may be in general use by significant segments
of the U.S. accounting profession, which are applicable to the circumstances as
of the date of determination.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
and any corporation or entity whose stock or capital ownership is owned or
controlled by any of the foregoing.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person or in any manner providing for the payment of any Debt of any other
Person or otherwise protecting the holder of such Debt against loss (whether by
agreement to keep-well, to purchase assets, goods, securities or services, or to
take-or-pay or otherwise), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business.
"Lien" means with respect to any property or asset (or any income or
profits therefrom) of any Person (in each case whether the same is consensual or
nonconsensual or arises by contract, operation of law, legal process or
otherwise) (a) any mortgage, lien, pledge, attachment, levy or other security
interest of any kind thereupon or in respect thereof, but not including the
interest of a third party in receivables sold by such Person to such third party
on a non-recourse basis or (b) any other arrangement, express or implied, under
which the same is subordinated, transferred, sequestered or otherwise identified
so as to subject the same to, or make the same available for, the payment or
performance of any liability in priority to the payment of the ordinary,
unsecured liabilities of such Person. For the purposes of this Agreement, a
Person shall be deemed to own subject to a Lien any asset that it has acquired
or holds subject to the interest of a vendor or lessor under any conditional
sale agreement, capital lease or other title retention agreement relating to
such asset.
"Loan" means a loan made by the Lender to Borrower pursuant to Section
2, or all such Loans, as the context may require.
"Material Adverse Effect" means a material adverse effect on the
business, financial position or results of operations of the Borrower and its
Subsidiaries taken as a whole.
"Obligation" means as applied to any Person, any law, decree,
regulation or similar enactment, any instrument, agreement or other obligation
or any judgment, injunction or other order or award of any judicial,
administrative or governmental authority or arbitrator by which such Person or
any of its Properties is bound.
2
<PAGE> 6
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a business trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Property" means any estate or interest in any kind of property or
asset, whether real, personal or mixed, and whether tangible or intangible.
"Subsidiary" means, as to any Person, any corporation, association,
partnership, joint venture or other business entity of which more than 50% of
the voting capital stock or other voting ownership interests is owned or
controlled directly or indirectly by such Person or by one or more of the
Subsidiaries of such Person or by a combination thereof.
"Tax" means all taxes, levies, imposts, stamp taxes, sales tax, goods
and services tax, duties, charges to tax, fees, deductions, withholdings and any
restrictions or conditions resulting in a charge to tax, in each case imposed by
or payable to a government or governmental agency, and all penalty, interest and
other payments on or in respect thereof.
"Term of this Agreement" means the period from the date hereof to and
including the Termination Date.
"Termination Date" means May 31, 2000.
1.2 Change of Obligor.
Coincident with the assumption by DEFS Corp. of any liability under the
364-Day Credit Agreement pursuant to Section 2.10(c) thereof, DEFS Corp. shall
become the Borrower under this Agreement and shall be deemed to be the Borrower
hereunder for all purposes, and DEFS LLC's status as Borrower will terminate.
All references herein to the Borrower as a limited liability company shall
thereafter be deemed amended to reflect the identity and corporate form of DEFS
Corp., mutatis mutandis.
SECTION 2. THE LOANS.
---------
2.1 Commitment to Lend.
(a) During the Term of this Agreement the Lender agrees, on the terms
and conditions contained in this Agreement, to make Loans to the Borrower at any
time prior to the Termination Date in an aggregate amount not exceeding at any
one time outstanding the Commitment in effect at the time the Loans are made.
The Borrower shall repay Loans in accordance with Section 2.3 and may reborrow
under this Section 2.1(a) at any time.
(b) Any other provision of this Agreement to the contrary
notwithstanding, the Lender shall not be obligated to make a Loan to the
Borrower at any time that the Borrower is, or after giving effect to the making
of the Loan the Borrower would be, in violation of any of the
3
<PAGE> 7
terms, conditions, covenants or provisions of this Agreement including, without
limitation, the terms and conditions contained in Section 3 hereof.
2.2 Method of Borrowing.
(a) With respect to each Loan made pursuant to Section 2.1 hereof, the
Borrower shall give the Lender a notice of borrowing notifying the Lender of its
request to borrow hereunder, which notice will specify (i) the date of the Loan,
which date shall be a Business Day, and (ii) the principal amount of the Loan,
which shall be $100,000 or a greater integral multiple thereof. The notice of
borrowing shall be written or electronic communication.
(b) If the Borrower gives the notice required by Section 2.2(a) with
respect to any Loan before 10:00 a.m. (Eastern Time), the Lender will disburse
the proceeds of the Loan to the Borrower in immediately available funds on the
date of such notice, or such other day as indicated on the request. The Lender
will disburse all Loans to the Borrower in such account as shall be designated
by the Borrower in the applicable notice of borrowing.
2.3 Repayment of the Loans.
(a) The Borrower agrees that it shall repay all Loans on or before the
Termination Date.
(b) The Borrower may repay the outstanding principal amount of Loans in
whole or in part on any Business Day upon notice to the Lender given not later
than 10:00 a.m. (Eastern Time) on the Business Day prior to the proposed payment
date. Notice hereunder shall specify the date of the repayment and the principal
amount to be repaid (which amount shall be an integral multiple of $100,000).
Each such repayment shall be made on the dates specified and, subject to
compliance with the foregoing procedures, may be made at any time without cost
or penalty of any kind.
2.4 Evidence of the Loans.
(a) The Loans made to the Borrower shall be evidenced by this Agreement
and by a loan account in the Borrower's name to be maintained by the Lender. All
Loans shall be payable by the Borrower to the order of the Lender not later than
the Termination Date.
(b) The Lender's loan account shall reflect appropriate notations
evidencing the date and the amount of each Loan and the date and amount of each
payment of principal and interest made by the Borrower with respect thereto. The
loan account shall be conclusive evidence, absent manifest error, of the amount
of the Loans, the interest accrued and payable thereon and all interest and
principal payments made thereon. Any failure to record or any error therein
shall in no way limit or otherwise affect the obligations of the Borrower
hereunder to pay any amount owing with respect to the Loans.
4
<PAGE> 8
2.5 Interest Rate and Payments.
(a) Loans shall bear interest on the outstanding principal amount
thereof, for each day during which any Loans are outstanding, at a rate per
annum equal to the Base Rate as in effect from time to time. Interest on Loans
shall be payable monthly in arrears and on the Termination Date. The Lender will
notify the Borrower in writing or electronically, not later than three days
after the end of each month, of the amount of interest payable hereunder with
respect to Loans, which notice will set forth in reasonable detail the
calculation of such amount. The Borrower agrees that it shall pay each monthly
installment of interest within five Business Days after the date on which it
receives such notice.
(b) To the extent permitted by law, overdue interest on the Loans shall
bear interest, payable on demand of the Lender, for each day until paid at a
rate per annum equal to the Base Rate plus 2%.
2.6 Reduction and Cancellation of the Commitment. The Commitment shall
terminate on the Termination Date, and any Loans then outstanding (together with
accrued but unpaid interest thereon) shall be repaid in full on such date.
2.7 General Provisions as to Payments. Subject to the provisions of
Section 2.3(b), the Borrower shall make each payment of principal of, and
interest on, the Loans in funds immediately available in the account that the
Lender shall designate. Whenever any payment of principal of, or interest on,
the Loans shall be due on a day which is not a Business Day, the date for
payment thereof shall be extended to the next succeeding Business Day. If the
date for any payment of principal is extended by operation of law or otherwise,
interest shall be payable for such extended time at a rate per annum equal to
the Base Rate.
2.8 Computation of Interest and Fees. Interest on Loans shall be
computed for each day on the basis of a year of 360 days.
2.9 No Deduction. All amounts payable by the Borrower under this
Agreement are payable without deduction or set-off unless specifically agreed to
by the Lender in writing.
2.10 Use of Proceeds. The proceeds of Loans will be employed by the
Borrower for general corporate purposes including, without limitation, as
working capital for the Borrower and its Subsidiaries.
SECTION 3. CONDITIONS OF LENDING.
---------------------
The obligation of the Lender to make each Loan hereunder is subject to
the performance by the Borrower of all its obligations under this Agreement and
to the satisfaction of the following further conditions:
5
<PAGE> 9
(a) receipt by the Lender of a notice of borrowing from the Borrower
required by Section 2.2(a) hereof;
(b) the fact that immediately after the making of the Loan no Default
or Event of Default shall have occurred and be continuing;
(c) the fact that the representations and warranties contained in this
Agreement are true and correct on and as of the date of the Loan with the same
force and effect as if made on and as of such date; and
(d) the fact that Borrower continues to be a Consolidated Subsidiary of
the Lender.
Each notice of borrowing and each borrowing by the Borrower hereunder shall be
deemed to be a representation and warranty by the Borrower on the date of such
Loan as to the facts specified in (b) and (c) above. If the Lender reasonably
believes, acting in good faith, that the conditions set forth in (b) and (c)
above cannot or would not be satisfied, the Lender will have no obligation to
make the applicable Loan.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
------------------------------
The Borrower hereby represents and warrants to the Lender that:
4.1 Corporate Existence and Power. The Borrower is a limited liability
company duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization, has full power and authority to carry on
its business as now being conducted and to own its properties and is duly
licensed or qualified and in good standing as a foreign limited liability
company in each other jurisdiction in which failure to qualify would have a
Material Adverse Effect. The Borrower is in compliance with its Limited
Liability Company Certificate, limited liability company agreement and all other
organizational or governing documents.
4.2 Corporate Authorization. The execution, delivery and performance
by the Borrower of this Agreement are within the Borrower's corporate power and
have been duly authorized by all necessary corporate, partnership or membership
action.
4.3 Binding Effect. This Agreement constitutes the valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its terms, except as may be limited by bankruptcy or insolvency laws or similar
laws affecting creditors' rights generally, or by general equitable principles.
4.4 No Contravention. The Borrower's execution and delivery of, and
performance of its obligations under, this Agreement do not, and consummation of
the transactions contemplated hereby will not, result in:
6
<PAGE> 10
(a) a violation of or a conflict with any provision of the Limited
Liability Company Certificate, limited liability company agreement or any other
organizational or governing document of the Borrower;
(b) a material breach or default under any provision of any contract,
agreement, lease, commitment, license, franchise or permit to which the Borrower
is a party or by which any property of the Borrower is bound;
(c) a material violation of any statute, rule, regulation, ordinance,
order, judgment, writ, injunction, decree or award of any judicial,
administrative, governmental or other authority or of any arbitrator; or
(d) an imposition on the business of the Borrower or on any of its
properties of any Lien.
4.5 Financial Statements. The combined financial statements of DEFS
Corp. and affiliates which have previously been delivered to the Lender, fairly
present in conformity with Generally Accepted Accounting Principles, the
combined financial position of DEFS Corp. and affiliates at the dates and the
combined results of operations for the periods ended, as of the dates for which
they are given.
4.6 Litigation. There is no action, suit, litigation or proceeding at
law or in equity or by or before any Governmental Authority now pending against
or, to the knowledge of the Borrower, threatened against the Borrower or any of
its Subsidiaries or any of their respective Properties, an adverse decision in
which could reasonably be expected to have a Material Adverse Effect, except as
disclosed in the Form S-1 Registration Statement (File No. 333-32502), filed by
DEFS Corp. with the Securities and Exchange Commission.
4.7 No Default. None of the Borrower or the Borrower's Subsidiaries
(i) is in breach or violation of any of the terms, covenants, conditions or
provisions of any of its Obligations such as reasonably could be expected to
have a Material Adverse Effect; or (ii) has done or omitted to do anything
which, with the giving of notice or lapse of time, or both, would constitute a
material default under any of its obligations or reasonably could be expected to
have a Material Adverse Effect.
4.8 No Event of Default. No Event of Default or other material event
which, with the giving of notice or lapse of time, or both, would constitute an
Event of Default has occurred and is continuing.
4.9 Adverse Change. There have been no material adverse changes in
the financial condition, results of operations or business of the Borrower and
its Subsidiaries taken as a whole since December 31, 1999.
4.10 Liens. Except with respect to certain title matters currently
being resolved between the Borrower and Phillips Petroleum Company, of which the
Borrower has made the Lender aware, the Borrower and the Borrower's Subsidiaries
have good and marketable title to
7
<PAGE> 11
each of their respective Properties, free and clear of all material Liens,
except for Liens arising in the ordinary course of their businesses and except
for Liens, if any, now existing (i) on any asset of any entity at the time such
entity became a Subsidiary and not created in contemplation of such event; (ii)
on any asset securing Debt incurred or assumed for the purpose of financing all
or any part of the cost of acquiring such asset; (iii) on any asset of any
entity which existed at the time such entity was merged into or consolidated
with the Borrower or a Subsidiary and not created in contemplation of such
event; (iv) on any asset prior to the acquisition thereof by the Borrower or a
Subsidiary and not created in contemplation of such acquisition; (v) which arose
out of the refinancing, extension, renewal or refunding of any Debt secured by
any Lien permitted by any of the foregoing clauses of this section; or (vi)
which arose pursuant to any order of attachment, distraint or similar legal
process in connection with court proceedings so long as the execution or other
enforcement thereof is effectively stayed and the claims secured thereby are
being contested in good faith by appropriate proceedings. The obligations of the
Borrower under this Agreement rank at least pari passu to all other debt of the
Borrower.
4.11 Compliance with Laws. The Borrower and each Subsidiary is in
compliance in all material respects with all applicable laws, ordinances, rules,
regulations and requirements of governmental authorities (including, without
limitation, ERISA and Environmental Laws) except where (i) non-compliance would
not have a Material Adverse Effect, or (ii) the necessity of compliance
therewith is contested in good faith by appropriate proceedings.
4.12 Taxes. All federal, state and other income tax returns of the
Borrower and each of the Borrower's Subsidiaries required by law to be filed
have been duly filed, and all federal, state and other taxes, assessments and
other governmental charges or levies upon the Borrower and each of the
Borrower's Subsidiaries and any of their respective Properties, income, profits
and assets, which are due and payable, have been paid, except such as are being
contested in good faith or which, if taken in the aggregate, reasonably would
not be expected to have a Material Adverse Effect.
4.13 Labor Matters. There are no strikes or other labor disputes,
grievances, charges or complaints with respect to any employee or group of
employees pending or, to the best knowledge of the Borrower, threatened against
the Borrower or any of the Borrower's Subsidiaries which reasonably could be
expected to have a Material Adverse Effect.
4.14 Completeness. None of the statements of the Borrower contained in
this Agreement or in any certificate or written statement furnished by the
Borrower to the Lender pursuant hereto when made (as limited or qualified in
such documents) contained any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements contained therein not
misleading. There is no fact known to the Borrower which the Borrower has not
disclosed to the Lender which reasonably could be expected to have a Material
Adverse Effect.
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SECTION 5. EVENTS OF DEFAULT.
-----------------
If any one or more of the following events ("Events of Default") shall
have occurred and be continuing:
(a) the Borrower shall fail to pay any interest on the Loans or any
commitment fee, in each case, within 30 days of the date when due or the
Borrower shall fail to pay any principal of the Loans when due; or
(b) any representation and warranty made by the Borrower herein or in
any document or instrument delivered pursuant hereto shall prove to be incorrect
or misleading in any material respect on the date when made or deemed to be
made, and not corrected by Borrower within 10 days after Borrower becomes aware,
or reasonably should have become aware, of such incorrect or misleading
representation or warranty; or
(c) the Borrower shall fail to pay or otherwise default on any term,
covenant or agreement contained herein (other than those specified in clauses
(a) or (b) above) for 30 days after written notice thereof has been given to
such Borrower by the Lender; or
(d) the Borrower or any of its Subsidiaries shall (i) fail to pay any
indebtedness (other than under this Agreement) with an aggregate principal
amount in excess of $100,000,000 when due or to pay interest thereon and, with
respect to interest, such failure shall continue for more than any applicable
grace period, or (ii) fail to observe or perform any other term, covenant or
agreement contained in any agreement, instrument, agreements, or instruments
(other than this Agreement) by which it is bound evidencing, securing or
relating to indebtedness in an aggregate principal amount in excess of
$100,000,000, if the effect thereof is to permit (or, with the giving of notice
or lapse of time or both, would permit) the holder or holders thereof or of any
obligations issued thereunder or a trustee or trustees acting on behalf of such
holder or holders to cause acceleration of the maturity thereof or of any such
obligations; or
(e) the Borrower or any of its Subsidiaries shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate action to authorize any of the
foregoing; or
(f) an involuntary case or other proceeding shall be commenced against
the Borrower or any of its Subsidiaries seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain
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undismissed and unstayed for a period of 90 days; or an order for relief shall
be entered against the Borrower or any of its Subsidiaries under the federal
bankruptcy laws as now or hereafter in effect;
(g) one or more judgments involving a liability of $50 million or more
against the Borrower or any of its Subsidiaries, or attachments against the
Property of either the operation or result of which reasonably could be expected
to have a Material Adverse Effect, remain unpaid, unstayed on appeal, not being
appealed in good faith, undischarged, unbonded or undismissed for a period of 60
days; or
(h) The Borrower or any of its material Subsidiaries shall voluntarily
suspend for more than 30 days the transaction of all or substantially all of its
business (a shutdown due to strikes, labor disputes, government action, or
action arising from acts of God are not to be deemed voluntary);
then, and in every such event, (1) in the case of any of the Events of Default
specified in paragraphs (e) or (f) above, the Commitment shall thereupon
automatically be terminated and the principal of and accrued interest on the
Loans shall automatically become due and payable without presentment, demand,
protest or other notice or formality of any kind, all of which are hereby
expressly waived and (2) in the case of any other Event of Default specified
above, the Lender may, by notice in writing to the Borrower, terminate the
Commitment and declare the Loans and all other sums payable under this Agreement
to be, and the same shall thereupon forthwith become, due and payable.
SECTION 6. MISCELLANEOUS.
-------------
6.1 Notices. Unless otherwise specified herein, all notices, requests,
demands or other communications to or from the parties hereto shall be made by
personal delivery, mail, electronic mail or telecopy and shall be effective upon
receipt by such party. Any such notice, request, demand or communication shall
be delivered or addressed as follows:
(i) if to the Lender, to it at:
Duke Capital Corporation
422 South Church Street
Charlotte, North Carolina 28202-1904
Attention: S. L. Love
Telephone: (704) 382-7488
Telecopy: (704) 382-9497
(ii) if to the Borrower, to it at:
Duke Energy Field Services, LLC
Duke Energy Field Services Corporation
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370 17th Street, Suite 900
Denver, Colorado 80202
Attention: David Frederick
Telephone: (303) 605-1614
Telecopy: (303) 893-2613
or at such other address or telex number or telecopy number as any party hereto
may designate by written notice to the other party hereto.
6.2 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, provided that the Borrower may not assign its rights and
obligations hereunder to any assignee that is not a Subsidiary of the Lender
without the prior written consent of the Lender. The Lender shall notify the
Borrower in writing promptly upon any assignment by the Lender of its rights and
obligations hereunder, including any such assignment to Duke Energy Corporation
or any other Subsidiary thereof.
6.3 Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
6.4 Headings; Table of Contents. The section and subsection headings
used herein and the Table of Contents have been inserted for convenience of
reference only and do not constitute matters to be considered in interpreting
this Agreement.
6.5 Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of North Carolina, without reference
to the conflict of law provisions of such laws.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
DUKE ENERGY FIELD SERVICES, LLC
By: /s/ DAVID D. FREDERICK
-----------------------------------------
David D. Frederick
Senior Vice President and
Chief Financial Officer
DUKE CAPITAL CORPORATION
By: /s/ DAVID L. HAUSER
-----------------------------------------
David L. Hauser
Vice President and Treasurer
ACCEPTED AND ACKNOWLEDGED:
DUKE ENERGY FIELD SERVICES CORPORATION
By: /s/ DAVID D. FREDERICK
---------------------------------------
David D. Frederick
Senior Vice President and
Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.14
DUKE ENERGY FIELD SERVICES CORPORATION
2000 LONG-TERM INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Duke Energy Field Services Corporation 2000
Long-Term Incentive Plan is to promote the interests of the Corporation and its
shareholders by strengthening the Corporation's ability to attract, motivate and
retain employees, consultants, advisors, and directors of the Corporation and
its Subsidiaries upon whose judgment, initiative and efforts the financial
success and growth of the business of the Corporation and its Subsidiaries
largely depend, and to provide an additional incentive for employees,
consultants, advisors, and directors through stock ownership and other rights
that promote and recognize the financial success and growth of the Corporation.
2. DEFINITIONS
Wherever the following capitalized terms are used in this Plan they
shall have the meanings specified below:
(a) "AWARD" means an award of an Option, Restricted Stock, Stock
Appreciation Right, Performance Award, Phantom Stock or Dividend Equivalent
granted under the Plan.
(b) "AWARD AGREEMENT" means an agreement entered into between the
Corporation and a Participant setting forth the terms and conditions of an Award
granted to a Participant.
(c) "BOARD" means the Board of Directors of the Corporation.
(d) "CHANGE IN CONTROL" shall have the meaning specified in Section 12
hereof.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "COMMITTEE" means the Compensation Committee of the Board, or such
other committee or subcommittee of the Board appointed by the Board to
administer the Plan from time to time.
(g) "COMMON STOCK" means the common stock of the Corporation, par value
$.01 per share.
<PAGE> 2
(h) "CONSULTANT" means any person who is not an Employee and who is
providing advisory or consulting services to the Corporation or any Subsidiary.
(i) "CORPORATION" means Duke Energy Field Services Corporation, a
Delaware corporation.
(j) "CORPORATION VOTING SECURITIES" means, at any given time, the then
outstanding voting securities of the Corporation entitled to vote generally in
the election of the Corporation's directors.
(k) "DATE OF GRANT" means the date on which an Award under the Plan is
made by the Committee, or such later date as the Committee may specify that the
Award becomes effective.
(l) "DIVIDEND EQUIVALENT" means an Award under Section 11 hereof
entitling the Participant to receive payments with respect to dividends declared
on the Common Stock.
(m) "DUKE" means Duke Energy Corporation, a North Carolina corporation.
(n) "EFFECTIVE DATE" means the Effective Date of this Plan, as defined
in Section 15.1 hereof.
(o) "ELIGIBLE PERSON" means any person who is an Employee, a
Consultant, or an Independent Director.
(p) "EMPLOYEE" means any person (including a member of the Board) who
is an employee of the Corporation or any Subsidiary; provided, however, that
with respect to Incentive Stock Options, "Employee" means any person who is
considered an employee of the Corporation or any Subsidiary for purposes of
Treasury Regulation Section 1.421-7(h).
(q) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(r) "FAIR MARKET VALUE" of a share of Common Stock as of a given date
means the closing sales price of the Common Stock on the New York Stock Exchange
as reflected on the composite index on the trading day immediately preceding the
date as of which Fair Market Value is to be determined or, in the absence of any
reported sales of Common Stock on such date, on the first preceding date on
which any such sale shall have been reported. If Common Stock is not listed on
the New York Stock Exchange on the date as of which Fair Market Value is to be
determined, the Committee shall determine in good faith the Fair Market Value in
whatever manner it considers appropriate. Notwithstanding the foregoing, the
Fair Market Value of a share of Common Stock on the date of an initial public
offering of Common Stock shall be the offering price under such initial public
offering.
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<PAGE> 3
(s) "INDEPENDENT DIRECTOR" means a member of the Board who is not an
employee of the Corporation or any Subsidiary.
(t) "INCENTIVE STOCK OPTION" means an option to purchase Common Stock
that is intended to qualify as an incentive stock option under section 422 of
the Code and the Treasury Regulations thereunder.
(u) "NONQUALIFIED STOCK OPTION" means an option to purchase Common
Stock that is not an Incentive Stock Option.
(v) "OPTION" means an Incentive Stock Option or a Nonqualified Stock
Option granted under Section 6 hereof.
(w) "PARTICIPANT" means any Eligible Person who holds an outstanding
Award under the Plan.
(x) "PERFORMANCE AWARD" means an Award made under Section 9 hereof
entitling a Participant to a payment based on the Fair Market Value of Common
Stock (a "Performance Share") or based on specified dollar units (a "Performance
Unit") at the end of a performance period if certain conditions established by
the Committee are satisfied.
(y) "PHANTOM STOCK" means an Award under Section 10 hereof entitling a
Participant to a payment at the end of a vesting period of a unit value based on
the Fair Market Value of a share of Common Stock.
(z) "PHILLIPS" means Phillips Petroleum Company, a Delaware
corporation.
(aa) "PLAN" means the Duke Energy Field Services Corporation 2000
Long-Term Incentive Plan as set forth herein, as it may be amended from time to
time.
(bb) "RESTRICTED STOCK" means an Award under Section 8 hereof entitling
a Participant to shares of Common Stock that are nontransferable and subject to
forfeiture until specific conditions established by the Committee are satisfied.
(cc) "STOCK APPRECIATION RIGHT" or "SAR" means an Award under Section 7
hereof entitling a Participant to receive an amount, representing the difference
between the base price per share of the right and the Fair Market Value of a
share of Common Stock on the date of exercise.
(dd) "SUBSIDIARY" means an entity that is wholly owned, directly or
indirectly, by the Corporation, or any other affiliate of the Corporation that
is so designated, from time to time, by the Committee; provided, however, that
with respect to Incentive Stock Options, the term "Subsidiary" shall not include
any entity that does not qualify within
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<PAGE> 4
the meaning of section 424(f) of the Code as a "subsidiary corporation" with
respect to the Corporation.
3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
3.1. NUMBER OF SHARES. Subject to the following provisions of this Section 3,
the aggregate number of shares of Common Stock that may be issued pursuant to
all Awards under the Plan is 4,000,000 shares of Common Stock; provided,
however, that no more than 400,000 shares of Common Stock may be issued pursuant
to all Awards of Restricted Stock, Performance Awards or Phantom Stock under the
Plan. The shares of Common Stock to be delivered under the Plan will be made
available from authorized but unissued shares of Common Stock or Common Stock
previously issued and outstanding and reacquired by the Corporation. If any
share of Common Stock that is the subject of an Award is not issued and ceases
to be issuable for any reason, or is forfeited, cancelled or returned to the
Corporation for failure to satisfy vesting requirements or upon the occurrence
of other forfeiture events, such share of Common Stock will no longer be charged
against the foregoing maximum share limitations and may again be made subject to
Awards under the Plan pursuant to such limitations.
3.2. ADJUSTMENTS. If there shall occur any recapitalization, reorganization,
reclassification, merger, consolidation, combination, stock dividend, stock
split, reverse stock split, split-up, split-off, spin-off or other distribution
with respect to the shares of Common Stock, or any similar corporate transaction
or event in respect of the Common Stock, then the Committee shall, in the manner
and to the extent that it deems appropriate and consistent with the terms of
this Plan, cause a proportionate adjustment to be made in (a) the maximum
numbers and kind of shares provided in Section 3.1 hereof, (b) the number and
kind of shares of Common Stock, share units, or other rights or property
(including, without limitation, cash) subject to the then-outstanding Awards,
(c) the price for each share or unit or other right subject to then outstanding
Awards without change in the aggregate purchase price or value as to which such
Awards remain exercisable or subject to restrictions, (d) the performance
targets or goals appropriate to any outstanding Performance Awards, or (e) any
other terms of an Award that are affected by the event.
4. ADMINISTRATION OF THE PLAN
4.1. COMMITTEE MEMBERS. Except as provided in Section 4.4 hereof, the Plan will
be administered by the Committee which, to the extent deemed necessary or
appropriate by the Board, will consist of two or more persons who satisfy the
requirements for a "nonemployee director" under Rule 16b-3 promulgated under the
Exchange Act. The Committee may exercise such powers and authority as may be
necessary or appropriate for the Committee to carry out its functions as
described in the Plan. No member of the Committee will be liable for any action
or determination made in good faith by the Committee with respect to the Plan or
any Award under it.
4.2. DISCRETIONARY AUTHORITY. Subject to the express limitations of the Plan,
the Committee has authority in its discretion to determine the Eligible Persons
to whom, and
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<PAGE> 5
the time or times at which, Awards may be granted, the number of shares, units
or other rights subject to each Award, the exercise, base or purchase price of
an Award (if any), the time or times at which an Award will become vested,
exercisable or payable, the performance criteria, performance goals and other
conditions of an Award, and the duration of the Award. The Committee also has
discretionary authority to interpret the Plan, to make all factual
determinations under the Plan, and to determine the terms and provisions of the
respective Award Agreements and to make all other determinations necessary or
advisable for Plan administration. The Committee has authority to prescribe,
amend, and rescind rules and regulations relating to the Plan. All
interpretations, determinations, and actions by the Committee will be final,
conclusive, and binding upon all parties.
4.3. CHANGES TO AWARDS. The Committee shall have the authority to effect, at any
time and from time to time, with the consent of the affected Participants, (a)
the cancellation of any or all outstanding Awards and the grant in substitution
therefor of new Awards covering the same or different numbers of shares of
Common Stock and having an exercise or base price which may be the same as or
different than the exercise or base price of the cancelled Awards or (b) the
amendment of the terms of any and all outstanding Awards. The Committee may in
its discretion accelerate the vesting or exercisability of an Award at any time
or on the basis of any specified event.
4.4. DELEGATION OF AUTHORITY. The Committee shall have the right, from time to
time, to delegate to one or more officers of the Corporation the authority of
the Committee to grant and determine the terms and conditions of Awards under
the Plan, subject to such limitations as the Committee shall determine;
provided, however, that no such authority may be delegated with respect to
Awards made to any member of the Board.
4.5. AWARDS TO INDEPENDENT DIRECTORS. An Award to an Independent Director under
the Plan shall be approved by the Board. With respect to Awards to Independent
Directors, all rights, powers and authorities vested in the Committee under the
Plan shall instead be exercised by the Board, and all provisions of the Plan
relating to the Committee shall be interpreted in a manner consistent with the
foregoing by treating any such reference as a reference to the Board for such
purpose.
5. ELIGIBILITY AND AWARDS
All Eligible Persons are eligible to be designated by the Committee to
receive an Award under the Plan. The Committee has authority, in its sole
discretion, to determine and designate from time to time those Eligible Persons
who are to be granted Awards, the types of Awards to be granted and the number
of shares or units subject to the Awards that are granted under the Plan. Each
Award will be evidenced by an Award Agreement as described in Section 13 hereof
between the Corporation and the Participant that shall include the terms and
conditions consistent with the Plan as the Committee may determine.
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<PAGE> 6
6. STOCK OPTIONS
6.1. GRANT OF OPTION. An Option may be granted to any Eligible Person selected
by the Committee; provided, however, that only Employees shall be eligible for
Awards of Incentive Stock Options. Each Option shall be designated, at the
discretion of the Committee, as an Incentive Stock Option or a Nonqualified
Stock Option.
6.2. EXERCISE PRICE. The exercise price of the Option shall be determined by the
Committee; provided, however, that the exercise price per share of an Option
shall not be less than one hundred percent (100%) of the Fair Market Value per
share of the Common Stock on the Date of Grant.
6.3. VESTING; TERM OF OPTION. The Committee, in its sole discretion, shall
prescribe in the Award Agreement the time or times at which, or the conditions
upon which, an Option or portion thereof shall become vested and exercisable,
and may accelerate the exercisability of any Option at any time. An Option may
become vested and exercisable upon a Participant's retirement, death,
disability, Change in Control or other event, to the extent provided in an Award
Agreement. The period during which a vested Option may be exercised shall be ten
years from the Date of Grant, unless a shorter exercise period is specified by
the Committee in an Award Agreement, and subject to such limitations as may
apply under an Award Agreement relating to the termination of a Participant's
employment or other service with the Corporation or any Subsidiary.
6.4. OPTION EXERCISE; WITHHOLDING. Subject to such terms and conditions as shall
be specified in an Award Agreement, an Option may be exercised in whole or in
part at any time during the term thereof by written notice to the Corporation
together with payment of the aggregate exercise price therefor. Payment of the
exercise price shall be made (a) in cash or by cash equivalent, (b) at the
discretion of the Committee, in shares of Common Stock acceptable to the
Committee, valued at the Fair Market Value of such shares on the date of
exercise, (c) at the discretion of the Committee, by a delivery of a notice that
the Participant has placed a market sell order (or similar instruction) with a
broker with respect to shares of Common Stock then issuable upon exercise of the
Option, and that the broker has been directed to pay a sufficient portion of the
net proceeds of the sale to the Corporation in satisfaction of the Option
exercise price (conditioned upon the payment of such net proceeds), (d) at the
discretion of the Committee, by a combination of the methods described above or
(e) by such other method as may be approved by the Committee and set forth in
the Award Agreement. In addition to and at the time of payment of the exercise
price, the Participant shall pay to the Corporation the full amount of any and
all applicable income tax and employment tax amounts required to be withheld in
connection with such exercise, payable under one or more of the methods
described above for the payment of the exercise price of the Options as may be
approved by the Committee.
6.5. LIMITED TRANSFERABILITY. Solely to the extent permitted by the Committee in
an Award Agreement and subject to such terms and conditions as the Committee
shall specify, a Nonqualified Stock Option (but not an Incentive Stock Option)
may be
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<PAGE> 7
transferred to members of the Participant's immediate family (as determined by
the Committee) or to trusts, partnerships or corporations whose beneficiaries,
members or owners are members of the Participant's immediate family, and/or to
such other persons or entities as may be approved by the Committee in advance
and set forth in an Award Agreement, in each case subject to the condition that
the Committee be satisfied that such transfer is being made for estate or tax
planning purposes or for gratuitous or donative purposes, without consideration
(other than nominal consideration) being received therefor. Except to the extent
permitted by the Committee in accordance with the foregoing, an Option shall be
nontransferable otherwise than by will or by the laws of descent and
distribution, and shall be exercisable during the lifetime of a Participant only
by such Participant.
6.6. ADDITIONAL RULES FOR INCENTIVE STOCK OPTIONS.
(a) ANNUAL LIMITS. To the extent that the aggregate fair market value
(determined at the time the respective Incentive Stock Option is granted) of
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by an individual during any calendar year under the Plan, and any
other stock option plans of the Corporation, any Subsidiary or any parent
corporation, exceeds $100,000 (determined in accordance with section 422(d) of
the Code), such Incentive Stock Options shall be treated as Nonqualified Stock
Options. The Committee shall determine, in accordance with applicable provisions
of the Code, Treasury Regulations and other administrative pronouncements, which
of a Participant's Incentive Stock Options shall be treated as Nonqualified
Stock Options because of such limitation and shall notify the Participant of
such determination as soon as practicable after such determination.
(b) TERMINATION OF EMPLOYMENT. An Award Agreement for an Incentive
Stock Option may provide that such Option may be exercised not later than 3
months following termination of employment of the Participant with the
Corporation and all Subsidiaries, subject to special rules relating to death and
disability, as and to the extent determined by the Committee to be appropriate
with regard to the requirements of section 422 of the Code and Treasury
Regulations thereunder.
(c) OTHER TERMS AND CONDITIONS; NONTRANSFERABILITY. Any Incentive Stock
Option granted hereunder shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as are deemed necessary or desirable
by the Committee, which terms, together with the terms of this Plan, shall be
intended and interpreted to cause such Incentive Stock Option to qualify as an
"incentive stock option" under section 422 of the Code. Such terms shall
include, if applicable, limitations on Incentive Stock Options granted to
ten-percent owners of the Corporation. An Award Agreement for an Incentive Stock
Option may provide that such Option shall be treated as a Nonqualified Stock
Option to the extent that certain requirements applicable to "incentive stock
options" under the Code shall not be satisfied. An Incentive Stock Option shall
be nontransferable otherwise than by will or by the laws of descent and
distribution, and shall be exercisable during the lifetime of a Participant only
by such Participant.
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<PAGE> 8
(d) DISQUALIFYING DISPOSITIONS. If shares of Common Stock acquired by
exercise of an Incentive Stock Option are disposed of within two years following
the Date of Grant or one year following the transfer of such shares to the
Participant upon exercise, the Participant shall, promptly following such
disposition, notify the Corporation in writing of the date and terms of such
disposition and provide such other information regarding the disposition as the
Committee may reasonably require.
7. STOCK APPRECIATION RIGHTS
7.1. GRANT OF SARS. A Stock Appreciation Right granted to a Participant is an
Award in the form of a right to receive, upon surrender of the right, but
without other payment, an amount based on appreciation in the Fair Market Value
of the Common Stock over a base price established for the Award, exercisable at
such time or times and upon conditions as may be approved by the Committee.
7.2. TANDEM SARS. A Stock Appreciation Right may be granted in connection with
an Option, either at the time of grant or at any time thereafter during the term
of the Option. An SAR granted in connection with an Option will entitle the
holder, upon exercise, to surrender such Option or any portion thereof to the
extent unexercised, with respect to the number of shares as to which such SAR is
exercised, and to receive payment of an amount computed as described in Section
7.4 hereof. Such Option will, to the extent and when surrendered, cease to be
exercisable. An SAR granted in connection with an Option hereunder will have a
base price per share equal to the per share exercise price of the Option, will
be exercisable at such time or times, and only to the extent, that a related
Option is exercisable, and will expire no later than the related Option expires.
7.3. FREESTANDING SARS. A Stock Appreciation Right may be granted without
relationship to an Option and, in such case, will be exercisable as determined
by the Committee, but in no event after 10 years from the Date of Grant. The
base price of an SAR granted without relationship to an Option shall be
determined by the Committee in its sole discretion; provided, however, that the
base price per share of a freestanding SAR shall not be less than one hundred
percent (100%) of the Fair Market Value of the Common Stock on the Date of
Grant.
7.4. PAYMENT OF SARS. An SAR will entitle the holder, upon exercise of the SAR,
to receive payment of an amount determined by multiplying: (a) the excess of the
Fair Market Value of a share of Common Stock on the date of exercise of the SAR
over the base price of such SAR, by (b) the number of shares as to which such
SAR will have been exercised. Payment of the amount determined under the
foregoing may be made, in the discretion of the Committee, in cash, in shares of
Common Stock valued at their Fair Market Value on the date of exercise, or in a
combination of cash and shares of Common Stock.
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<PAGE> 9
8. RESTRICTED STOCK
8.1. GRANTS OF RESTRICTED STOCK. An Award of Restricted Stock to a Participant
represents shares of Common Stock that are issued subject to such restrictions
on transfer and other incidents of ownership and such forfeiture conditions as
the Committee may determine. The Committee may, in connection with an Award of
Restricted Stock, require the payment of a specified purchase price.
8.2. VESTING REQUIREMENTS. The restrictions imposed on an Award of Restricted
Stock shall lapse in accordance with the vesting requirements specified by the
Committee in the Award Agreement. Such vesting requirements may be based on the
continued employment of the Participant with the Corporation or its Subsidiaries
for a specified time period or periods, provided that any such restriction shall
not be scheduled to lapse in its entirety earlier than the first anniversary of
the Date of Grant. Such vesting requirements may also be based on the attainment
of specified business goals or measures established by the Committee in its sole
discretion.
8.3. RESTRICTIONS. Shares of Restricted Stock may not be transferred, assigned
or subject to any encumbrance, pledge or charge until all applicable
restrictions are removed or expire or unless otherwise allowed by the Committee.
The Committee may require the Participant to enter into an escrow agreement
providing that the certificates representing Restricted Stock granted or sold
pursuant to the Plan will remain in the physical custody of an escrow holder
until all restrictions are removed or expire. Failure to satisfy any applicable
restrictions shall result in the subject shares of Restricted Stock being
forfeited and returned to the Corporation, with any purchase price paid by the
Participant to be refunded, unless otherwise provided by the Committee. The
Committee may require that certificates representing Restricted Stock granted
under the Plan bear a legend making appropriate reference to the restrictions
imposed.
8.4. RIGHTS AS SHAREHOLDER. Subject to the foregoing provisions of this Section
8 and the applicable Award Agreement, the Participant will have all rights of a
shareholder with respect to shares of Restricted Stock granted to him, including
the right to vote the shares and receive all dividends and other distributions
paid or made with respect thereto, unless the Committee determines otherwise at
the time the Restricted Stock is granted, as set forth in the Award Agreement.
8.5. SECTION 83(b) ELECTION. The Committee may provide in an Award Agreement
that the Award of Restricted Stock is conditioned upon the Participant making an
election, or refraining from making an election, with respect to the Award under
section 83(b) of the Code. Irrespective of whether an Award is so conditioned,
if a Participant makes an election pursuant to section 83(b) of the Code with
respect to an Award of Restricted Stock, the Participant shall be required to
promptly file a copy of such election with the Corporation.
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<PAGE> 10
9. PERFORMANCE AWARDS
9.1. GRANT OF PERFORMANCE AWARDS. The Committee may grant Performance Awards
under the Plan, which shall be represented by units denominated on the Date of
Grant either in shares of Common Stock (Performance Shares) or in specified
dollar amounts (Performance Units). At the time a Performance Award is granted,
the Committee shall determine, in its sole discretion, one or more performance
periods and performance goals to be achieved during the applicable performance
periods, as well as such other restrictions and conditions as the Committee
deems appropriate. In the case of Performance Units, the Committee shall also
determine a target unit value or a range of unit values for each Award. No
performance period shall exceed ten years from the Date of Grant. The
performance goals applicable to a Performance Award grant may be subject to such
later revisions as the Committee shall deem appropriate to reflect significant
unforeseen events such as changes in law, accounting practices or unusual or
nonrecurring items or occurrences.
9.2. PAYMENT OF PERFORMANCE AWARDS. At the end of the performance period, the
Committee shall determine the extent to which performance goals have been
attained or a degree of achievement between minimum and maximum levels in order
to establish the level of payment to be made, if any, and shall determine if
payment is to be made in the form of cash or shares of Common Stock (valued at
their Fair Market Value at the time of payment) or a combination of cash and
shares of Common Stock. Payments of Performance Awards shall generally be made
as soon as administratively practicable following the end of the performance
period.
10. PHANTOM STOCK
10.1. GRANT OF PHANTOM STOCK. Phantom Stock is an Award to a Participant of a
number of hypothetical share units with respect to shares of Common Stock, with
an initial value based on the Fair Market Value of the Common Stock on the Date
of Grant. Phantom Stock shall be subject to such restrictions and conditions as
the Committee shall determine. On the Date of Grant, the Committee shall
determine, in its sole discretion, the installment or other vesting period of
the Phantom Stock and the maximum value of the Phantom Stock, if any. No vesting
period shall exceed 10 years from the Date of Grant. An Award of Phantom Stock
may be granted, at the discretion of the Committee, together with an Award of
Dividend Equivalent rights for the same number of shares covered thereby.
10.2. PAYMENT OF PHANTOM STOCK. Upon the vesting date or dates applicable to
Phantom Stock granted to a Participant, an amount equal to the Fair Market Value
of one share of Common Stock upon such vesting dates (subject to any applicable
maximum value) shall be paid with respect to such Phantom Stock unit granted to
the Participant. Payment may be made, at the discretion of the Committee, in
cash or in shares of Common Stock valued at their Fair Market Value on the
applicable vesting dates, or in a combination thereof.
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<PAGE> 11
11. DIVIDEND EQUIVALENTS
11.1. GRANT OF DIVIDEND EQUIVALENTS. A Dividend Equivalent granted to a
Participant is an Award in the form of a right to receive cash payments
determined by reference to dividends declared on the Common Stock from time to
time during the term of the Award, which shall not exceed 10 years from the Date
of Grant. Dividend Equivalents may be granted on a stand-alone basis or in
tandem with other Awards. Dividend Equivalents granted on a tandem basis shall
expire at the time the underlying Award is exercised or otherwise becomes
payable to the Participant, or expires.
11.2. PAYMENT OF DIVIDEND EQUIVALENTS. Dividend Equivalent Awards shall be
payable in cash or in shares of Common Stock, valued at their Fair Market Value
on either the date the related dividends are declared or the date the Dividend
Equivalents are paid to a Participant, as determined by the Committee. Dividend
Equivalents shall be payable to a Participant as soon as administratively
practicable following the time dividends are declared and paid with respect to
the Common Stock, or at such later date as the Committee shall specify in the
Award Agreement.
12. CHANGE IN CONTROL
12.1. EFFECT OF CHANGE IN CONTROL. The Committee may, in an Award Agreement,
provide for the effect of a Change in Control on an Award. Such provisions may
include any one or more of the following: (a) the acceleration, limitation or
extension of time periods for purposes of exercising, vesting in, or realizing
gain from any Award; (b) the waiver or modification of performance or other
conditions related to the payment or other rights under an Award; (c) provision
for the cash settlement of an Award for an equivalent cash value, as determined
by the Committee; or (d) such other modification or adjustment to an Award as
the Committee deems appropriate to maintain and protect the rights and interests
of Participants upon or following a Change in Control.
12.2. DEFINITION OF CHANGE IN CONTROL. For purposes hereof, a "Change in
Control" shall be deemed to have occurred upon:
(a) an acquisition subsequent to the Effective Date by any individual,
entity or group (within the meaning of section 13(d)(3) or 14(d)(2) of the
Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of
either (i) the then outstanding shares of Common Stock or (ii) the combined
voting power of the then outstanding Corporation Voting Securities; excluding,
however, the following: (A) any acquisition directly from the Corporation, other
than an acquisition by virtue of the exercise of a conversion privilege unless
the security being so converted was itself acquired directly from the
Corporation, (B) any acquisition by the Corporation and (C) any acquisition by
an employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any Subsidiary;
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<PAGE> 12
(b) during any period of two (2) consecutive years (not including any
period prior to the Effective Date), individuals who at the beginning of such
period constitute the Board (and any new directors whose election by the Board
or nomination for election by the Corporation's shareholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was so approved) cease for any reason (except for death,
disability or voluntary retirement) to constitute a majority thereof;
(c) the approval by the shareholders of the Corporation of a merger,
consolidation, reorganization or similar corporate transaction, whether or not
the Corporation is the surviving corporation in such transaction, other than a
merger, consolidation, reorganization or similar corporate transaction that
would result in the Corporation Voting Securities outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the combined voting power of the Corporation Voting Securities (or the
voting securities of such surviving entity) outstanding immediately after such
merger, consolidation, reorganization or similar corporate transaction;
(d) the approval by the shareholders of the Corporation of (i) the sale
or other disposition of all or substantially all of the assets of the
Corporation, or (ii) a complete liquidation or dissolution of the Corporation;
or
(e) adoption by the Board of a resolution to the effect that any Person
has acquired effective control of the business and affairs of the Corporation.
Notwithstanding the foregoing, if, at the time of a change described in clause
(i) or (ii) below, Duke and Phillips (or any successor to Duke and/or Phillips)
own, directly or indirectly and on an aggregate basis, at least fifty percent
(50%) of the combined voting power of the then outstanding Corporate Voting
Securities, a Change in Control shall not include (i) any change in the
ownership or ownership structure of Duke or Phillips and (ii) any change in the
percentage ownership interests held by Duke and/or Phillips in the Corporation.
13. AWARD AGREEMENTS
13.1. FORM OF AGREEMENT. Each Award under this Plan shall be evidenced by an
Award Agreement in a form approved by the Committee setting forth the number of
shares of Common Stock, units or other rights (as applicable) subject to the
Award, the exercise, base or purchase price (if any) of the Award, the time or
times at which an Award will become vested, exercisable or payable, the duration
of the Award and, in the case of Performance Awards, the applicable performance
criteria and goals. The Award Agreement shall also set forth other material
terms and conditions applicable to the Award as determined by the Committee
consistent with the limitations of this Plan. Award Agreements evidencing
Incentive Stock Options shall contain such terms and
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<PAGE> 13
conditions as may be necessary to meet the applicable provisions of section 422
of the Code.
13.2. TERMINATION OF SERVICE. The Award Agreements may include provisions
describing the treatment of an Award in the event of the retirement, disability,
death or other termination of a Participant's employment with or other service
to the Corporation and all Subsidiaries, such as provisions relating to the
vesting, exercisability, acceleration, forfeiture or cancellation of the Award
in these circumstances, including any such provisions as may be appropriate for
Incentive Stock Options as described in Section 6.6(b) hereof.
13.3. FORFEITURE EVENTS. The Committee may specify in an Award Agreement that
the Participant's rights, payments and benefits with respect to an Award shall
be subject to reduction, cancellation, forfeiture or recoupment upon the
occurrence of certain specified events, in addition to any otherwise applicable
vesting or performance conditions of an Award. Such events shall include, but
shall not be limited to, termination of employment for cause, violation of
material Corporation or Subsidiary policies, breach of noncompetition,
confidentiality or other restrictive covenants that may apply to the
Participant, or other conduct by the Participant that is detrimental to the
business or reputation of the Corporation or any Subsidiary.
13.4. CONTRACT RIGHTS; AMENDMENT. Any obligation of the Corporation to any
Participant with respect to an Award shall be based solely upon contractual
obligations created by an Award Agreement. No Award shall be enforceable until
the Award Agreement has been signed on behalf of the Corporation by its
authorized representative and signed by the Participant and returned to the
Corporation. By executing the Award Agreement, a Participant shall be deemed to
have accepted and consented to the terms of such Award Agreement and this Plan,
and any action taken in good faith under this Plan by and within the discretion
of the Committee, the Board or their delegates. Award Agreements covering
outstanding Awards may be amended or modified by the Committee in any manner
that may be permitted for the grant of Awards under the Plan, subject to the
consent of the Participant to the extent provided in the Award Agreement.
14. GENERAL PROVISIONS
14.1. NO ASSIGNMENT OR TRANSFER; BENEFICIARIES. Except as provided in Sections
6.5 and 8.3 hereof, Awards under the Plan shall not be assignable or
transferable, except by will or by the laws of descent and distribution, and
during the lifetime of a Participant the Award shall be exercised only by such
Participant or by his guardian or legal representative. Notwithstanding the
foregoing, the Committee may provide in the terms of an Award Agreement that the
Participant shall have the right to designate a beneficiary or beneficiaries who
shall be entitled to any rights, payments or other interests specified under an
Award following the Participant's death.
14.2. DEFERRALS OF PAYMENT. The Committee may permit a Participant to defer the
receipt of payment of cash or delivery of shares of Common Stock that would
otherwise
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<PAGE> 14
be due to the Participant by virtue of the exercise of a right or the
satisfaction of vesting or other conditions with respect to an Award. If any
such deferral is to be permitted by the Committee, the Committee shall establish
the rules and procedures relating to such deferral, including, without
limitation, the period of time in advance of payment when an election to defer
may be made, the time period of the deferral and the events that would result in
payment of the deferred amount, the interest or other earnings attributable to
the deferral and the method of funding, if any, attributable to the deferred
amount.
14.3. RIGHTS AS SHAREHOLDER. A Participant shall have no rights as a holder of
Common Stock with respect to any unissued securities covered by an Award until
the date the Participant becomes the holder of record of these securities.
Except as provided in Section 3.2 hereof, no adjustment or other provision shall
be made for dividends or other shareholder rights, except to the extent that the
Award Agreement provides for Dividend Equivalents, dividend payments or similar
economic benefits.
14.4. EMPLOYMENT OR SERVICE. Nothing in the Plan, in the grant of any Award or
in any Award Agreement shall confer upon any Eligible Person the right to
continue in the capacity in which he is employed by or otherwise serves the
Corporation or any Subsidiary.
14.5 TRANSFER OF EMPLOYMENT TO DUKE. For purposes of the Plan and all Award
Agreements governing outstanding Awards held by a Participant as of the date, if
any, of such Participant's transfer of employment as hereinafter described,
unless provided otherwise by the Committee in an Award Agreement, a Participant
who is an Employee shall not be considered to have terminated employment with
the Corporation and all Subsidiaries if such Participant's employment is
transferred directly from the Corporation or any Subsidiary to Duke (or an
entity that is wholly owned, directly or indirectly, by Duke) at a time when
Duke owns, directly or indirectly, greater than fifty percent (50%) of the
combined voting power of the then outstanding Corporation Voting Securities;
provided, however, that such a Participant shall be considered to have
thereafter terminated such employment upon the first to occur of (a) the date
such Participant terminates employment with the Corporation, all Subsidiaries,
Duke and all entities that are wholly owned, directly or indirectly, by Duke and
(b) the date Duke ceases to own, directly or indirectly, greater than fifty
percent (50%) of the combined voting power of the then outstanding Corporation
Voting Securities. The provisions of this Section 14.5 shall cease to apply as
of the first date upon which Duke owns, directly or indirectly, fifty percent
(50%) or less of the combined voting power of the then outstanding Corporation
Voting Securities.
14.6. SECURITIES LAWS. No shares of Common Stock will be issued or transferred
pursuant to an Award unless and until all then applicable requirements imposed
by federal and state securities and other laws, rules and regulations and by any
regulatory agencies having jurisdiction, and by any stock exchanges upon which
the Common Stock may be listed, have been fully met. As a condition precedent to
the issuance of shares pursuant to the grant or exercise of an Award, the
Corporation may require the Participant to take any reasonable action to meet
such requirements. The Committee may
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<PAGE> 15
impose such conditions on any shares of Common Stock issuable under the Plan as
it may deem advisable, including, without limitation, restrictions under the
Securities Act of 1933, as amended, under the requirements of any stock exchange
upon which such shares of the same class are then listed, and under any blue sky
or other securities laws applicable to such shares.
14.7. TAX WITHHOLDING. The Participant shall be responsible for payment of any
taxes or similar charges required by law to be withheld from an Award or an
amount paid in satisfaction of an Award, which shall be paid by the Participant
on or prior to the payment or other event that results in taxable income in
respect of an Award. The Award Agreement shall specify the manner in which the
withholding obligation shall be satisfied with respect to the particular type of
Award.
14.8. UNFUNDED PLAN. The adoption of this Plan and any setting aside of cash
amounts or shares of Common Stock by the Corporation with which to discharge its
obligations hereunder shall not be deemed to create a trust or other funded
arrangement. The benefits provided under this Plan shall be a general, unsecured
obligation of the Corporation payable solely from the general assets of the
Corporation, and neither a Participant nor the Participant's permitted
transferees or estate shall have any interest in any assets of the Corporation
or any Subsidiary by virtue of this Plan, except as a general unsecured creditor
of the Corporation. Notwithstanding the foregoing, the Corporation shall have
the right to implement or set aside funds in a grantor trust subject to the
claims of the Corporation's creditors to discharge its obligations under the
Plan.
14.9. OTHER COMPENSATION AND BENEFIT PLANS. The adoption of the Plan shall not
affect any other stock incentive or other compensation plans in effect for the
Corporation or any Subsidiary, nor shall the Plan preclude the Corporation from
establishing any other forms of stock incentive or other compensation for
employees of the Corporation or any Subsidiary. The amount of any compensation
deemed to be received by a Participant pursuant to an Award shall not constitute
compensation with respect to which any other employee benefits of such
Participant are determined, including, without limitation, benefits under any
bonus, pension, profit sharing, life insurance or salary continuation plan,
except as otherwise specifically provided by the terms of such plan.
14.10. PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the
Corporation, its successors and assigns, and the Participant, his executor,
administrator and permitted transferees and beneficiaries.
14.11. CONSTRUCTION AND INTERPRETATION. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun shall include the
feminine gender. Headings of Articles and Sections hereof are inserted for
convenience and reference and constitute no part of the Plan.
14.12. SEVERABILITY. If any provision of the Plan or any Award Agreement shall
be determined to be illegal or unenforceable by any court of law in any
jurisdiction, the
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remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
14.13. GOVERNING LAW. The validity and construction of this Plan and of the
Award Agreements shall be governed by the laws of the State of Delaware.
15. EFFECTIVE DATE, TERMINATION AND AMENDMENT
15.1. EFFECTIVE DATE; SHAREHOLDER APPROVAL. The Effective Date of the Plan shall
be the date of the adoption of the Plan by the Board, provided the Plan is
approved by the shareholders of the Corporation on such date or within 12 months
thereafter.
15.2. TERMINATION. The Plan shall terminate on the date immediately preceding
the tenth anniversary of the date the Plan is adopted by the Board. The Board
may, in its sole discretion and at any earlier date, terminate the Plan.
Notwithstanding the foregoing, no termination of the Plan shall in any manner
affect any Award theretofore granted without the consent of the Participant or
the permitted transferee of the Award.
15.3. AMENDMENT. The Board may at any time and from time to time and in any
respect, amend or modify the Plan; provided, however, that no amendment or
modification of the Plan shall be effective without the consent of the
Corporation's shareholders that would (a) change the class of Eligible Persons
under the Plan, or (b) increase the number of shares of Common Stock reserved
for issuance under the Plan or for certain types of Awards under Section 3.1
hereof. In addition, the Board may seek the approval of any amendment or
modification by the Corporation's shareholders to the extent it deems necessary
or advisable in its sole discretion for purposes of compliance with section 422
of the Code, the listing requirements of the New York Stock Exchange or for any
other purpose. No amendment or modification of the Plan shall in any manner
affect any Award theretofore granted without the consent of the Participant or
the permitted transferee of the Award.
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<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Duke Energy Field Services Corporation
<TABLE>
<CAPTION>
State or other Jurisdiction of
Name of Subsidiary Subsidiary Incorporation or Organization
- ------------------ ----------------------------------------
<S> <C>
AIM Pipeline, LLC Delaware
Associated Louisiana Intrastate Pipe Line, LLC Delaware
Atchafalaya Pipeline System, LLC Delaware
Aurora Centana Gathering, LLC Louisiana
Belle Rose NGL Pipeline, LLC Delaware
Brigham-Duke (Delaware) LLC Delaware
Centana Gathering, LLC Delaware
Centana Intrastate Pipeline, LLC Delaware
Centana Oil Gathering, LLC Delaware
Duke Energy Canada Pipeline Ltd. Canadian Federal Entity
Duke Energy Comite, LLC Delaware
Duke Energy Field Services, LLC Delaware
Duke Energy Field Services Assets, LLC Delaware
Duke Energy Field Services Canada Holdings, Inc. Delaware
Duke Energy Field Services LP Acquisition, LLC Delaware
Duke Energy Field Services Marketing, LLC Delaware
Duke Energy Field Services Southwest, LLC Delaware
Duke Energy Financial Services, LLC Delaware
Duke Energy Fuels Operating LLC Delaware
Duke Energy Gathering and Processing, L.P. Delaware
Duke Energy Hinshaw Pipeline, LLC Delaware
Duke Energy Intrastate Network, LLC Delaware
Duke Energy Intrastate Pipeline, LLC Delaware
Duke Energy Midstream Services Canada Ltd. Canadian Federal Entity
Duke Energy NGL Services, LLC Delaware
Duke Energy Oklahoma II, LLC Delaware
Duke Energy Oklahoma Midstream, LLC Delaware
Duke Energy Ozona Condensate, LLC Delaware
Duke Energy Southwest Ozona Plant, LLC Delaware
Duke Energy Stratton Liquid Pipeline, LLC Delaware
Duke Energy Texas Intrastate Pipeline, LLC Delaware
East Texas Regulated, LLC Delaware
EasTrans Limited Partnership Texas
Edwards Cotton Valley, LLC Delaware
Fox Plant, LLC Delaware
Fuels Acquisition Company Operating, LLC Delaware
Fuels Cotton Valley Gathering, LLC Delaware
Fuels Storage, LLC Delaware
GPM Anadarko Gathering Company, LLC Delaware
GPM Austin Gathering Company, LLC Delaware
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
GPM Eddy Gathering Company, LLC Delaware
GPM Gas Company, LLC Delaware
GPM Gas Gathering LLC Delaware
GPM Gas Trading Company, LLC Delaware
GPM Panhandle Gathering Company, LLC Delaware
GPM Pipeline Company, LLC Delaware
Gulf Coast NGL Pipeline, LLC Delaware
Gulf Cotton Valley, LLC Delaware
Highlands Gas, LLC Delaware
Highlands NGL Pipeline, LLC Delaware
Laverne Pipeline Company, LLC Delaware
Laverne Pipeline Holding Company LLC Delaware
Lubrication Services, LLC Delaware
Masters Creek Louisiana Pipeline, LLC Delaware
Midcontinent Pipeline Operating, LLC Delaware
National Helium, LLC Delaware
Ouachita River Gas Storage Co., LLC Louisiana
Overland Trail Transmission, LLC Delaware
PanEnergy Dauphin Island, LLC Delaware
PanEnergy Louisiana Intrastate, LLC Delaware
PanEnergy Mobile Bay Processing, LLC Delaware
Panhandle Field Services, LLC Delaware
Panhandle Gathering, LLC Delaware
Panola Pipe Line, LP Delaware
Peach Ridge Pipeline, LP Delaware
Philips Gas Company Delaware
Rio Bravo Gas Systems, LLC Delaware
TEA Canada Ltd. Alberta Province, Canada
TCE Flour Bluff, L.P. Texas
TCTM, L.P. Delaware
TEPPCO Colorado, LLC Delaware
TEPPCO Crude Oil, LLC Delaware
TEPPCO Crude Pipeline, LLC Delaware
TEPPCO Investments, LLC Delaware
TEPPCO Partners, L.P. Delaware
TE Products Pipeline Company, Limited Partnership Delaware
Texas Eastern Products Pipeline Company, LLC Delaware
TPP Services, LLC Delaware
Tri-States NGL Pipeline, LLC Delaware
United L.P. Gas, LLC Oklahoma
Weld County EP Properties, LLC Colorado
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 6, 2000, with respect to the financial
statements of Phillips Gas Company included in Amendment No. 3 to the
Registration Statement (Form S-1 No. 333-32502), and related Prospectus of Duke
Energy Field Services Corporation for the registration of its common stock.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
May 22, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the combined statements of income and cash flows of the UP Fuels
Division of Union Pacific Resources Group Inc. for the three-month period ended
March 31, 1999 and the year ended December 31, 1998 (and to all references to
our Firm) included in or made a part of this Registration Statement (No.
333-32502).
/s/ ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 22, 2000
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-32502 of Duke Energy Field Services Corporation of our report dated February
18, 2000, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
May 22, 2000
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-32502 of Duke Energy Field Services Corporation of our report dated June 12,
1998, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Fort Worth, Texas
May 22, 2000
