UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............ to ............
Commission file number 1-11429
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0233140
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 COX ROAD, P.O. BOX 1398 28053-1398
GASTONIA, NORTH CAROLINA (Zip Code)
(Address of principal executive offices)
(704) 864-6731
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, $1 par value, outstanding
at January 30, 1998...................................................20,061,089
<PAGE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
The condensed financial statements included herein have been prepared
by the registrant without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, the registrant believes that the
disclosures herein are adequate to make the information presented not
misleading. It is recommended that these condensed financial statements be read
in conjunction with the financial statements and the notes thereto included in
the registrant's latest annual report on Form 10-K.
1
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Twelve Months Ended
December 31 December 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating revenues $103,784 $ 93,653 $348,060 $327,614
Cost of gas 63,060 52,201 192,862 181,934
-------- -------- -------- --------
Gross margin 40,724 41,452 155,198 145,680
-------- -------- -------- --------
Operating expenses and taxes:
Operating and maintenance 14,766 15,757 60,197 57,748
Provision for depreciation 6,078 5,394 23,072 20,346
General taxes 4,858 4,393 17,389 16,695
Income taxes 4,232 4,870 15,073 14,937
-------- -------- -------- --------
29,934 30,414 115,731 109,726
-------- -------- -------- --------
Operating income 10,790 11,038 39,467 35,954
Other income, net 1,067 992 3,961 3,909
Interest deductions 4,664 4,124 17,795 15,190
-------- -------- -------- --------
Net income $ 7,193 $ 7,906 $ 25,633 $ 24,673
======== ======== ======== ========
Average common shares outstanding 19,893 19,296 19,699 19,126
Basic earnings per share $.36 $.41 $1.30 $1.29
Diluted common shares outstanding 20,011 19,397 19,790 19,199
Diluted earnings per share $.36 $.41 $1.30 $1.29
Cash dividends declared per share $.23 $.22 $.91 $.8725
</TABLE>
2
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<CAPTION>
Dec 31 Sep 30 Dec 31
1997 1997 1996
<S> <C> <C> <C>
Gas utility plant $697,678 $684,227 $641,294
Less - Accumulated depreciation 210,067 203,225 189,212
-------- -------- --------
487,611 481,002 452,082
-------- -------- --------
Non-utility property, net 630 642 678
-------- -------- --------
Current assets:
Cash and temporary investments 7,642 1,641 4,481
Restricted cash and temporary investments 9,645 9,888 6,475
Receivables, less allowance for
doubtful accounts 55,739 26,617 54,740
Materials and supplies 8,142 7,645 6,981
Stored gas inventory 18,944 20,890 14,408
Deferred gas costs, net 27,784 19,338 25,910
Prepayments and other 2,093 2,403 1,903
-------- -------- --------
129,989 88,422 114,898
-------- -------- --------
Deferred charges and other assets 16,255 15,076 14,617
-------- -------- --------
Total $634,485 $585,142 $582,275
======== ======== ========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common equity -
Common stock, $1 par $ 19,918 $ 19,771 $ 19,309
Capital in excess of par value 126,052 123,474 115,847
Retained earnings 66,475 64,123 59,051
-------- -------- --------
212,445 207,368 194,207
Long-term debt 174,050 180,850 183,350
-------- -------- --------
386,495 388,218 377,557
-------- -------- --------
Current liabilities:
Maturities of long-term debt 9,300 9,300 9,300
Accounts payable 46,152 27,799 48,191
Accrued taxes 6,091 4,303 6,674
Customer prepayments and deposits 8,233 6,978 6,611
Cash dividends and interest 7,284 8,983 7,191
Restricted supplier refunds 9,645 9,888 6,475
Other 4,069 5,150 4,435
-------- -------- --------
90,774 72,401 88,877
Interim bank loans 69,500 38,000 30,000
-------- -------- --------
160,274 110,401 118,877
-------- -------- --------
Deferred credits and other liabilities:
Income taxes, net 60,468 59,438 57,380
Investment tax credits 3,667 3,780 4,079
Accrued pension cost 9,490 9,532 10,646
Deferred revenues 2,855 3,100 3,834
Other 11,236 10,673 9,902
-------- -------- --------
87,716 86,523 85,841
-------- -------- --------
Total $634,485 $585,142 $582,275
======== ======== ========
</TABLE>
3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands)
Twelve Months Ended
December 31
1997 1996
Balance beginning of period $59,051 $51,166
Add - Net income 25,633 24,673
Deduct - Common stock dividends
and other 18,209 16,788
------- -------
Balance end of period $66,475 $59,051
======= =======
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three Months Ended Twelve Months Ended
December 31 December 31
------------------ ---------------
1997 1996 1997 1996
------- ------- ------- -----
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 7,193 $ 7,906 $25,633 $24,673
Adjustments to reconcile net income
to net cash provided by operating
activities -
Depreciation, depletion and other 6,970 6,441 26,588 24,656
Deferred income taxes, net 1,030 1,147 3,088 3,578
------- ------- ------- -------
15,193 15,494 55,309 52,907
Change in operating assets and liabilities:
Receivables, net (29,438) (37,361) (2,191) (18,791)
Inventories 1,449 1,179 (5,697) (5,057)
Accounts payable 18,353 27,891 (2,039) 13,032
Accrued pension cost (42) (1,568) (1,156) (2,170)
Other (7,842) (4,835) (3,216) (6,901)
------- ------- ------- -------
(2,327) 800 41,010 33,020
------- ------- ------- -------
Cash Flows From Investing Activities:
Construction expenditures (13,451) (12,288) (61,474) (61,951)
Non-utility and other (993) (512) 394 (2,426)
------- ------- ------- -------
(14,444) (12,800) (61,080) (64,377)
------- ------- ------- -------
Cash Flows From Financing Activities:
Sale of senior debentures, net of expenses - 49,404 - 98,718
Issuance of common stock through
dividend reinvestment, stock purchase
and stock option plans 2,866 1,767 10,908 7,917
Increase (decrease) in interim bank
loans, net 31,500 (29,500) 39,500 (47,000)
Retirement of long-term debt
and common stock (7,060) (4,329) (9,564) (10,637)
Cash dividends (4,534) (4,222) (17,613) (16,445)
------- ------- ------- -------
22,772 13,120 23,231 32,553
------- ------- ------- -------
Net increase in cash and
temporary investments 6,001 1,120 3,161 1,196
Cash and temporary investments
at beginning of period 1,641 3,361 4,481 3,285
------- ------- ------- -------
Cash and temporary investments
at end of period $ 7,642 $ 4,481 $ 7,642 $ 4,481
======= ======= ======= =======
Cash paid during the period for:
Interest (net of amount capitalized) $ 6,328 $ 4,164 $17,679 $13,541
Income taxes 930 - 13,865 11,480
</TABLE>
4
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NOTES TO FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements and notes should
be read in conjunction with the financial statements and notes included in
PSNC's 1997 Annual Report. In the opinion of management, all adjustments
necessary for a fair statement of the results of operations for the interim
periods have been recorded. Certain amounts previously reported have been
reclassified to conform with the current period's presentation.
PSNC's business is seasonal in nature; therefore, the financial results
for any interim period are not necessarily indicative of those which may be
expected for the annual period.
2. In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Awards of Stock-Based Compensation to Employees. This statement defines a fair
value method of accounting for stock options or similar equity instruments and
was adopted by PSNC beginning October 1, 1996.
SFAS No. 123 permits companies to continue to account for stock-based
compensation awards under existing accounting rules, but requires disclosure in
a note to the financial statements of the pro forma net income and earnings per
share (EPS) as if PSNC had adopted the new method of accounting. Currently PSNC
has two stock-based compensation plans which are described in Note 3 to the
financial statements in PSNC's 1997 Annual Report. PSNC will continue to apply
current accounting rules and adopt only the disclosure requirements for these
plans. As a result, adoption of the new statement will not directly impact
PSNC's financial position or results of operations.
3. In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting EPS. It requires
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires reconciliation of the
computation of basic EPS to diluted EPS. Basic EPS is computed by dividing
income available to shareholders by the weighted average number of shares
outstanding for the period. Diluted EPS gives effect to all dilutive potential
common shares that were outstanding during the period. Prior period EPS has been
restated to conform to the new statement.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1997 December 31, 1996
---------------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $7,193,000 19,893,000 $.36 $7,906,000 19,296,000 $.41
Effect of dilutive
securities (Options) 118,000 101,000
----------- -----------
Diluted EPS
Net income $7,193,000 20,011,000 $.36 $7,906,000 19,397,000 $.41
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended
December 31, 1997 December 31, 1996
--------------------------------------------- ------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $25,633,000 19,699,000 $1.30 $24,673,000 19,126,000 $1.29
Effect of dilutive
securities (Options) 92,000 73,000
----------- ------------
Diluted EPS
Net income $25,633,000 19,791,000 $1.30 $24,673,000 19,199,000 $1.29
=========== =============
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Changes in Results of Operations
(Amounts in thousands except
degree day and customer data) Three Months Ended December 31
------------------------------
Increase
1997 1996 (Decrease)
-------- -------- ---------
Gross margin $ 40,724 $ 41,452 $ (728) (2)
Less - Franchise taxes 3,347 3,022 325 11
-------- -------- --------
Net margin $ 37,377 $ 38,430 $ (1,053) (3)
======== ======== ========
Total volume throughput (DT):
Residential 6,124 5,876 248 4
Commercial/small industrial 3,607 3,572 35 1
Large commercial/industrial 9,306 8,726 580 7
-------- -------- ---------
19,037 18,174 863 5
======== ======== =========
System average degree days:
Actual 1,484 1,313 171 13
Normal 1,289 1,289 - -
Percent of normal 115% 102%
Weather normalization adjustment
income (refund), net of
franchise taxes $ (3,433) $ (788) $ (2,645)
Customers at end of period:
Residential 280,393 266,014 14,379 5
Commercial/small industrial 40,724 39,179 1,545 4
Large commercial/industrial 2,425 2,388 37 2
-------- -------- ---------
323,542 307,581 15,961 5
======== ======== =========
Net margin for the three months ended December 31, 1997 decreased
$1,053,000 as compared to the same period last year. This decrease in net margin
is attributable to the items shown below (in thousands):
7
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
Commercial/ Large
Small Commercial/
Residential Industrial Industrial Other Total
----------- ---------- ---------- -------- --------
Price variance * $ 122 $ 125 $ 123 $ - $ 370
Volume variances, net (878) (446) 296 - (1,028)
Other - - - (395) (395)
------ ------ ------- ------ -------
Total $ (756) $ (321) $ 419 $ (395) $(1,053)
====== ====== ======= ====== =======
*Includes changes in sales mix.
This decrease in net margin is due primarily to a reduction resulting
from the weather normalization adjustment (WNA) for this period. The WNA
adjustment for November and December more than offset any additional margin
which resulted from the colder than normal weather and increase in customers
which occurred. The November and December consumption per degree day by
residential and small general service customers was lower than the historical
average consumption per degree day used in the WNA mechanism. The WNA only
accounts for differences in consumption caused by temperature variations from
normal. It does not compensate PSNC for any non-temperature related changes in
consumption.
(Amounts in thousands except
degree day data) Twelve Months Ended December 31
-----------------------------------
Increase
1997 1996 (Decrease) %
-------- -------- --------- --
Gross margin $155,198 $145,680 $ 9,518 7
Less - Franchise taxes 11,143 10,489 654 6
-------- -------- --------
Net margin $144,055 $135,191 $ 8,864 7
======== ======== ========
Total volume throughput (DT):
Residential 20,008 22,573 (2,565) (11)
Commercial/small industrial 12,409 14,157 (1,748) (12)
Large commercial/industrial 33,560 29,872 3,688 12
-------- -------- --------
65,977 66,602 (625) (1)
======== ======== ========
System average degree days:
Actual 3,424 3,715 * (291) (8)
Normal 3,384 3,402 * (18) (1)
Percent of normal 101% 109%
Weather normalization adjustment
income (refund), net of
franchise taxes $ 3,315 $(7,490) $ 10,805
* Reflects an additional day for leap year.
8
<PAGE>
Net margin for the twelve months ended December 31, 1997 increased
$8,864,000 as compared to the same period last year. This increase in net margin
is attributable to the items shown below (in thousands):
Commercial/ Large
Small Commercial/
Residential Industrial Industrial Other Total
----------- ---------- ---------- ------ ------
Price variance * $6,107 $ 2,052 $(3,702) $ - $ 4,457
Volume variances, net 1,914 (1,189) 3,430 - 4,155
Southern Expansion - - - 734 734
Other - - - (482) (482)
------ ------- ------- ------- -------
Total $8,021 $ 863 $ (272) $ 252 $ 8,864
====== ======= ======= ======= =======
* Includes changes in sales mix.
This increase in net margin is due primarily to an increase in the
number of customers served and to the general rate increase effective October 1,
1996. Net margin for twelve months ended December 31, 1996 was partially offset
by a $734,000 charge to cost of gas expense related to the final resolution of
regulatory and related accounting issues associated with Southern Expansion
pipeline costs.
Operating and maintenance expenses for the three months ended December
31, 1997 decreased 6% as compared to the same period last year, while increasing
approximately 4% for the twelve-month period. The change for both periods
includes a decrease in net expenses of $1,034,000 related to the voluntary early
retirement program offered during the first quarter of fiscal 1997. On a
straight comparison basis without this expense, operating and maintenance
expenses remained relatively flat for the quarter and increased 6% for the
twelve-month period. Reduced power usage at PSNC's liquefied natural gas
facility and lower uncollectible provision expenses also contributed to the
decrease for both periods. These items are partially offset by increases in
hospitalization and employee training costs, outside services for consultants in
the information systems area and telecommunications costs. Further impacting
both periods were increases in wages and the cost of various employee benefits,
including group life, dental, pension and post-retirement.
Depreciation expense increased for the three and twelve months ended
December 31, 1997 due to utility plant additions. For the three- and
twelve-month periods, general taxes increased 11% and 4%, respectively. This
increase is due primarily to increased franchise taxes based on increased
operating revenues for the respective periods.
Other income for the three and twelve months ended December 31, 1997
increased $75,000 and $52,000, respectively. These increases are primarily
9
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
due to merchandising and jobbing income which increased by $380,000 and $743,000
for the three- and twelve-month periods. Part of the increase in merchandising
income for both periods is due to a decrease in expenses of $231,000 related to
the voluntary early retirement program offered during the first quarter of
fiscal 1997. In December 1996, Sonat Public Service Company L.L.C. was formed,
of which PSNC and Sonat Marketing Inc. each owns 50%. Prior to December 1996,
income from secondary market transactions was recorded as other income. Income
from secondary market transactions is now recorded in subsidiary operations net
of tax. Income from this joint venture decreased for the twelve-month period
ended December 31, 1997 due to weather that was 8% warmer than the prior
twelve-month period and less attractive market conditions, which negatively
impacted margin earned from secondary market transactions and natural gas
brokering activities. This decrease is partially offset by the five-year
amortization of deferred revenue into income and the related interest income
generated from the formation of Sonat Public Service Company L.L.C.
Additionally, impacting other income for the twelve-month period is a $265,000
gain related to the sale of land in June 1996.
Interest deductions for the three and twelve months ended December 31,
1997 increased 13% and 17% as compared to the same periods last year. These
increases reflect interest expense on the December 1996 issuance of $50,000,000
of 7.45% Senior Debentures due 2026. Offsetting the increase in interest expense
for both the three- and twelve-month periods is a decrease in interest expense
on short-term debt resulting from lower average bank loans outstanding during
the period.
The change in earnings per share for the three- and twelve-month
periods reflect an increase of 3% in the average number of common shares
outstanding as compared to the same periods last year. These increases are
primarily due to shares issued through PSNC's dividend reinvestment and stock
option plans.
Changes in Financial Condition
The capital expansion program, through the construction of lines,
services, systems, and facilities, and the purchase of equipment, is designed to
help PSNC meet the growing demand for its product. PSNC's fiscal 1998
construction budget is approximately $69,781,000, compared to actual
construction expenditures for fiscal 1997 of $60,310,000. The construction
program is regularly reviewed by management and is dependent upon PSNC's
continuing ability to generate adequate funds internally and to sell new issues
of debt and equity securities on acceptable terms. Construction expenditures
during the three and twelve months ended December 31, 1997 were $13,451,000 and
10
<PAGE>
$61,474,000, respectively, as compared to $12,288,000 and $61,951,000 for
the same periods a year ago.
PSNC generally finances its operations with internally generated funds,
supplemented with bank lines of credit to satisfy seasonal requirements. PSNC
also borrows under its bank lines of credit to finance portions of its
construction expenditures pending refinancing through the issuance of equity or
long-term debt at a later date depending upon prevailing market conditions. PSNC
has committed lines of credit with seven commercial banks which vary monthly
depending upon seasonal requirements and a five-year revolving line of credit
with one bank. For the twelve-month period beginning April 1, 1997, total lines
of credit with these banks range from a minimum of $37,000,000 to a winter-
period maximum of $81,000,000. PSNC also has uncommitted annual lines of credit
totaling $80,000,000. Lines of credit are evaluated periodically by management
and renegotiated to accommodate anticipated short-term financing needs.
Management believes these lines are currently adequate to finance a portion of
construction expenditures, stored gas inventories and other corporate needs.
Restricted cash and temporary investments and restricted supplier
refunds relate to refunds of $9,645,000 received from PSNC's pipeline supplier
that have not been deposited into the expansion fund in the Office of the State
Treasurer. This fund was created by an order of the North Carolina Utilities
Commission (NCUC) dated June 3, 1993, to finance the construction of natural gas
lines into unserved areas of PSNC's service territory that otherwise would not
be economically feasible to serve.
Stored gas inventories increased $4,536,000 as compared to December 31,
1996. This increase is due to larger quantities in storage and the addition of a
storage service during fiscal 1997.
Net deferred gas costs fluctuate in response to the operation of PSNC's
Rider D rate mechanism. This mechanism allows PSNC to recover margin losses on
negotiated sales to large commercial and industrial customers with alternate
fuel capability. It also allows PSNC to recover from customers all prudently
incurred gas costs. On a monthly basis, any difference in amounts paid and
collected for these costs is recorded for subsequent refund to or collection
from PSNC's customers. Net deferred gas costs at December 31, 1997, September
30, 1997, and December 31, 1996 primarily represent undercollections from
customers. PSNC's deferred gas costs balances are approved by the NCUC in annual
gas cost prudence reviews and are collected from or refunded to customers over a
subsequent twelve-month period. Amounts that have not been collected from or
refunded to customers bear interest at an annual rate of 10% as required by the
NCUC. PSNC's strategy is to manage the balance of deferred gas costs to a
minimal level. On November 6, 1997, the NCUC issued an order permitting
PSNC, on a two-year trial basis, to establish its commodity cost of gas
11
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
for large commercial and industrial customers on the basis of market prices for
natural gas. PSNC will continue to establish a benchmark cost of gas for
residential and small commercial customers pursuant to its existing procedures.
The increase in deferred charges and other assets as compared to
December 31, 1996 was primarily due to unamortized Year 2000 costs of $1,966,000
discussed further in Regulatory Matters. Deferred charges and other assets also
include the restricted cash contribution from Sonat Marketing Company L.P.
PSNC's subsidiary, PSNC Production Corporation, and Sonat Marketing Company
L.P., a subsidiary of Sonat Inc., created Sonat Public Service Company L.L.C.
Sonat Marketing contributed $4,944,000 for its 50% ownership of which
approximately $4,845,000 is currently restricted. Sonat Marketing is entitled to
a partial refund of its contribution not yet earned if the economics of the
transaction are adversely modified by any regulatory body over a five-year
period. Restricted cash will be released annually in equal amounts beginning in
December 1998 and extending through December 2001.
On December 17, 1996, PSNC sold $50,000,000 of 7.45% Senior Debentures
due 2026 in a public offering. The net proceeds of $49,404,000 were used to pay
down a significant portion of the then outstanding short-term bank debt. There
has been no long-term financing since that time, resulting in an increase in
short-term bank loans. At December 31, 1997 and 1996, total short-term bank
loans outstanding were $69,500,000 and $30,000,000, respectively.
Regulatory Matters
PSNC began providing natural gas service in McDowell County during
December 1996. The extension of PSNC's system into McDowell County was the first
project undertaken by PSNC using monies from its NCUC-approved expansion fund.
The original estimate to complete this project was approximately $14,500,000, of
which $8,193,500 would be financed by PSNC's expansion fund and local government
assistance payments. Through December 31, 1997, $14,240,000 was spent on the
project, of which $7,781,000 has been received from the expansion fund. PSNC
will receive an additional $412,500 over the next five years in the form of
local government assistance payments. The expansion phase of this project has
been completed.
PSNC currently provides natural gas service to the eastern portion of
Haywood County, and began extending service to western Haywood County, including
Waynesville, Clyde and Lake Junaluska, in September 1997. On April 22, 1997, the
NCUC approved PSNC's application to use expansion funds for this project and
authorized disbursements from the expansion fund of
12
<PAGE>
$4,127,000. PSNC will begin providing partial service to this area of Haywood
County in February 1998. Through December 31, 1997, $2,304,000 was spent on the
project, of which $1,376,000 was received from the expansion fund. An additional
reimbursement of $352,000 was received in February 1998.
PSNC and a subsidiary of Piedmont Natural Gas Company, Inc. (Piedmont)
formed Cardinal Pipeline Company, LLC (Cardinal) in March 1994, to construct and
operate a 24-inch, 37.5-mile natural gas pipeline, of which PSNC owns 64%. It
was placed into service on December 31, 1994, and provides 130 million cubic
feet per day (mmcf/day) of additional firm capacity (70 mmcf/day for PSNC and 60
mmcf/day for Piedmont). In September 1995, PSNC, Piedmont, Transcontinental Gas
Pipe Line Corporation (Transco) and North Carolina Natural Gas Corporation
(NCNG) signed a letter of intent to form Cardinal Extension Company, LLC
(Cardinal Extension) to purchase and extend the Cardinal Pipeline. As proposed,
the pipeline will extend 67 miles from the termination point of the original
Cardinal Pipeline to a point southeast of Raleigh and will provide 140 mmcf/day
of additional capacity (100 mmcf/day for PSNC and 40 mmcf/day for NCNG), and
will cost an estimated $75,000,000. Through their respective subsidiaries, PSNC
will own approximately 33%, Piedmont will own approximately 17%, Transco will
own approximately 45%, and NCNG will own approximately 5% of the new 104.5-mile
pipeline. PSNC, through a subsidiary, will contribute to Cardinal its net book
investment in the existing pipeline plus additional equity capital of
approximately $1,000,000. On November 6, 1997, the NCUC issued an order granting
Cardinal Extension a certificate to construct the new facilities and merge with
Cardinal. No appeals of this order were received within the statutory review
period. Right-of-way acquisition has started, and construction will begin in
mid-1998. The facilities are expected to be in service on or before November 1,
1999.
Pine Needle LNG Company, LLC (Pine Needle) was formed by subsidiaries
of Transco, Piedmont, NCNG, Amerada Hess, and PSNC, and the Municipal Gas
Authority of Georgia. Pine Needle will own and operate a liquefied natural gas
storage facility, with an estimated cost of $107,000,000. This facility will be
located near Transco's pipeline northwest of Greensboro, North Carolina, and
will have a storage capacity of four billion cubic feet with vaporization
capability of 400 million cubic feet per day. On April 30, 1996, the Federal
Energy Regulatory Commission (FERC) made a preliminary determination to grant
Pine Needle certificate authority to construct, own and operate the LNG storage
facility. It approved a 12.75% return on equity for the project and stated that
the debt component of the rate structure will be determined after permanent
financing is obtained. On May 30, 1996, the NCUC filed an application for
rehearing of the preliminary determination. On November 27, 1996, the FERC
issued an order granting a certificate of convenience and necessity authorizing
the construction and operation of Pine Needle, and denying the NCUC's request
for rehearing. The NCUC then filed a petition for review of FERC's November 27
order with the United States Court of Appeals for the District of Columbia
Circuit. On October 7, 1997, Pine Needle and the NCUC signed an agreement
relating to the NCUC's appeal of the Pine Needle certificate order. Based upon
this agreement between Pine Needle and the NCUC, the NCUC filed a motion on
October 20, 1997 to withdraw its petition for review. Liquefaction is expected
13
<PAGE>
to begin in May 1999 in time for withdrawal service to begin in the 1999 winter
heating season. PSNC Blue Ridge Corporation (Blue Ridge) will make an equity
capital contribution of approximately $9,000,000 at the end of the construction
period. Through December 31, 1997, Blue Ridge has advanced $387,000 towards the
construction of the facility until permanent financing can be obtained.
On November 14, 1996, PSNC filed an application with the NCUC
requesting deferred accounting for the costs of a project to ensure that PSNC's
computer operating systems function properly in the year 2000. Similar costs
will be incurred by businesses worldwide and the Emerging Issues Task Force of
the Financial Accounting Standards Board has determined that these costs should
be expensed as incurred. PSNC requested that total estimated contractor labor of
$3,300,000 be deferred for subsequent recovery in a future rate case. On April
29, 1997, the NCUC issued an order authorizing the deferral of each year's costs
and requiring a three-year amortization of these costs beginning in the year
incurred. PSNC began amortizing these costs in September 1997 and will seek to
recover unamortized costs at the time of its next general rate case.
Management currently anticipates filing a general rate case on or about
April 1, 1998, using the twelve months ended December 31, 1997, as its test
year. If this rate case is filed as planned, a general rate order from the NCUC
would be expected on or about November 1, 1998.
Forward-looking Statements
Statements contained in this document and the notes to the financial
statements which are not historical in nature are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. PSNC undertakes no obligation to update forward-looking statements
to reflect events or circumstances after the date hereof. Such risks and
uncertainties with respect to PSNC include, but are not limited to, its ability
to successfully implement internal performance goals, performance issues with
natural gas suppliers and transporters, the capital-intensive nature of PSNC's
business, regulatory issues (including rate relief to recover increased capital
and operating costs), competition, weather, exposure to environmental issues and
liabilities, variations in natural gas prices and general and specific economic
conditions. From time to time, subsequent to the date of the filing of this
document, PSNC may include forward-looking statements in oral statements or
other written documents.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As more fully disclosed in Part I under "Environmental Matters" and in
Part II in Note 7 to the financial statements in the Annual Report on Form 10-K
for the period ending September 30, 1997, PSNC owns or has owned portions of
sites at which manufactured gas plants were formerly operated and is cooperating
with the North Carolina Department of Environment, Health and Natural Resources
to investigate these sites.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits:
27 - Financial Data Schedule.
Part II Exhibits:
10-D-7 Amended Operating Agreement of Cardinal
Extension Company, LLC, dated December 19,
1996.
10-D-8 Amended Construction, Operation and Maintenance
Agreement by and between Cardinal Operating
Company and Cardinal Extension Company, LLC,
dated December 19, 1996.
15
<PAGE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended December 31, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY
OF NORTH CAROLINA, INCORPORATED
(Registrant)
Date 2-12-98 /s/Charles E. Zeigler, Jr.
Charles E. Zeigler, Jr.
Chairman, President and
Chief Executive Officer
Date 2-12-98 /s/Jack G. Mason
Jack G. Mason
Vice President - Treasurer
and Chief Financial Officer
17
<PAGE>
EXHIBIT 10-D-7
Amended
Operating Agreement
of
Cardinal Extension Company, LLC
Dated December 19, 1996
<PAGE>
Amended
Operating Agreement
of
Cardinal Extension Company, LLC
Table of Contents
1 Definitions and Construction...............................................1
1.1 Definitions........................................................1
1.1.1 Act.........................................................1
1.1.2 Additional Necessary Regulatory Approvals...................1
1.1.3 Affiliate...................................................1
1.1.4 AFUDC.......................................................1
1.1.5 Articles of Organization....................................1
1.1.6 Authorizations..............................................1
1.1.7 Bankrupt Member.............................................2
1.1.8 Business Day................................................2
1.1.9 Capital Account.............................................2
1.1.10 Capital Contribution.....................................2
1.1.11 Certificate..............................................2
1.1.12 Certified Public Accountants.............................2
1.1.13 Code.....................................................2
1.1.14 Commitment...............................................2
1.1.15 Commitment Date..........................................2
1.1.16 Company..................................................2
1.1.17 CO&M Agreement...........................................2
1.1.18 Cost of the Facilities...................................2
1.1.19 Cost of the Modification.................................3
1.1.20 Customer.................................................3
1.1.21 Default Interest Rate....................................3
1.1.22 Dispose, Disposing or Disposition........................3
1.1.23 Effective Time...........................................3
1.1.24 Estimated Cost of the Facilities.........................3
1.1.25 Estimated Cost of the Modification.......................3
1.1.26 Existing Cardinal Pipeline...............................3
1.1.27 Facilities...............................................4
1.1.28 Financing Commitment.....................................4
1.1.29 Financing Corporation....................................4
1.1.30 Formation Date...........................................4
1.1.31 General Interest Rate....................................4
1.1.32 Governmental Authority...................................4
1.1.33 Member...................................................5
1.1.34 Membership Interest......................................5
1.1.35 Merger...................................................5
1.1.36 Merger Agreement.........................................5
1.1.37 Modification.............................................5
1.1.38 Necessary Regulatory Approvals...........................5
1.1.39 NCNG Energy Corporation..................................5
1.1.40 NCUC.....................................................5
1.1.41 NCUC Application.........................................5
1.1.42 Operator ...............................................6
1.1.43 Parent...................................................6
1.1.44 Person...................................................6
1.1.45 Piedmont Intrastate Pipeline Company ..................6
<PAGE>
1.1.46 Pre-Formation Date Expenditures .........................6
1.1.47 Proceeding...............................................6
1.1.48 PSNC Cardinal Pipeline Company...........................6
1.1.49 PUHCA....................................................6
1.1.50 Representative .........................................7
1.1.51 Rule 16. ................................................7
1.1.52 Service Agreements.......................................7
1.1.53 Sharing Ratio............................................7
1.1.54 Supermajority Vote ......................................7
1.1.55 TransCardinal Company....................................7
1.1.56 Transferring Member......................................7
1.2 Construction.......................................................7
2 Formation and Purpose of the Company.......................................7
2.1 Formation..........................................................7
2.2 Name...............................................................7
2.3 Registered Office, Registered Agent................................7
2.4 Offices............................................................8
2.5 Purposes...........................................................8
2.6 Foreign Qualification..............................................8
2.7 Term...............................................................8
2.8 No State-Law Partnership...........................................8
3 Membership; Disposition of Interests.......................................8
3.1 Initial Members....................................................8
3.2 Restrictions on the Disposition of an Interest.....................9
3.3 Additional Members................................................14
3.4 Interests in a Member.............................................15
4 Representations, Warranties and Covenants; Information....................15
4.1 Commitment to Acquire the Existing Cardinal Pipeline
and to Construct the Facilities...................................15
4.2 Development of a Modification.....................................17
4.3 Commitment to Construct a Modification............................18
4.4 General Representations and Warranties............................19
4.5 Representations, Warranties and Covenant Concerning
PUHCA.............................................................20
4.6 Governmental Applications.........................................21
4.7 Information.......................................................21
4.8 Liability to Third Parties........................................22
4.9 Withdrawal........................................................22
4.10 Lack of Authority.................................................22
5 Capital Contributions.....................................................22
5.1 Pre-Formation Date Expenditures...................................22
5.2 Capital Contributions Relating to the Existing
Cardinal Pipeline.................................................23
5.3 Requests for Capital Contributions................................23
5.4 Loans.............................................................25
5.5 Equalization of Capital Accounts and Membership
Interests.........................................................26
5.6 Voluntary Contributions...........................................26
5.7 Return of Contributions...........................................26
5.8 Capital Accounts..................................................27
<PAGE>
6 ALLOCATIONS AND DISTRIBUTIONS.............................................28
6.1 Allocations.......................................................28
6.2 Distributions.....................................................28
7 MANAGEMENT................................................................29
7.1 Management by Members through Representatives.....................29
7.2 Actions by Members; Representatives; Committees;
Delegation of Authority and Duties................................33
7.3 Number and Term of Office.........................................33
7.4 Vacancies; Removal; Resignation...................................34
7.5 Chairman and Secretary............................................34
7.6 Meetings..........................................................34
7.7 Action by Written Consent or Telephone Conference.................35
7.8 Conflicts of Interest.............................................36
8 ACTION OF MEMBERS.........................................................36
8.1 Action of Members.................................................36
9 OPERATION OF THE FACILITIES...............................................36
9.1 Operator..........................................................36
10 INDEMNIFICATION..........................................................37
10.1 Right to Indemnification..........................................37
10.2 Advance Payment...................................................37
10.3 Indemnification of Agents.........................................38
10.4 Appearance as a Witness...........................................38
10.5 Nonexclusivity of Rights..........................................38
10.6 Insurance.........................................................39
10.7 Member Notification...............................................39
10.8 Savings Clause....................................................39
11 TAXES....................................................................40
11.1 Tax Returns.......................................................40
11.2 Tax Elections.....................................................40
11.3 "Tax Matters Partner".............................................40
12 BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS...............................41
12.1 Maintenance of Books..............................................41
12.2 Reports...........................................................41
12.3 Accounts..........................................................43
13 INSPECTION...............................................................43
13.1 Inspection of Facilities and Records..............................43
14 BANKRUPTCY OF A MEMBER...................................................43
14.1 Bankruptcy Members................................................43
15 DISSOLUTION, LIQUIDATION, AND TERMINATION................................44
15.1 Dissolution.......................................................44
15.2 Liquidation and Termination.......................................44
15.3 Deficit Capital Accounts..........................................45
15.4 Articles of Dissolution...........................................46
16 GENERAL PROVISIONS.......................................................46
16.1 Offset............................................................46
<PAGE>
16.2 Notices...........................................................46
16.3 Entire Agreement; Supersedure.....................................46
16.4 Effect of Waiver or Consent.......................................47
16.5 Amendment or Modification.........................................47
16.6 Binding Effect....................................................47
16.7 Governing Law; Severability.......................................47
16.8 Further Assurances................................................47
16.9 Indemnification...................................................48
16.10 Notice to Members of Provisions of this Agreement.................48
16.11 Counterparts......................................................48
<PAGE>
Amended
Operating Agreement
of
Cardinal Extension Company, LLC
This Operating Agreement of Cardinal Extension Company, LLC, a Limited
Liability Company under the laws of the State of North Carolina (the "Company"),
is executed and agreed to by the Members (as defined below) as of the 19th day
of December, 1996.
1 Definitions and Construction. The terms defined in this Section 1 shall, for
all purposes of this Agreement, have the meanings set forth below:
1.1 Definitions.
1.1.1 Act. The North Carolina Limited Liability Company
Act as set forth in Chapter 57C of the North
Carolina General Statutes.
1.1.2 Additional Necessary Regulatory Approvals. All
Authorizations as may be required (but excluding
Authorizations of a nature not customarily
obtained prior to commencement of construction of
facilities of the nature of the Modification in
question) in connection with (a) the ownership,
construction and operation of a Modification and
(b) the transportation of the natural gas in
connection with such Modification.
1.1.3 Affiliate. Any Person that, directly or
indirectly through one or more intermediaries,
controls or is controlled by or is under common
control with any other Person in question,
including, but not limited to: a Parent of a
Member; a corporation 100% of the outstanding
voting stock of which is owned by a Member or a
Parent of a Member; or a corporation 100% of the
outstanding voting stock of which is owned by a
corporation 100% of the outstanding voting stock
of which is owned by a Member or a Parent of a
Member.
1.1.4 AFUDC. Allowance for funds used during
construction.
1.1.5 Articles of Organization. The Articles of Organization of the
Company filed with the Secretary of State of North Carolina
under and pursuant to the Act on December 6, 1995.
1.1.6 Authorizations. Licenses, certificates, permits,
orders, approvals, determinations and
authorizations from Governmental Authorities
having jurisdiction.
1
<PAGE>
1.1.7 Bankrupt Member. A member who shall take or be
subject to any of the actions described in Section
57C-3-02(3)a through f of the Act.
1.1.8 Business Day. A day on which commercial banks are
open for the transaction of business in New York,
New York.
1.1.9 Capital Account. See Section 5.8.
1.1.10 Capital Contribution. Any contribution by a
Member to the capital of the Company.
1.1.11 Certificate. The certificate(s) of public
convenience and necessity issued by the NCUC
pursuant to the NCUC Application.
1.1.12 Certified Public Accountants. The firm(s) of
nationally recognized independent public
accountants selected from time to time by the
Operator.
1.1.13 Code. The Internal Revenue Code of 1986, as
amended, or any successor or replacement statute.
1.1.14 Commitment. In the case of a Member executing
this Agreement as of the date of this Agreement or
a person acquiring that Membership Interest, the
amount specified for that Member as its Commitment
on Appendix A. In the case of a Membership
Interest issued pursuant to Section 3.3, the
Commitment established pursuant thereto in each
case, subject to adjustments on account of
Dispositions of Membership Interests permitted by
this Agreement.
1.1.15 Commitment Date. The date of the vote of the
Representatives committing the Company to the
construction of the Facilities pursuant to Section
4.1.
1.1.16 Company. Cardinal Extension Company, LLC, a
Limited Liability Company under the laws of the
State of North Carolina.
1.1.17 CO&M Agreement. The Construction, Operating and
Maintenance Agreement provided for in Section 9.1.
1.1.18 Cost of the Facilities. All costs and expenses,
including without limitation AFUDC and
Pre-Formation Date Expenditures, borne by the
Operator or the Company for the acquisition,
planning, design, engineering, financing,
administration, construction and start-up of the
2
<PAGE>
Facilities, and securing all Authorizations required
therefor.
1.1.19 Cost of the Modification. All costs and expenses, including
without limitation AFUDC, borne by the Operator or the
Company for the acquisition, planning, design, engineering,
financing, administration construction and start-up of a
Modification, and securing all Authorizations required
therefor.
1.1.20 Customer. A Person who, with the approval of the
Representatives, has entered into a Service Agreement with
the Company (or, where applicable, a precedent agreement
relating thereto) for the receipt, transportation and
delivery of natural gas by means of the Facilities.
1.1.21 Default Interest Rate. A rate per annum equal to the lesser
of (a) two percent (2%) per annum over the prime rate of
Citibank, N.A. (or its successor) from time to time publicly
announced and in effect, or (b) the maximum interest rate
allowed for this purpose pursuant to the laws of the State
of North Carolina.
1.1.22 Dispose, Disposing or Disposition. A sale, assignment,
transfer, exchange, mortgage, pledge, grant of a security
interest, or other disposition or encumbrance (including,
without limitation, by operation of law), or the acts
thereof.
1.1.23 Effective Time. The time at which the Merger
shall become effective.
1.1.24 Estimated Cost of the Facilities. The estimated
total Cost of the Facilities as determined by the
Operator from time to time.
1.1.25 Estimated Cost of the Modification. The estimated
total Cost of the Modification as determined by
the Operator from time to time.
1.1.26 Existing Cardinal Pipeline. The existing twenty-
four inch (24") diameter pipeline, which extends
approximately thirty-seven (37) miles from
Transcontinental Gas Pipe Line Corporation's
Compressor Station No. 160 to Burlington, North
Carolina, and which is jointly owned by Public
Service Company of North Carolina, Inc. and
Piedmont Intrastate Pipeline Company. The
Existing Cardinal Pipeline has firm transportation
rights of 130,000 Mcf/d (60,000 Mcf/d of which are
held by Piedmont Natural Gas Company, Inc. and
3
<PAGE>
70,000 Mcf/d of which are held by Public Service Company of
North Carolina, Inc.)
1.1.27 Facilities. The real, personal, mixed and
contractual property (whether tangible or
intangible) to be owned, operated, constructed and
maintained by the Company for the receipt,
transportation and delivery of natural gas, all as
more fully described in Appendix B, with such
changes in size, design and location as may be
approved by the Representatives (including, but
not limited to, a Modification approved by the
Representatives pursuant to Section 4.2). After
the Effective Time of the Merger, the Facilities
will also include the Existing Cardinal Pipeline.
1.1.28 Financing Commitment. Definitive agreements
between one or more financial institutions or
other Persons and the Company or the Financing
Corporation pursuant to which such financial
institutions or other Persons agree, subject to
the conditions set forth therein, to lend money
to, or purchase securities of, the Company or the
Financing Corporation, the proceeds of which shall
be used to finance all or a portion of the
Facilities.
1.1.29 Financing Corporation. A corporation or trust wholly owned
by the Company that may be organized for the purpose of
issuing securities, the proceeds from which are to be
advanced directly or indirectly to the Company to finance
all or a portion of the Facilities.
1.1.30 Formation Date. The date on which the Articles of
Organization were filed with the Secretary of
State of North Carolina.
1.1.31 General Interest Rate. A rate per annum equal to
the lesser of (a) the prime rate of Citibank, N.A.
(or its successor) from time to time publicly
announced and in effect, or (b) the maximum
interest rate allowed for this purpose pursuant to
the laws of the State of North Carolina.
1.1.32 Governmental Authority. Any court, agency,
authority, board, bureau, commission, department,
office or instrumentality of any nature whatsoever
of any governmental or quasi-governmental unit,
whether federal, state, parish, county, district,
municipality, city, political subdivision or
otherwise, domestic or foreign whether now or
hereafter in existence.
4
<PAGE>
1.1.33 Member. Any Person executing this Agreement as of the date
of this Agreement or who is hereafter admitted to the
Company as a member as provided in this Agreement, but does
not include any Person who has ceased to be a member of the
Company.
1.1.34 Membership Interest. All of a Member's rights in the
Company, including, without limitation, the Member's share
of profits and losses of the Company, the right to receive
distributions of the Company's assets, any right to vote,
and any right to participate in the management of the
Company.
1.1.35 Merger. The transaction to be effected under the Merger
Agreement by which Cardinal Pipeline Company, LLC will be
merged into the Company, the Company will be the surviving
entity, and the name of the surviving entity will be changed
to Cardinal Pipeline Company, LLC.
1.1.36 Merger Agreement. The Agreement of Merger to be
entered into by the Company and Cardinal Pipeline
Company, LLC by which the Company will acquire the
Existing Cardinal Pipeline.
1.1.37 Modification. Any facilities installed (a) to
modify, improve, expand or increase the capacity
or scope of the Existing Cardinal Pipeline, the
Facilities or any portion thereof after the
Commitment Date (except in connection with
customary maintenance) or (b) to provide a new
point of delivery or receipt of natural gas for
the Existing Cardinal Pipeline or the Facilities
after the Commitment Date.
1.1.38 Necessary Regulatory Approvals. All
Authorizations as may be required (but excluding
Authorizations of a nature not customarily
obtained prior to commencement of construction of
facilities such as the Facilities) in connection
with (a) the acquisition, ownership and operation
of the Existing Cardinal Pipeline by the Company,
(b) the construction and operation of the
Facilities (not including any Modifications), and
(c) the receipt, transportation and delivery of
natural gas under the Service Agreements.
1.1.39 NCNG Energy Corporation. See Section 3.1.
1.1.40 NCUC. The North Carolina Utilities Commission or
any other governmental body succeeding to the
powers of such Commission.
1.1.41 NCUC Application. The documents pursuant to which
an application will be filed with the NCUC for
5
<PAGE>
authority (a) to consummate the merger of Cardinal Pipeline
Company, LLC with and into the Company pursuant to the
Merger Agreement, (b) to transfer the Existing Cardinal
Pipeline to the Company, (c) for the Company to acquire, own
and operate the Existing Cardinal Pipeline and to construct,
own and operate the Facilities, (d) to receive, transport
and deliver natural gas by means of the Existing Cardinal
Pipeline and the Facilities (not including any
modifications), and (e) to establish initial rates for the
Company's services.
1.1.42 Operator. Cardinal Operating Company, its
successors and assigns, pursuant to the CO&M
Agreement.
1.1.43 Parent. Any Person who directly or indirectly
owns more than 50% of the outstanding voting stock
of a Member.
1.1.44 Person. An individual, a trust, an estate, a domestic
corporation, a foreign corporation, a professional
corporation, a partnership, a limited partnership, a limited
liability partnership, a limited liability company, a
foreign limited liability company, an unincorporated
association, or another entity.
1.1.45 Piedmont Intrastate Pipeline Company. See Section
3.1.
1.1.46 Pre-Formation Date Expenditures. Expenditures
made by any Member or any of its Affiliates prior
to the Formation Date, if approved by the
Representatives pursuant to Section 5 if required
to be so approved, including, but not limited to,
expenditures made in the course of activities
reasonably related to preparing this Agreement and
the CO&M Agreement, creating the Company,
preparing the Merger Agreement, planning and
designing the Facilities, acquiring rights of way,
preparing the NCUC Application and obtaining the
Necessary Regulatory Approvals.
1.1.47 Proceeding. See Section 10.1.
1.1.48 PSNC Cardinal Pipeline Company See Section 3.1.
1.1.49 PUHCA. The Public Utility Holding Company Act of
1935, as amended (or any successor statute
thereto).
6
<PAGE>
1.1.50 Representative. The Person designated by a Member
to represent that Member in accordance with the
terms of this Agreement.
1.1.51 Rule 16. 17 C.F.R. ss. 250.16 or any successor
provision thereto.
1.1.52 Service Agreements. The agreement(s) by and
between the Company and the Customers for the
receipt, transportation and delivery of natural
gas by means of the Facilities.
1.1.53 Sharing Ratio. With respect to any Member, the
fraction (expressed as a percentage), the
numerator of which is that Member's Commitment and
the denominator of which is the sum of the
Commitments of all Members.
1.1.54 Supermajority Vote. A vote of Members
representing not less than 75% of the Sharing
Ratios of all Members.
1.1.55 TransCardinal Company. See Section 3.1.
1.1.56 Transferring Member. See Section 3.2.2.
1.2 Construction. Whenever the context requires, the
gender of all words used in this Agreement includes
the masculine, feminine and neuter. All references to
Sections refer to sections of this Agreement (unless
the context clearly indicates otherwise), and all
references to Appendices are to Appendices attached to
this Agreement, each of which is made a part hereof
for all purposes.
2 Formation and Purpose of the Company.
2.1 Formation. The Company has been organized as a North Carolina limited
liability company by the filing of the Articles of Organization under
and pursuant to the Act with the Secretary of State of North Carolina.
2.2 Name. The name of the Company is "Cardinal Extension
Company, LLC." The name of the Company will change to
"Cardinal Pipeline Company, LLC" upon the Effective
Time of the Merger.
2.3 Registered Office, Registered Agent. The location of
the registered office of the Company shall be in
Gaston County, North Carolina; the street address of
the registered office of the Company shall be 400 Cox
Road, Gastonia, North Carolina 28054; the mailing
address of the registered office shall be P.O. Box
1398, Gastonia, North Carolina 28053; and the
registered agent shall be J. Paul Douglas or such
7
<PAGE>
other Person or Persons as the Representatives may designate from time
to time in the manner provided by law and as set forth in an addendum
to this Agreement.
2.4 Offices. The principal offices of the Company shall be at such place
as the Members may from time to time determine. Notice of any change
in such offices shall be given to each Member by the Representatives.
The Company may have such other offices as the Members may designate
from time to time.
2.5 Purposes. The purposes of the Company shall be to
acquire the Existing Cardinal Pipeline, to plan,
design, develop, and construct the Facilities, to own
and provide for the operation and maintenance of the
Existing Cardinal Pipeline and the Facilities, and to
conduct such business activities that are necessary or
incidental in connection therewith.
2.6 Foreign Qualification. Prior to the Company
conducting business in any jurisdiction other than
North Carolina, the Members shall cause the Company to
comply, to the extent procedures are available and
those matters are reasonably within the control of the
Members, with all requirements necessary to qualify
the Company as a foreign limited liability company in
that jurisdiction. Each Member shall execute,
acknowledge, swear to, and deliver all certificates
and other instruments conforming with this Agreement
that are necessary or appropriate to qualify,
continue, and terminate the Company as a foreign
limited liability company in all such jurisdictions.
2.7 Term. The Company commenced on the date of the filing
of the Articles of Organization with the Secretary of
State of North Carolina and shall continue in
existence until the latest date on which the Company
is to dissolve as provided in the Articles of
Organization or until such earlier date as the Company
may be dissolved as provided in this Agreement.
2.8 No State-Law Partnership. The Members intend that the
Company not be a partnership (including, without
limitation, a limited partnership) or joint venture,
and that no Member or Representative be a partner or
joint venturer of any other Member or Representative
as a result of this Agreement, for any purposes other
than federal and state tax purposes, and this
Agreement may not be construed to suggest otherwise.
3 Membership; Disposition of Interests.
3.1 Initial Members. The initial Members of the Company
are the following:
8
<PAGE>
(a) TransCardinal Company ("TransCardinal"), a
corporation organized under the laws of the State of
Delaware, with its principal office and address at
P. O. Box 1396, Houston, Texas 77251-1396 (2800 Post
Oak Boulevard, Houston, Texas 77056).
(b) PSNC Cardinal Pipeline Company ("PSNC Cardinal"), a
corporation organized under the laws of the State of
North Carolina, with its principal office and
address at P. O. Box 1398, Gastonia, North Carolina
28053 (400 Cox Road, Gastonia, North Carolina
28054).
(c) Piedmont Intrastate Pipeline Company ("Piedmont
Intrastate"), a corporation organized under the laws
of the State of North Carolina, with its principal
office and address at P. O. Box 33068, Charlotte,
North Carolina 28233 (1915 Rexford Road, Charlotte,
North Carolina 28211).
(d) NCNG Energy Corporation ("NCNG Energy"), a
corporation organized under the laws of the State of
North Carolina, with its principal office and
address at P. O. Box 909, Fayetteville, North
Carolina 28302 (150 Rowan Street, Fayetteville,
North Carolina 28301).
3.2 Restrictions on the Disposition of an Interest.
3.2.1 Except as specifically provided in Section 3.2 of
this Agreement, a Disposition of an interest in
the Company may not be effected without the
consent of Members holding at least 75% of the
Sharing Ratios of all Members. Any attempted
Disposition by a Person of an interest or right,
or a part thereof, in or in respect of the Company
other than in accordance with Section 3.2 of this
Agreement shall be null and void ab initio.
3.2.2 If any Member ("Transferring Member") wishes to transfer any of
its Membership Interest, the following procedures shall apply:
3.2.2.1 Without the unanimous consent of all other
Members, a Transferring Member may not transfer
less than all of its Membership Interest.
3.2.2.2 After receiving a bona fide offer from a Person
to purchase its Membership Interest, the
Transferring Member shall give written notice
to the Chairman and to all other Members of the
terms of the offer and of its intent to accept
the offer unless the Membership Interest is
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purchased by one or more of the other Members
pursuant to the rights of first refusal
provided in this Section 3.2.2 Upon receipt of
such written notice, the Chairman shall call a
meeting of Members for a date that is not less
than 30 days nor more than 45 days from the
date of the receipt of such written notice. Any
Member wishing to exercise its rights of first
refusal must announce its intent to do so at
the meeting.
3.2.2.3 Any purchase of all or any part of a
Membership Interest pursuant to this
Section 3.2.2 shall be on the same terms
and conditions as the bona fide offer
(except the purchase price shall be the
lesser of that amount set forth in the
bona fide offer or the balance in
Transferring Member's Capital Account on
the date of the proposed transfer).
3.2.2.4 If TransCardinal is the Transferring
Member, PSNC Cardinal shall have the
right to purchase all or any part of
TransCardinal's Membership Interest. If
PSNC Cardinal does not announce its
intent to exercise its right of first
refusal, or if PSNC Cardinal announces
its desire to purchase less than the
total amount of TransCardinal's
Membership Interest, each other Member
shall have the right to purchase all or
any part of TransCardinal's Membership
Interest not purchased by PSNC Cardinal.
If more than one Member desires to
purchase all or any portion of
TransCardinal's Membership Interest that
is not to be purchased by PSNC Cardinal,
the Membership Interests to be purchased
by such Members shall be allocated on a
pro rata basis based upon their
respective Sharing Ratios, unless another
allocation is unanimously agreed to by
such Members. If the Members do not
agree to purchase 100% of TransCardinal's
Membership Interest, TransCardinal shall
be free to complete the transfer to the
Person making the bona fide offer. If
the transfer to the Person making the
bona fide offer is not consummated within
90 days after the date of the meeting,
TransCardinal may not transfer its
interest without again complying with
this Section 3.2.2.
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3.2.2.5 If PSNC Cardinal is the Transferring
Member, TransCardinal shall have the
right to purchase all or any part of PSNC
Cardinal's Membership Interest. If
TransCardinal does not announce its
intent to exercise its right of first
refusal, or if TransCardinal announces
its desire to purchase less than the
total amount of PSNC Cardinal's
Membership Interest, each other Member
shall have the right to purchase all or
any part of PSNC Cardinal's Membership
Interest not purchased by TransCardinal.
If more than one Member desires to
purchase all or any portion of PSNC
Cardinal's Membership Interest that is
not to be purchased by TransCardinal, the
Membership Interests to be purchased by
such Members shall be allocated on a pro
rata basis based upon their respective
Sharing Ratios, unless another allocation
is unanimously agreed to by such Members.
If the Members do not agree to purchase
100% of PSNC Cardinal's Membership
Interest, PSNC Cardinal shall be free to
complete the transfer to the Person
making the bona fide offer. If the
transfer to the Person making the bona
fide offer is not consummated within 90
days after the date of the meeting, PSNC
Cardinal may not transfer its interest
without again complying with this Section
3.2.2.
3.2.2.6 If a Member other than TransCardinal or
PSNC Cardinal is the Transferring Member,
TransCardinal and PSNC Cardinal shall
have the right to purchase all or any
part of Transferring Member's Membership
Interest. If both TransCardinal and PSNC
Cardinal announce their intent to
exercise their rights of first refusal,
the Membership Interest shall be
allocated to TransCardinal and PSNC
Cardinal on pro rata basis based on their
respective Sharing Ratios, unless another
allocation is agreed to by TransCardinal
and PSNC Cardinal. If neither
TransCardinal nor PSNC Cardinal announces
its desire to purchase the Membership
Interest or if TransCardinal and PSNC
Cardinal announce their desire to
purchase less than 100% of the Membership
Interest, each Member other than the
Transferring Member, TransCardinal and
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PSNC Cardinal shall have the right to purchase
all or any part of the Membership Interest not
purchased by TransCardinal or PSNC Cardinal. If
more than one Member desires to purchase all or
any portion of the Membership Interest that is
not to be purchased by TransCardinal or PSNC
Cardinal, the Membership Interest to be
purchased by such Members shall be allocated on
a pro rata basis based upon their respective
Sharing Ratios, unless another allocation is
unanimously agreed to by such Members. If the
Members do not agree to purchase 100% of
Transferring Member's Membership Interest, the
Transferring Member shall be free to complete
the transfer to the Person making the bona fide
offer. If the transfer to the Person making the
bona fide offer is not consummated within 90
days after the date of the meeting, the
Transferring Member may not transfer its
interest without again complying with this
Section 3.2.2.
3.2.3 If a Member shall cease to be controlled directly
or indirectly by the same Persons who controlled
it as of the date of that Member's admission to
the Company, the Member shall provide written
notice thereof to the other Members. On or before
30 days after such notice is received by the other
Members, such other Members shall have the option
to buy that Member's Membership Interest at a
purchase price equal to the balance in that
Member's Capital Account on the date the option is
exercised. If more than one of such other Members
wishes to exercise such option, they shall
exercise such option on the same date and share in
such purchase on a pro rata basis based on their
respective Sharing Ratios. This paragraph shall
not apply to a change in control that results from
the merger or consolidation of the corporation
which directly or indirectly controls a Member
("Parent Corporation") with another corporation or
the sale of all or substantially all of the assets
of a Member's Parent Corporation if, in each such
case, (a) the Parent Corporation shall not have
been formed for the principal purpose of directly
controlling the Member, and (b) either (i) such
Parent Corporation shall be the continuing
corporation and shall continue to directly or
indirectly control the Member, or (ii) the
successor corporation (if other than the Parent
Corporation of the Member) shall be a corporation
organized and existing under the laws of the
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United States of America or a state thereof or the District of
Columbia and such successor corporation shall continue to be in
substantially the same business as the Parent Corporation. This
Section 3.2.3 is intended to prohibit any kind of financing or
corporate structure techniques designed to avoid the reach of
the right of first refusal provisions of Section 3.2 of this
Agreement.
3.2.4 Subject to the provisions of Sections 3.2.5, 3.2.6
and 3.2.7, a Person (who is not already a Member)
to whom a Membership Interest is proposed to be
transferred has the right to be admitted to the
Company as a Member only with the consent of
Members holding at least 75% of the Sharing Ratios
of all Members. Any consent given pursuant to
Section 3.2.1 shall be deemed a consent only to
the transfer of the rights to allocations and
distributions to which the transferring Person
would be entitled but for the Disposition, unless
such consent expressly consents to the admission
of the transferee as a Member.
3.2.5 The Company may not recognize for any purpose any
purported Disposition of all or part of a
Membership Interest unless and until the other
applicable provisions of Section 3.2 of this
Agreement have been satisfied and the Members have
received, on behalf of the Company, a document (i)
executed by both the Member effecting the
Disposition and the Person to whom the Membership
Interest or part thereof is Disposed, (ii)
including the notice address of any Person to be
admitted to the Company as a Member and its agree
ment to be bound by this Agreement in respect of
the Membership Interest or part thereof being
obtained, (iii) setting forth the Sharing Ratios
and the Commitments after the Disposition of the
Member effecting the Disposition and the Person to
whom the Membership Interest or part thereof is
Disposed (which together must total the Sharing
Ratio and the Commitment of the Member effecting
the Disposition before the Disposition), and (iv)
containing a representation and warranty that the
Disposition was made in accordance with all
applicable laws and regulations (including
securities laws) and, if the Person to whom the
Membership Interest or part thereof is Disposed is
to be admitted as a Member, its representation and
warranty that the representations and warranties
in Sections 4.4, 4.5 and 4.6 are true and correct
with respect to that Person. Each Disposition
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and, if applicable, admission complying with the provisions of
this Section 3.2.5 is effective as of the first day of the
calendar month immediately succeeding the month in which the
Representatives receive the notification of Disposition and the
other requirements of Section 3.2 of this Agreement have been
met.
3.2.6 For the right of a Member to Dispose of a
Membership Interest or any part thereof or of any
Person to be admitted to the Company in connection
therewith to exist or be exercised, (i) either (A)
the Membership Interest or part thereof subject to
the Disposition or admission must be registered
under the Securities Act of 1933, as amended, and
any applicable state securities laws or (B) the
Company must receive a favorable opinion of the
Company's legal counsel or of other legal counsel
acceptable to the Members to the effect that the
Disposition or admission is exempt from
registration under those laws and (ii) the Company
must receive a favorable opinion of the Company's
legal counsel or of other legal counsel acceptable
to the Members to the effect that the Disposition
or admission, when added to the total of all other
sales, assignments, or other Dispositions within
the preceding 12 months, would not result in the
Company being considered to have terminated within
the meaning of the Code. The Members, however,
may waive the requirements of this Section 3.2.6.
3.2.7 The Member effecting a Disposition and any Person
admitted to the Company in connection therewith
shall pay, or reimburse the Company for, all costs
incurred by the Company in connection with the
Disposition or admission (including, without
limitation, the legal fees incurred in connection
with the legal opinions referred to in Section
3.2.6) on or before the 30th day after the receipt
by that Person of the Company's invoice for the
amount due. If payment is not made by the date
due, the Person owing that amount shall pay
interest on the unpaid amount from the date due
until paid at a rate per annum equal to the
Default Interest Rate.
3.3 Additional Members. Additional Persons may be
admitted to the Company as Members and Membership
Interests may be created and issued to those Persons
and to existing Members only upon a Supermajority
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Vote. The terms of admission or issuance must specify the Sharing
Ratios and the Commitments applicable thereto and may provide for
the creation of different classes or groups of Members and having
different rights, powers and duties. The Members shall reflect the
creation of any new class or group in an amendment to this
Agreement indicating the different rights, powers, and duties. Any
such admission also must comply with the provisions of Sections
3.2.5(i) and (ii) and is effective only after the new Member has
executed and delivered to the other Members a document including
the new Member's notice address, its agreement to be bound by this
Agreement and its representation and warranty that the
representation and warranties in Sections 4.4, 4.5 and 4.6 are
true and correct with respect to the new Member. The provisions of
this Section 3.3 shall not apply to Dispositions of Membership
Interests.
3.4 Interests in a Member. A Member may not cause or permit an interest
direct or indirect, in itself to be Disposed of such that, after the
Disposition, the Company would be considered to have terminated within
the meaning of section 708 of the Code.
4 Representations, Warranties and Covenants; Information.
4.1 Commitment to Acquire the Existing Cardinal Pipeline
and to Construct the Facilities.
4.1.1 The Members agree to cause the Company to enter into the Merger
Agreement and to use their best efforts to consummate the
Merger.
4.1.2 The Members agree to cause the Company to file the NCUC
Application and the Members agree to support the NCUC
Application.
4.1.3 The Members agree to use their best efforts to
obtain an order from the NCUC granting the
authorizations needed to permit the Company to
carry out the purposes of the Company as described
in Section 2.5 of this Agreement and to construct,
own and operate the Facilities. Within 15 days
after the NCUC issues its order ruling on the NCUC
Application, the Members will meet to discuss and
vote on whether the Company should accept the
order, seek rehearing of the order, appeal the
order, reject the order or take some other course
of action. If the Members do not vote to accept
the order, the Members agree to exhaust all legal
remedies reasonably available to obtain an
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acceptable order, including, but not limited to, seeking
rehearing and judicial review of an unacceptable order. If the
order is modified on rehearing, appeal or otherwise, the
Members shall again meet within 15 days of the date of the
order providing for such modification to vote on whether to
accept the order, seek further rehearing of the order, appeal
the order, reject the order or take some other course of
action. In order may be accepted only upon the unanimous vote
of the Members; however, each Member agrees to vote to accept
the order unless a condition of the order is materially
different from the order requested and is unacceptable in the
Member's reasonable judgment.
4.1.4 Subject to Section 5.1 below, except upon the
approval by a Supermajority Vote, the Company
shall not incur any material costs or obligations
with respect to the Existing Cardinal Pipeline or
the Facilities or become obligated under the
Financing Commitment relating to the Existing
Cardinal Pipeline or the Facilities until (a) the
Necessary Regulatory Approvals have been obtained
and accepted, (b) the Financing Commitment has
been negotiated and is ready for acceptance by the
Company (with the Members to decide whether such
Financing Commitment utilizes a Financing
Corporation), (c) the Service Agreements have been
executed by the Company and the Customers, (d) the
Estimated Cost of the Facilities has been
determined, and (e) the Members have approved the
commitment to construct the Facilities as provided
in Section 4.1.5.
4.1.5 Immediately following the last to occur of the
events referred to in Section 4.1.4(a), (b) and
(d) and the satisfaction or waiver by the
applicable Customers of all conditions set forth
in the precedent agreements entered into by each
of the Customers for execution of the Service
Agreements (other than the vote of the Members to
commit to acquire the Existing Cardinal Pipeline
and to construct the Facilities), the Members
shall vote on whether the Company shall be
committed to consummate the Merger and to
construct the Facilities (which commitment to
construct shall constitute an acceptance of the
Financing Commitment). If the Members agree by a
Supermajority Vote to acquire the Existing
Cardinal Pipeline and to construct the Facilities,
a Member who voted in the negative must sell his
Membership Interest to the Members who voted in
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the affirmative, and the Members who voted in the affirmative
must purchase such Membership Interest on a pro rata basis
based on the respective sharing ratios of the Members who voted
in the affirmative. If the selling Member is NCNG Energy, the
purchase price shall be the balance in NCNG Energy's Capital
Account on the date of the transfer, the transfer shall take
place on the first day of the second month following the date
of the vote and the purchase price shall be paid not less than
30 days after the date of transfer. If the selling Member is
Piedmont Intrastate, the purchase price shall be the balance in
Piedmont Intrastate's Capital Account on the date of transfer,
the transfer of Piedmont Intrastate's voting rights in the
Company shall take place immediately following the vote, the
transfer of Piedmont Intrastate's other Membership Interests
shall take place at the Time of Merger and the purchase price
shall be paid not less than 30 days after the Time of Merger.
In the event the Members do not agree by a Supermajority Vote
to acquire the Existing Cardinal Pipeline and to construct the
Facilities, the Company shall be dissolved.
4.1.6 After the Commitment Date, except with the
approval by a Supermajority Vote, the Company
shall not incur any material costs or obligations
with respect to the Facilities until all
conditions precedent to the obtaining by the
Company of funds pursuant to the Financing
Commitment relating to the Facilities have been
satisfied.
4.1.7 If at any time the Members by a Supermajority Vote
determine that it is not in the best interests of
the Company to proceed with the construction or
operation of the Facilities, the Company shall not
thereafter incur any additional material costs or
obligations with respect to the Facilities or
become obligated under the Financing Commitment
relating to the Facilities.
4.2 Development of a Modification.
4.2.1 Any Member who desires the Company to construct a Modification
shall notify the other Members and the Operator of the nature
of the proposed Modification, including such details as are
then available, and shall provide a detailed explanation of the
reasons why such Modification
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<PAGE>
is being requested. Promptly, but in no event later than one
hundred fifty (150) days from the date requested to do so by
majority consent of the Members, the Operator shall prepare and
provide to each Member a detailed description of the proposed
Modification and an estimate of the cost thereof, appropriate
rate information and the proposed financing therefor.
4.2.2 Within 60 days after the information described in
Section 4.2.1 has been received by each Member,
the Members shall vote on whether to proceed with
the development of such proposed Modification.
Upon the Unanimous Vote to proceed with the
development of such proposed Modification, the
Company shall proceed with such development,
including, but not limited to, the acquisition of
Additional Necessary Regulatory Approvals and the
Financing Commitment. A vote to proceed with the
development of a Modification shall be without
prejudice to the vote on whether the Company shall
be committed to construct such Modification under
Section 4.3.2.
4.3 Commitment to Construct a Modification.
4.3.1 Except upon the approval by a Supermajority Vote,
the Company shall not incur material costs or
obligations with respect to a Modification or be
obligated under any Financing Commitment relating
to a Modification until (a) the Additional
Necessary Regulatory Approvals have been obtained
and accepted, (b) such Financing Commitment, if
any, as may be required in the opinion of the
Members for such Modification has been negotiated
and is ready for acceptance by the Company (with
the Representatives to decide whether such
Financing Commitment utilizes a Financing
Corporation), (c) if applicable, the Service
Agreements for the use of the capacity of the
Modification have been executed by the Company and
by one or more Customers, (d) the Estimated Cost
of the Modification has been determined and (e)
the Representatives have approved a commitment to
construct such Modification as provided in Section
4.3.2.
4.3.2 Immediately following the last to occur of the events referred
to in Section 4.3.1(a), (b) and (d), and if the Modification
includes additional capacity, the satisfaction or waiver by the
applicable Customers of all conditions set forth
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in the precedent agreements for execution of the Service
Agreements by the Customers that will utilize the capacity to
be created by the Modification (other than the vote of the
Members to commit to construct the Modification), or at such
later time as agreed by the Members, the Members shall vote on
whether the Company shall be committed to construct the
Modification (which commitment to construct shall constitute an
acceptance of the Financing Commitment, if any). In the event
the Members do not agree by a Supermajority Vote to construct
the Modification, the Modification shall not be constructed.
4.3.3 After the Members vote to commit the Company to
construct a Modification, except with the approval
by a Supermajority Vote, the Company shall not
incur any material costs or obligations with
respect to such Modification until all conditions
precedent to the obtaining by the Company of funds
pursuant to a Financing Commitment (if any)
relating to such Modification have been satisfied.
4.3.4 Notwithstanding the provisions of Sections 4.3.1,
4.3.2 and 4.3.3, the Company agrees to grant the
right to Public Service Company of North Carolina,
Inc., Piedmont Natural Gas Company, Inc. and North
Carolina Natural Gas Corporation to direct tie-ins
between (a) their respective local distribution
companies and (b) the Existing Cardinal Pipeline
and/or the Facilities for the purpose of serving
their respective franchised areas. The terms and
conditions of such direct tie-ins (including
reimbursement requirements and/or the incremental
charges to be levied against the Customer
requesting such tie-ins and the construction,
operation and maintenance specifications for the
tie-ins) shall be set forth in an Interconnect and
Reimbursement Agreement to be executed by the
Company and approved by the Members, if required,
in accordance with this Agreement.
4.4 General Representations and Warranties. Each Member
hereby represents and warrants to the Company and to
each other Member (a) that it is duly organized,
validly existing, and in good standing under the law
of the state of its incorporation and is duly
qualified and in good standing as a foreign
corporation in the jurisdiction of its principal place
of business (if not incorporated therein); (b) that
the Member has full corporate power and authority to
execute and agree to this Agreement and to perform its
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obligations hereunder and that all necessary actions by the board of
directors, shareholders, or other Persons necessary for the due
authorization, execution, delivery and performance of this Agreement
have been duly taken; (c) that the Member has duly executed and
delivered this Agreement; and (d) that the Member's authorization,
execution, delivery and performance of this Agreement do not and will
not contravene or conflict with any provision of law applicable to
such Member or with any agreement or arrangement to which the Member
is a party or by which it is bound.
4.5 Representations, Warranties and Covenant Concerning
PUHCA.
4.5.1 Each Member represents and warrants that it is not
(i) a "holding company" or (ii) a "subsidiary
company" or "affiliate" of a "holding company,"
except for a "holding company" that is exempt from
all liabilities, obligations and duties imposed
upon it as a "holding company" by the provisions of
PUHCA and the rules and regulations promulgated
thereunder (other than Section 9(a)(2) of PUHCA);
in each case (and in each case within Sections
4.6.2 and 4.6.3) within the meaning of PUHCA and
the rules and regulations promulgated thereunder.
4.5.2 Except as provided in Section 4.6.3, no Member
shall make any transfer or take other action that
would cause the Company to be a "subsidiary
company" or an "affiliate" of a "holding company,"
except for a "holding company" that is exempt from
all liabilities, obligations and duties imposed
upon it as a "holding company" by the provisions of
PUHCA and the rules and regulations promulgated
thereunder (other than Section 9(a)(2) of PUHCA).
4.5.3 A Member may make a transfer or take other action otherwise
prohibited by Section 4.6.2, but only so long as all conditions
of Rule 16 are satisfied so that the Company shall be exempt
from all liabilities, obligations and duties imposed upon it as
an "affiliate" or "subsidiary company" of a "holding Company."
4.5.4 Each Member covenants that it will take all actions necessary
to assure that the Company will not be subject to regulation,
for any purpose, under PUHCA, or lose the benefits of the
exemption under Rule 16, as a result of such Member's ownership
of its respective Membership Interest.
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4.6 Governmental Applications. Each Member agrees to support the Company
and Cardinal Pipeline Company, LLC in securing the Necessary
Regulatory Approvals, including, without limitation, preparing, filing
and prosecuting the NCUC Application.
4.7 Information.
4.7.1 In addition to the other rights specifically set
forth in this Agreement, each Member is entitled
to all information to which that Member is
entitled to have access pursuant toss.57C-3-04 of
the Act under the circumstances and subject to the
conditions therein stated. The Members agree,
however, that the Representatives from time to
time may determine, due to contractual
obligations, business concerns, or other
considerations, that certain information regarding
the business, affairs, properties, and financial
condition of the Company should be kept
confidential.
4.7.2 Each Member acknowledges that, from time to time,
it may receive information for or regarding the
Company in the nature of trade secrets or that
otherwise is confidential, the release of which
may be damaging to the Company or Persons with
whom it does business. Each Member shall hold in
strict confidence any information it receives
regarding the Company that is identified as being
confidential (and if that information is provided
in writing, that is so marked) and may not
disclose it to any Person other than another
Member, except for disclosures (i) compelled by
law (but the Member must notify the other Members
promptly of any request for that information,
before disclosing it, if practicable), (ii) to
advisers or representatives of the Member or
Persons to which that Member's Membership Interest
may be Disposed as permitted by this Agreement,
but only if the recipients have agreed to be bound
by the provisions of this Section 4.7.2, or (iii)
of information that Member also has received from
a source independent of the Company that the
Member reasonably believes obtained that
information without breach of any obligation of
confidentiality. Each Member acknowledges that
breach of the provisions of this Section 4.7.2 may
cause irreparable injury to the Company for which
monetary damages are inadequate, difficult to
compute, or both. Accordingly, each Member agrees
that provisions of this Section 4.7.2 may be
enforced by specific performance.
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4.8 Liability to Third Parties. No Member or
Representative shall be liable for the debts,
obligations or liabilities of the Company by reason of
being a Member or Representative or both, and does not
become so liable by participating, in whatever
capacity, in the management or control of the business
of the Company.
4.9 Withdrawal. A Member does not have the right or power
to unilaterally withdraw from the Company.
4.10 Lack of Authority. Except as otherwise specifically provided
herein, no Member or Representative has the authority or power to
act for or on behalf of the Company, to do any act that would be
binding on the Company, or to incur any expenditures on behalf of
the Company.
5 Capital Contributions.
5.1 Pre-Formation Date Expenditures.
5.1.1 Set forth on Appendix C are the amounts of Pre-
Formation Date Expenditures that have been
incurred by each Member.
5.1.2 If any Member, or Affiliate thereof, has made
Pre-Formation Date Expenditures during the period
immediately preceding the Formation Date that are
not set forth in Appendix C, such Member shall
have the right to request approval thereof by
Supermajority Vote as soon as practicable after
the Formation Date (but not later than 90 days
after the Formation Date).
5.1.3 After all Pre-Formation Date Expenditures to be
considered under Section 5.1.2 have been approved
or disapproved by the Members, to the extent such
approval is required and prior to the Effective
Time, the applicable Members shall, upon request
of the Representatives pursuant to Section 5.3,
make cash Capital Contributions or advances to the
Company in the following manner: TransCardinal -
54%; PSNC Cardinal - 40%; and NCNG Energy - 6%.
Piedmont Intrastate shall not be required to make
cash Capital Contributions or advances to the
Company prior to the Effective Time. After the
Effective Time, each Member shall, upon the
request of the Representatives pursuant to Section
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5.3, make cash Capital Contributions or advances to the Company
on a pro rata basis in proportion to the Sharing Ratios as set
forth in Appendix A or as revised in accordance with Section
5.5.
5.1.4 The assets, if any, acquired by means of the Pre-Formation Date
Expenditures of the Members shall be and are hereby contributed
to the Company. All applicable Members agree to execute and
deliver any and all assignments and conveyances as may be
necessary or appropriate to evidence such contribution.
5.2 Capital Contributions Relating to the Existing
Cardinal Pipeline. Pursuant to the Merger Agreement,
Cardinal Pipeline Company, LLC shall be merged into
and with the Company. Upon the Effective Time of the
merger, PSNC Cardinal shall be deemed to have made a
capital contribution to the Company equal to the net
book value of Public Service Company of North
Carolina, Inc.'s membership interest in Cardinal
Pipeline Company, LLC at the Effective Time and
Piedmont Intrastate shall be deemed to have made a
capital contribution to the Company equal to the net
book value of its membership interest in Cardinal
Pipeline Company LLC at the Effective Time. The
Membership Interests of the Members shall be adjusted
at the Effective Time in accordance with Section 5.5
and PSNC Cardinal will receive a cash reimbursement in
order to maintain the Sharing Ratio set forth in
Appendix A hereto.
5.3 Requests for Capital Contributions.
5.3.1 Except as otherwise provided in Sections 5.1 or
5.2, the Members shall issue or cause to be issued
a written request to each applicable Member for
the making of Capital Contributions at such times
and in such amounts as the Members shall approve.
All amounts received by the Company pursuant to
this Section 5.3, whether received prior to, on or
after the date specified in Section 5.3.2(d),
shall be credited to the respective Member's
Capital Account as of such specified date (and the
Pre-Formation Date Expenditures approved pursuant
to Section 5.1.2 shall be so credited as of the
date specified in Section 5.3.2(d)). All amounts
received from a Member after the date specified in
Section 5.3.2(d) by the Company pursuant to this
Section 5.3 shall be accompanied by interest on
such overdue amounts (and the default shall not be
cured unless such interest is also received by the
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Company), which interest shall be payable to the Company and
shall accrue from and after such specified date at the Default
Interest Rate except as provided in Section 5.2. Any such
interest paid with respect to a Capital Contribution shall be
credited to the respective Capital Accounts of all the Members,
on a pro rata basis in proportion to their respective Sharing
Ratios as of the date such payment is made to the Company after
giving effect to the payment of the Capital Contribution with
respect to which such interest accrued.
5.3.2 Each written request issued pursuant to Section
5.3.1 shall include the following information:
(a) The total amount of Capital Contributions
requested from all applicable Members;
(b) The amount of Capital Contribution requested from the Member to
whom the request is addressed, such amount to be in accordance
with the Sharing Ratio of such Member (except as provided in
Section 5.1 or 5.2);
(c) The purpose for which the funds are to be applied
in such reasonable detail as the Representatives
shall direct;
(d) The date on which payments of the Capital Contribution shall be
made (which date shall not be less than 30 days following the
date the request is given, unless a sooner date is approved by
the Members) and the method of payment, provided that such date
and method shall be the same for each of the members; and
(e) Evidence that the Members have approved the request in
accordance with Section 5.3.1.
5.3.3 Each Member agrees that it shall make payments of
its respective Capital Contributions in accordance
with requests issued pursuant to Section 5.3.1 and
Section 5.3.2; provided, however, that a Member
may elect not to make Capital Contributions or
Loans under Section 5.4 with respect to a
Modification if it (i) does not vote for the
Modification and (ii) provides written notice to
all other Members within ten (10) days of any vote
under Sections 4.3.1 or 4.3.2 to proceed with a
Modification, as the case may be, that it does not
wish to make Capital Contributions or Loans with
respect to such Modification. In the event the
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Company proceeds with a Modification after one or more Members
elect not to make Capital Contributions or Loans with respect
thereto, the Sharing Ratios and Capital Accounts of all Members
shall be adjusted to reflect the respective Capital
Contributions or Loans of all Members.
5.4 Loans.
5.4.1 At any time after the Capital Contributions
referred to in Section 5.1.3 have been made that
the Members determine that the Company needs
funds, rather than calling for Capital
Contributions, the Members may issue or cause to
be issued a written request to each applicable
Member for the making of loans or advances to the
Company at such times and in such amounts as the
Members shall approve, by a Supermajority Vote,
provided that the Members shall not call for loans
or advances rather than Capital Contributions if
doing so would breach any Financing Commitment or
other agreement of the Company. All amounts
received from a Member after the date specified in
Section 5.4.2(d) by the Company pursuant to this
Section 5.4 shall be accompanied by interest on
such overdue amounts (and the default shall not be
cured unless such interest is also received by the
Company), which interest shall be payable to the
Company and shall accrue from and after such
specified date at a rate equal to the Default
Interest Rate except as provided in Section 5.2.
Any such interest paid shall be credited to the
respective Capital Accounts of all the Members, on
a pro rata basis in proportion to their respective
Sharing Ratios as of the date such payment is made
to the Company, but shall not be considered part
of the principal of the loan.
5.4.2 Each written request issued pursuant to Section
5.4.1 shall include the following information:
(a) The total amount of loans or advances requested
from all Members;
(b) The amount of the loans or advances requested from the Member
to whom the request is addressed, such amount to be in
accordance with the Sharing Ratio of such Member (except as
provided in Sections 5.1 or 5.2);
(c) The purpose for which the funds are to be applied
in such reasonable detail as the Members shall
direct;
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(d) The date on which the loans or advances to the Company shall be
made (which date shall not be less than 30 days following the
date the request is given, unless a sooner date is approved by
the Members) and the method of payment, provided that such date
and method shall be the same for each of the Members; and
(e) All terms relating to such loans, including the terms of
repayment, provided that such terms shall be the same for each
of the Members; and
(f) Evidence that the Members have approved the request in
accordance with Section 5.4.1.
5.4.3 Each Member agrees that it shall make its respective loans or
advances in accordance with requests issued pursuant to Section
5.4.1 and 5.4.2.
5.5 Equalization of Capital Accounts and Membership
Interests. It is not anticipated that the provisions
of this Agreement would ever permit the Capital
Accounts of the Members not to be in the same ratio as
their Sharing Ratios. If such event should ever
occur, the Members shall require (and the applicable
Members shall make) Capital Contributions so as to
cause the Members' Capital Accounts to be in the same
ratio as their Sharing Ratios.
5.6 Voluntary Contributions. No Member shall be required
or permitted to make any Capital Contributions or
loans to the Company except pursuant to this Section
5.
5.7 Return of Contributions. A Member is not entitled
to the return of any part of its Capital
Contributions or to be paid interest in respect of
either its Capital Account or its Capital
Contributions. An unrepaid Capital Contribution is
not a liability of the Company or of any Member. A
Member is not required to contribute or to lend any
cash or property to the Company to enable the
Company to return any Member's Capital
Contributions.
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5.8 Capital Accounts. A capital account shall be
established and maintained for each Member. Each
Member's capital account (a) shall be increased by (i)
the amount of money contributed by that Member to the
Company, (ii) the fair market value of property
contributed by that Member to the Company (net of
liabilities secured by the contributed property that
the Company is considered to assume or take subject to
under section 752 of the Code), and (iii) allocations
to that Member of Company income and gain (or items
thereof), including income and gain exempt from tax
and income and gain described in Treas. Reg.ss.1.704-
1(b)(2)(iv)(g), but excluding income and gain
described in Treas. Reg.ss.1.704-1(b)(4)(i), and (b)
shall be decreased by (i) the amount of money
distributed to that Member by the Company, (ii) the
fair market value of property distributed to that
Member by the Company (net of liabilities secured by
the distributed property that the Member is considered
to assume or take subject to under section 752 of the
Code), (iii) allocations to that Member of
expenditures of the Company described in section
705(a)(2)(B) of the Code, and (iv) allocations of
Company loss and deduction (or items thereof),
including loss and deduction described in Treas. Reg.
ss. 1.704-1(b)(2)(iv)(g), but excluding items described
in clause (b)(iii) above and loss or deduction
described in Treas. Reg.ss.1.704-1(b)(4)(i) or Treas.
Reg.ss.1.704-1(b)(4)(iii). The Members' capital
accounts also shall be maintained and adjusted as
permitted by the provisions of Treas. Reg.ss.1.704-
1(b)(2)(iv)(f), and as required by the other
provisions ofss.1.704-1(b)(2)(iv) andss.1.704-1(b)(4),
including adjustments to reflect the allocations to
the Members of depreciation, depletion, amortization,
and gain or loss as computed for book purposes rather
than the allocation of the corresponding items as
computed for tax purposes, as required by Treas. Reg.
ss. 1.704-1(b)(2)(iv)(g). A Member that has more than
one Membership Interest shall have a single capital
account that reflects all its Membership Interests,
regardless of the class of Membership Interests owned
by that Member and regardless of the time or manner in
which those Membership Interests were acquired. On
the transfer of all or part of a Membership Interest,
the capital account of the transferor that is
attributable to the transferred Membership Interest or
part thereof shall carry over to the transferee Member
in accordance with the provisions of Treas. Reg.ss.
1.704-1(b)(2)(iv)(l).
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6 ALLOCATIONS AND DISTRIBUTIONS
6.1 Allocations.
6.1.1 Except as may be required by section 704(c) of the Code and
Treas. ss. 1.704-1(b)(2)(iv)(f)(4), all items of income, gain,
loss, deduction, and credit of the Company shall be allocated
among the Members in accordance with their Sharing Ratios.
6.1.2 All items of income, gain, loss, deduction, and
credit allocable to any Membership Interest that
may have been transferred shall be allocated
between the transferor and the transferee based on
the portion of the calendar year during which each
was recognized as owning that Membership Interest,
without regard to the results of Company
operations during any particular portion of that
calendar year and without regard to whether cash
distributions were made to the transferor or the
transferee during that calendar year; provided,
however, that this allocation must be made in
accordance with a method permissible under section
706 of the Code and the regulations thereunder.
6.2 Distributions.
6.2.1 From time to time (but at least once each calendar
quarter) the Representatives shall determine in
their reasonable judgment to what extent (if any)
the Company's cash on hand exceeds its current and
anticipated needs, including, without limitation,
for operating expenses, debt service,
acquisitions, and a reasonable contingency
reserve. If such an excess exists, the Members
shall cause the Company to distribute to the
Members, in accordance with their Sharing Ratios,
an amount in cash equal to that excess.
6.2.2 From time to time the Members also may cause
property of the Company other than cash to be
distributed to the Members, which distribution
must be made in accordance with their Sharing
Ratios and may be made subject to existing
liabilities and obligations. Immediately prior to
such a distribution, the capital accounts of the
Members shall be adjusted as provided in Treas.
Reg. ss. 1.704(b)(2)(iv)(f).
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7 MANAGEMENT
7.1 Management by Members through Representatives.
7.1.1 Subject to the provisions of Section 7.1.2, (i)
the voting of the Members pursuant to this
Agreement shall be by their respective
Representatives, (ii) the powers of the Company
shall be exercised by or under the authority of,
and the business and affairs of the Company shall
be managed under the direction of, the Members
through their respective Representatives, and
(iii) the Members through their respective
Representatives may make all decisions and take
all actions for the Company not otherwise provided
for in this Agreement, including, without
limitation, the following:
(i) entering into, making and performing contracts, agreements,
and other undertakings binding the Company that may be
necessary, appropriate, or advisable in furtherance of the
purposes of the Company and making all decisions and waivers
thereunder;
(ii) opening and maintaining bank and investment accounts and
arrangements, drawing checks and other orders for the
payment of money, and designating individuals with authority
to sign or give instructions with respect to those accounts
and arrangements;
(iii) maintaining the assets of the Company in good
order;
(iv) collecting sums due the Company;
(v) to the extent that funds of the Company are
available therefor, paying debts and obligations
of the Company;
(vi) acquiring, utilizing for Company purposes, and
Disposing of any asset of the Company;
(vii) borrowing money or otherwise committing the
credit of the Company for Company activities and
voluntary prepayments or extensions of debt;
(viii) selecting, removing and changing the authority
and responsibility of lawyers, accountants, and
other advisers and consultants;
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(ix) obtaining insurance for the Company;
(x) determining distributions of Company cash and
other property as provided in Section 6.2;
(xi) establishing a seal for the Company;
(xii) establishing an annual budget for capital
expenditures and operations; and
(xiii) appointing the Operator as agent of the Company
to accomplish one or more of the foregoing.
7.1.2. Prior to the Effective Time on each matter decided
by the Members, Piedmont Intrastate's
representative shall have a vote equal to 17% of
the total votes of all Members and each other
Representative shall have a vote equal to Sharing
Ratio multiplied by 0.83. After the Effective
Time on all matters decided by the Members, each
Representative shall have a vote equal to the
Sharing Ratio of the Member he or she represents.
Except as otherwise provided in this Agreement,
the vote of the Members necessary for a matter to
be approved shall be a majority of the total
Sharing Ratios of the Members. If the requisite
majority of Sharing Ratios is not voted in favor
of a matter being voted on, then the matter shall
be deemed to be denied; furthermore, unless
otherwise provided herein, if the matter being
voted on provides for more than two alternatives
and no alternative receives the requisite majority
approval then no alternative shall be selected.
7.1.3 Before any vote of the Members is taken through
their respective Representatives pursuant to
Section 4.1, 4.2 or 4.3 (unless the vote is taken
by written consent pursuant to Section 7.7), all
Representatives shall fully discuss the matter at
the meeting called for such purpose and shall
disclose to each other their intentions with
respect to such vote, so that when the actual vote
is taken each Member may vote in an informed
manner, with full knowledge of how the other
Members will vote on such matter.
7.1.4 Notwithstanding the provisions of Section 7.1.2, the Members
through their respective Representatives may not cause the
Company to do any of the following without obtaining the vote
required in this Section 7.1.4.
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7.1.4.1 Action requiring a unanimous vote:
(a) Causing the NCUC Application to provide for (i)
a geographic location, scope or size of the
Facilities different than that set forth in
Appendix B, (ii) other than a straight-fixed
variable rate design, (iii) an estimated
capital cost of the Facilities in excess of $75
million, (iv) a post-Effective Time capital
structure other than 50% equity and 50% debt,
(v) an initial rate on the Facilities to be
other than a cost-based rate based on a 14.5%
return on equity and a 40-year depreciation
period, or (vi) a design of the Facilities that
would provide a minimum pressure of less than
550 psig at the existing Burlington, North
Carolina delivery points or a minimum pressure
of less than 500 psig at the interconnection of
the Facilities and the facilities of North
Carolina Natural Gas Corporation near the Wake
County, North Carolina/Johnston County, North
Carolina border.
(b) Agreeing to proceed with the development of a
Modification pursuant to Section 4.2.2.
(c) Approving a sale or abandonment of the
Facilities.
(d) Amending, modifying, changing or otherwise altering any
provision of this Agreement requiring a unanimous vote to
require a lesser vote.
(e) Electing to dissolve the Company.
(f) Voting to commit the Company to accept an order
under Sections 4.1.3.
(g) Delegating any authority to any committee, Representative or
agent of the Company to take any action that requires the
unanimous vote of the Representatives under this Section
7.1.4.1.
(h) Causing any Financing Commitment to be issued on
other than a non-recourse basis.
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7.1.4.2 Action requiring a Supermajority Vote:
(a) Approving a Disposition of an interest in the
Company pursuant to Section 3.2.1.
(b) Approving any matter pursuant to Section 3.3.
(c) Approving any matter pursuant to Sections 4.1.4,
4.1.5, 4.1.6 and 4.1.7.
(d) Approving any matter pursuant to Sections 4.3.1,
4.3.2 and 4.3.3.
(e) Approving any matter pursuant to Section 5.1.2.
(f) Requesting that loans (rather than Capital Contributions) be
made to the Company pursuant to Section 5.4.1.
(g) Voting at a meeting of the Representatives on a matter not
on the agenda for the meeting referred to in Section 7.6.1
or shortening the ten (10) day period provided in Section
7.6.1.
(h) Amending, modifying, changing or otherwise altering the CO&M
Agreement pursuant to Section 9.1.
(i) Electing not to dissolve the Company upon the death,
retirement, resignation, expulsion, bankruptcy or
dissolution of a Member, or the occurrence of any other
event that terminates the continued membership of a Member
in the Company under the provisions of Section 15.1.
(j) Delegating any authority to any committee, Representative or
agent of the Company to take any action that requires a
Supermajority Vote under this Section 7.1.4.2
(k) Amending, modifying, changing or otherwise altering any
provision of this Agreement requiring a Supermajority Vote
to require a lesser vote.
7.1.5 Notwithstanding the provisions of Sections 7.1.2
and 7.1.4, the Members agree to cause the Company
to propose a cost allocation and/or rate design
for existing firm transportation services (70,000
Mcf/d for Public Service Company of North
Carolina, Inc. and 60,000 Mcf/d for Piedmont
Natural Gas Company, Inc.) on the Existing
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Cardinal Pipeline for deliveries at or upstream of Burlington,
North Carolina, in the NCUC Application and in subsequent rate
cases, in such a manner to reasonably approximate rates that
would have resulted if the Existing Cardinal Pipeline had
remained in the utility rate bases of Public Service Company of
North Carolina, Inc. and Piedmont Natural Gas Company, Inc..
The Members agree to support and cause their affiliates to
support such cost allocation and/or rate design.
7.2 Actions by Members; Representatives; Committees;
Delegation of Authority and Duties.
7.2.1 In managing the business and affairs of the
Company and exercising its powers, the Members
shall act (i) collectively by their respective
Representatives through meetings and written
consents pursuant to Section 7.6 and 7.7, (ii)
through committees pursuant to Section 7.2.2; and
(iii) through Representatives to whom authority
and duties have been delegated pursuant to Section
7.2.3.
7.2.2 The Members may, from time to time, designate one
or more committees, including chair of each such
committee. The chair shall report to the
Representatives. Any such committee, to the
extent provided in such resolution or in the
Articles of Organization or in this Agreement,
shall have and may exercise all of the authority
of the Representatives, subject to the limitations
set forth in Section 7.1.4.1(g), Section 7..4.2(j)
and in the Act. The Representatives may dissolve
any committee at any time, unless otherwise
provided in the Articles of Organization or this
Agreement.
7.2.3 Subject to Sections 7.1.4.1(g) and 7.1.4.2(j), the Members may,
from time to time, delegate to one or more Representatives such
authority and duties as the Representatives may deem advisable.
Any delegation pursuant to this Section 7.2.3 may be revoked at
any time by the Representatives.
7.3 Number and Term of Office. Each Member shall be
authorized to designate from time to time, in writing,
one person as the Member's Representative. Each
Representative shall hold office for the term for
which he is appointed and thereafter until his
successor shall have been appointed or until his
earlier death, resignation or removal. Each Member
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may designate from time to time, in writing, an alternate
Representative who shall have the authority set forth in such writing
to act in the absence of the Member's Representative. Representatives
need not be residents of the State of North Carolina.
7.4 Vacancies; Removal; Resignation. Any person serving
as a Representative of a Member may resign at any
time. Such resignation shall be made in writing and
shall take effect at the time specified therein, or if
no time be specified, at the time of its receipt by
the remaining Representative. The acceptance of a
resignation shall not be necessary to make it
effective, unless expressly so provided in the
resignation. Upon the resignation of a
representative, the Member appointing that
representative shall have the right to designate
another person as a Representative.
7.5 Chairman and Secretary. The Members shall elect a
Chairman to serve at the pleasure of the
Representatives, provided that the Chairman must also
be a Representative. The Chairman or his/her designee
shall preside at all meetings of Members and shall
have such other duties as may be delegated by the
Members. The Members also shall designate a Secretary
to serve at the pleasure of the Representatives. The
Secretary shall record the minutes of the meetings of
Members and shall have such other duties as may be
delegated by the Members. The Members may designate a
Vice Chairman and/or Assistant Secretary.
7.6 Meetings.
7.6.1 The Chairman or his/her designee shall preside at
all meetings of the Members, which meetings shall
be held quarterly subject to more or less frequent
meetings upon approval of the Members. A notice
of and an agenda for all meetings shall be
provided by the Secretary to all Representatives
at least 10 days prior to the date of such
meetings. The Secretary shall consult with each
of the Representatives prior to preparing each
such agenda and shall place on such agenda any
matters requested by a Representative to be
included on such agenda for the respective
meeting. Special meetings of the Members may be
called at such times and places, and in such
manner, as any Member deems necessary. Any Member
calling for any such special meeting shall notify
the Chairman and the Secretary; the Secretary in
turn shall notify all Representatives of the date
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and agenda for such meeting at least 10 days prior to the date
of such meeting. Such 10 day period may be shortened by a
Supermajority Vote. Written minutes of all meetings shall be
maintained, and the minutes for each meeting shall be approved
at the next meeting of the Members.
7.6.2 Each Representative or his/her alternate shall
attend each meeting of the Members unless he/she
is unable to do so because of an event beyond his
reasonable control, and (notwithstanding any other
provision in this Agreement) in such an
extraordinary circumstance such Representative
shall immediately so advise the Secretary by
telephone, who in turn shall similarly notify all
other Representatives and shall reschedule such
meeting as soon as practicable.
7.6.3 A Representative who is present at a meeting of
the Members at which action on any Company matter
is taken shall be presumed to have assented to the
action unless his/her dissent shall be entered in
the minutes of the meeting or unless he shall file
his/her written dissent to such action with the
Person acting as secretary of the meeting before
the adjournment thereof or shall deliver such
dissent to the Company immediately after the
adjournment of the meeting. Such right to dissent
shall not apply to a Representative who voted in
favor of such action.
7.7 Action by Written Consent or Telephone Conference.
Any action permitted or required by the Act, the
Articles of Organization or this Agreement to be taken
at a meeting of the Members or any committee
designated by the Members may be taken without a
meeting if a consent in writing, setting forth the
action to be taken, is signed by all the
Representatives or Members of such committee, as the
case may be. Such consent shall have the same force
and effect as a unanimous consent at a meeting and may
be stated as such in any document or instrument filed
with the Secretary of State of North Carolina, and the
execution of such consent shall constitute attendance
or presence in person at a meeting of the Members or
any such committee, as the case may be. Subject to
the requirements of the Act, the Articles of
Organization or this Agreement for notice of meetings,
unless otherwise restricted by the Articles of
Organization, Representatives, or Members of any
committee designated by the Members, may participate
in and hold a meeting of the Members or any such
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committee, as the case may be, by means of a conference telephone or
similar communications equipment by means of which all Persons
participating in the meeting can hear each other, and participation in
such meeting shall constitute attendance and presence at such meeting,
except where a Person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
7.8 Conflicts of Interest. Except as otherwise provided
in this Agreement, each Member or Representative at
any time and from time to time may engage in and
possess interests in other business ventures of any
and every type and description, independently or with
others, including business ventures in competition
with the Company, with no obligation to offer to the
Company or any other Member or Representative the
right to participate therein. The Company may
transact business with any Representative or Member or
affiliate thereof, provided the terms of those
transactions are no less favorable than those the
Company could obtain from unrelated third parties.
8 ACTION OF MEMBERS.
8.1 Action of Members. Unless otherwise required by this
Agreement or by nonwaiverable provisions of applicable
law, all actions required or permitted to be taken by
a Member is delegated by such Member to the
Representative designated to act for such Member. In
the event action required to be taken by a Member
cannot be delegated to the Representative representing
such Member, such action may be taken in any manner
permitted by the Act.
9 OPERATION OF THE FACILITIES.
9.1 Operator. The Company entered into a CO&M Agreement
with the Operator on the Formation Date. The Members
may, at any time, upon a Supermajority Vote, agree to
an amendment to the CO&M Agreement provided that the
Operator concurs therewith. In the event that such
CO&M Agreement is terminated pursuant to the terms
thereof or the Operator ceases to serve as Operator in
accordance with the terms of the CO&M Agreement, the
Representatives may select a new Operator. Any
successor Operator selected pursuant to this Agreement
shall execute and be bound by an agreement
substantially in the form of the CO&M Agreement
existing immediately prior to such execution.
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10 INDEMNIFICATION
10.1 Right to Indemnification. Subject to the limitations
and conditions as provided in Section 10 of this
Agreement, each Person who was or is made a party or
is threatened to be made a party to or is involved in
any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative,
arbitrative or investigative (hereinafter a
"Proceeding"), or any appeal in such a Proceeding or
any inquiry or investigation that could lead to such a
Proceeding, by reason of the fact that he or she, or a
Person of whom he or she is the legal representative,
is or was a Representative of the Company or while a
Representative of the Company is or was serving at the
request of the Company as a Representative, director,
officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another
foreign or domestic limited liability company,
corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other
enterprise shall be indemnified by the Company to the
fullest extent permitted by the Act, as the same
exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such
amendment permits the Company to provide broader
indemnification rights than said law permitted the
Company to provide prior to such amendment) against
judgments, penalties (including excise and similar
taxes and punitive damages), fines, settlements and
reasonable expenses (including, without limitation,
attorneys' fees) actually incurred by such Person in
connection with such Proceeding, and indemnification
under Section 10 of this Agreement shall continue as
to a Person who has ceased to serve in the capacity
which initially entitled such Person to indemnity
hereunder. The rights granted pursuant to Section 10
of this Agreement shall be deemed contract rights, and
no amendment, modification or repeal of Section 10 of
this Agreement shall have the effect of limiting or
denying any such rights with respect to actions taken
or Proceedings arising prior to any such amendment,
modification or repeal. It is expressly acknowledged
that the indemnification provided in Section 10 of
this Agreement could involve indemnification for
negligence or under theories of strict liability.
10.2 Advance Payment. The right to indemnification
conferred in Section 10 of this Agreement shall
include the right to be paid or reimbursed by the
Company the reasonable expenses incurred by a Person
of the type entitled to be indemnified under Section
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10.1 who was, is or is threatened to be made a named defendant or
respondent in a Proceeding in advance of the final disposition of
the Proceeding and without any determination as to the Person's
ultimate entitlement to indemnification; provided, however, that
the payment of such expenses incurred by any such Person in
advance of the final disposition of a Proceeding, shall be made
only upon delivery to the Company of a written affirmation by such
Representative of his or her good faith belief that he or she has
met the standard of conduct necessary for indemnification under
Section 10 of this Agreement and a written undertaking, by or on
behalf of such Person, to repay all amounts so advanced if it
shall ultimately be determined that such indemnified Person is not
entitled to be indemnified under Section 10 of this Agreement or
otherwise.
10.3 Indemnification of Agents. The Company, by adoption
of a resolution of the Representatives, may indemnify
and advance expenses to an agent of the Company to the
same extent and subject to the same conditions under
which it may indemnify and advance expenses to
Representatives under Section 10 of this Agreement;
and, the Company may indemnify and advance expenses to
Persons who are not or were not Representatives or
agents of the Company but who are or were serving at
the request of the Company as a representative,
director, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of
another foreign or domestic limited liability company,
corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other
enterprise against any liability asserted against him
or her and incurred by him or her in such a capacity
or arising out of his status as such a Person to the
same extent that it may indemnify and advance expenses
to Representatives under Section 10 of this Agreement.
10.4 Appearance as a Witness. Notwithstanding any other
provisions of Section 10 of this Agreement, upon
approval by the Members the Company shall pay or
reimburse expenses incurred by a Member in connection
with that Member or Member's Representative or other
employee's appearance as a witness or other
participation in a Proceeding at a time when that
Member or Member's Representative is not a named
defendant or respondent in the Proceeding.
10.5 Nonexclusivity of Rights. The right to
indemnification and the advancement and payment of
expenses conferred in Section 10 of this Agreement
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<PAGE>
shall not be exclusive of any other right which a Representative
or other Person indemnified pursuant to Section 10.3 may have or
hereafter acquired under any law (common or statutory), provision
of the Articles of Organization or this Agreement, agreements,
vote of Members or otherwise.
10.6 Insurance. The Company may purchase and maintain
insurance, at its expense, to protect itself and any
Person who is or was serving as a Representative or
agent of the Company or is or was serving at the
request of the Company as a Representative, director,
officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another
foreign or domestic limited liability company,
corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other
enterprise against any expense, liability or loss,
whether or not the Company would have the power to
indemnify such Person against such expense, liability
or loss under Section 10 of this Agreement.
10.7 Member Notification. To the extent required by law,
any indemnification of or advance of expenses to a
Representative in accordance with Section 10 of this
Agreement shall be reported in writing to the Members
with or before the notice or waiver of notice of the
next Members' meeting or with or before the next
submission to Members of a consent to action without a
meeting and, in any case, within the 12-month period
immediately following the date of the indemnification
or advance.
10.8 Savings Clause. If Section 10 of this Agreement or
any portion hereof shall be invalidated on any ground
by any court of competent jurisdiction, then the
Company shall nevertheless indemnify and hold harmless
each Representative or any other Person indemnified
pursuant to Section 10 of this Agreement as to costs,
charges and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with
respect to any action, suit or proceedings, whether
civil, criminal, administrative or investigative to
the full extent permitted by any applicable portion of
Section 10 of this Agreement that shall not have been
invalidated and to the fullest extent permitted by
applicable law.
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11 TAXES.
11.1 Tax Returns. The Members shall cause to be prepared
and filed all necessary federal and state income tax
returns for the Company, including making the
elections described in Section 11.2. Each Member
shall furnish to the Person preparing such returns all
pertinent information in its possession relating to
Company operations that is necessary to enable such
returns to be prepared and filed.
11.2 Tax Elections. The Company shall make the following
elections on the appropriate tax returns:
(a) to adopt the calendar year as the Company's fiscal
year;
(b) to adopt the accrual method of accounting and to
keep the Company's books and records on the income-
tax method;
(c) if a distribution of Company property as described in section 734
of the Code occurs or if a transfer of a Membership Interest as
described in section 743 of the Code occurs, on written request of
any Member, to elect, pursuant to section 754 of the Code, to
adjust the basis of Company properties;
(d) to elect to amortize the organizational expenses of the Company
and the start-up expenditures of the Company under Section 195 of
the Code ratably over a period of 60 months as permitted by
section 709(b) of the Code; and
(e) any other election the Members may deem appropriate
and in their best interests.
Neither the Company nor any Representative or Member may make an election
for the Company to be excluded from the application of the provisions of
subchapter K of chapter 1 of subtitle A of the Code or any similar
provisions of applicable state law, and no provision of this Agreement
(including, without limitation, Section 2.8) shall be construed to
sanction or approve such an election.
11.3 "Tax Matters Partner." The Members shall designate a
Member as "tax matters partner" of the Company pursuant
to section 6231(a)(7) of the Code. TransCardinal
shall be the "tax matters partner" unless and until the
Members designate a different "tax matters partner."
Any Member who is designated "tax matters partner"
shall take such action as may be necessary to cause
each other Member to become a "notice partner" within
the meaning of section 6223 of the Code. Any Member
40
<PAGE>
who is designated "tax matters partner" shall inform each other
Member of all significant matters that may come to its attention
in its capacity as "tax matters partner" by giving notice thereof
on or before the fifth Business Day after becoming aware thereof
and, within that time, shall forward to each other Member copies
of all significant written communications it may receive in that
capacity. Before taking any of the following actions as the "tax
matters partner," the Member then constituting the "tax matter
partner" shall obtain the unanimous consent of the Members to such
actions:
(1) Entry into a settlement agreement that under Code Section
6224(c)(3) would bind any Member that is not a party to it;
(2) Filing a petition under Code Section 6226(a);
(3) Intervening pursuant to Code Section 6226(b)(5) in
any action brought pursuant to Code Section
6226(b);
(4) Filing a request for an administrative adjustment
pursuant to Code Section 6227(b);
(5) Filing a petition pursuant to Code Section
6228(a); or
(6) Agreeing to the extension of a period of
assessment, pursuant to Code Section
6229(b)(1)(B).
12 BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS
12.1 Maintenance of Books. The Company shall keep books
and records of accounts and shall keep minutes of the
proceedings of its Members and each committee. The
books of account for the Company shall be maintained
on an accrual basis in accordance with the terms of
this Agreement, except that the capital accounts of
the Members shall be maintained in accordance with
Section 5.8. The calendar year shall be the
accounting year of the Company.
12.2 Reports.
12.2.1 Annual Reports. On or before the 120th day
following the end of the fiscal year during the
term of the Company, the Members shall cause each
Member to be furnished with a balance sheet, an
income statement, and a statement of changes in
Members' capital of the Company for, or as of the
end of, that year certified by the Certified
Public Accountants. These financial statements
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must be prepared in accordance with accounting principles
generally employed for accrual-basis records consistently
applied (except as therein noted) and must be accompanied by
a report of the Certified Public Accountants certifying the
statements and stating that (a) their examination was made
in accordance with generally accepted auditing standards
and, in their opinion, the financial statements present
fairly the financial position, financial results of
operations, and changes in Members' capital in accordance
with accounting principles generally employed for
accrual-basis records consistently applied (except as
therein noted) and (b) in making the examination and
reporting on the financial statements described above,
nothing came to their attention that caused them to believe
that (i) the income and revenues were not paid or credited
in accordance with the financial and accounting provisions
of this Agreement, (ii) the costs and expenses were not
charged in accordance with the financial and accounting
provisions of this Agreement, or (iii) the Members or any
Member failed to comply in any material respect with the
financial and accounting provisions of this Agreement, or if
they do conclude that a Member so failed, specifying the
nature and period of existence of the failure.
12.2.2 Interim Reports. Within 45 days after the end of
each fiscal quarter, the Members shall cause to be
prepared and delivered to each Member, with an
appropriate certificate of the Person authorized
to prepare the same (provided that the Members may
make any change to the financial statements
required by this Section 12.2.2 as they may deem
appropriate):
(a) A profit and loss statement and a statement of cash flows for
such fiscal quarter (including sufficient information to permit
the Members to calculate their tax accruals) and for the
portion of the fiscal year then ended;
(b) A balance sheet and a statement of each Member's Capital
Account as of the end of such fiscal quarter and the portion of
the fiscal year then ended; and
(c) A statement comparing the actual financial status and results
of the Company as of the end of or for such fiscal quarter and
the portion of the fiscal year then ended with the budget and
results as of the end of or for such respective periods.
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<PAGE>
12.2.3 Governmental Reports. The Operator shall prepare
and file, or cause to be prepared and filed, all
reports prescribed or required by the NCUC or any
other Governmental Authority having jurisdiction
over the Company.
12.2.4 Other Reports. The Members also may cause to be
prepared or delivered such other reports as they
may deem appropriate.
12.2.5 Cost of Preparing and Distributing Reports. The
Company shall bear the costs of preparing and
distributing any reports required or permitted in
Section 12.2.1, 12.2.2, 12.2.3 and 12.2.4.
12.3 Accounts. The Members shall cause to be established and maintained
one or more separate bank and investment accounts and arrangements
for Company funds in the Company's name with financial
institutions and firms that the Members determine. The Company's
funds may not be commingled with the funds of any Member.
13 INSPECTION
13.1 Inspection of Facilities and Records. Subject to the
provisions of Section 4.7.2, each Member shall have
the right at all reasonable times during usual
business hours upon providing reasonable notice to the
Operator to inspect the Facilities and other
properties of the Company and to audit, examine and
make copies of the books of account and other records
of the Company. Such right may be exercised through
any agent or employee of such Member designated in
writing by it or by an independent public accountant,
petroleum engineer, attorney or other consultant so
designated. The Member making the request shall bear
all reasonable costs and expenses incurred by such
Member, the Company or the Operator in connection with
any inspection, examination or audit made on such
Member's behalf.
14 BANKRUPTCY OF A MEMBER
14.1 Bankruptcy Members. If any Member becomes a Bankrupt
Member, the Company shall have the option, exercisable
by notice from the other Members to the Bankrupt
Member (or its representative) at any time prior to
the 180th day after receipt of notice of the
occurrence of the event causing it to become a
Bankrupt Member, to buy, and on the exercise of this
option the Bankrupt Member or its representative shall
sell, its Membership Interest. The purchase price
shall be an amount equal to the balance in that
Member's Capital Account. The purchaser shall pay the
amount due the Bankrupt Member as so determined in
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<PAGE>
four equal cash installments, the first due on closing and the
remainder (together with accumulated interest on the amount unpaid
at the General Interest Rate) due on each of the first three
anniversaries thereof. The payment to be made to the Bankruptcy
Member or its representative pursuant to this Section 14.1 is in
complete liquidation and satisfaction of all the rights and
interest of the Bankrupt Member and its representative (and of all
Persons claiming by, through, or under the Bankrupt Member and its
representative) in and in respect of the Company, including,
without limitation, any Membership Interest, any rights in
specific Company property, and any rights against the Company and
(insofar as the affairs of the Company are concerned) against the
Members, and constitutes a compromise to which all Members have
agreed.
15 DISSOLUTION, LIQUIDATION, AND TERMINATION
15.1 Dissolution. The Company shall dissolve and its
affairs shall be wound up on the first to occur of the
following:
(a) the time specified in the Articles of
Organization;
(b) the unanimous written consent of the Members;
(c) any Member shall become a Bankrupt Member (with or without
the consent of Required Interest) or dissolve, or there
shall occur any other event that terminates the continued
membership in the Company of any Member; and
(d) entry of a decree of judicial dissolution of the Company
under section 57C-6-02 of the Act or the filing by the
Secretary of State of North Carolina of a certificate of
dissolution under section 57C-6-03 of the Act.
The death, retirement, resignation, expulsion, bankruptcy or
dissolution of a Member, or the occurrence of any other event that
terminates the continued membership of a Member in the Company
shall not cause a dissolution of the Company if the Company
exercises its option under Section 14.1 or if, after the Sharing
Ratios of the remaining Members being increased pro rata so that
the total of all Sharing Ratios continues to be 100%, there is a
Supermajority Vote to continue the existence of the Company.
15.2 Liquidation and Termination. On dissolution of the
Company, the Members shall act as liquidator or may
appoint one or more Members as liquidator. The
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liquidator shall proceed diligently to wind up the affairs of the
Company and make final distributions as provided herein and in the
Act. The costs of liquidation shall be borne as a Company expense.
Until final distribution, the liquidator shall continue to operate
the Company properties with all of the power and authority of the
Members. The steps to be accomplished by the liquidator are as
follows:
(a) as promptly as possible after dissolution and
again after final liquidation, the liquidator
shall cause a proper accounting to be made by the
Certified Public Accountants of the Company's
assets, liabilities, and operations through the
last day of the calendar month in which the
dissolution occurs or the final liquidation is
completed, as applicable;
(b) the liquidator shall cause the notice described in section
57C-6-07 of the Act to be mailed to each known creditor of
and claimant against the Company in the manner described in
section 57C-6-07 of the Act;
(c) the liquidator shall cause the notice described in section
57C-6-08 of the Act to be published in the manner described
in section 57-6-08 of the Act.
(d) the Company's assets shall be applied in the
manner provided by Section 57C-6-05 of the Act.
The distribution of cash and/or property to a Member in accordance
with the provisions of this Section 15.2 constitutes a complete
return to the Member of its Capital Contributions and a complete
distribution to the Member of its Membership Interest and all the
Company's property and constitutes a compromise to which all
Members have consented. To the extent that a Member returns funds
to the Company, it has no claim against any other Member for those
funds.
15.3 Deficit Capital Accounts. Notwithstanding anything to
the contrary contained in this Agreement, and
notwithstanding any custom or rule of law to the
contrary, to the extent that the deficit, if any, in
the capital account of any Member results from or is
attributable to deductions and losses of the Company
(including non-cash items such as depreciation), or
distributions of money pursuant to this Agreement to
all Members in proportion to their respective Sharing
Ratios, upon dissolution of the Company such deficit
shall not be an asset of the Company and such Members
shall not be obligated to contribute such amount to
the Company to bring the balance of such Member's
capital account to zero.
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<PAGE>
15.4 Articles of Dissolution. On completion of the
distribution of Company assets as provided herein, the
Company is terminated, and the Members (or such other
Person or Persons as the Act may require or permit)
shall cause to be filed Articles of Dissolution with
the Secretary of State of North Carolina as required
by section 57C-6-06 of the Act, cancel any other
filing made pursuant to Sections 2.3 or 2.6, and take
such other actions as may be necessary to terminate
the Company.
16 GENERAL PROVISIONS
16.1 Offset. Whenever the Company is to pay any sum to
any Member, any amounts that Member owes the Company
may be deducted from that sum before payment.
16.2 Notices. Except as expressly set forth to the
contrary in this Agreement, all notices, requests,
or consents provided for or permitted to be given
under this Agreement must be in writing and must be
given either by depositing that writing in the
United States mail, addressed to the recipient,
postage paid, and registered or certified with
return receipt requested or by delivering that
writing to the recipient in person, by courier, or
by facsimile transmission; and a notice, request, or
consent given under this Agreement is effective on
receipt by the Person to receive it. All notices,
requests, and consents to be sent to a Member must
be sent to or made at the addresses given for that
Member on the signature pages of this Agreement or
in the instrument described in Section 3.2.5 or 3.3,
or such other address as that Member may specify by
notice to the other Members. Any notice, request,
or consent to the Company must be given at the
following address: 2800 Post Oak Boulevard, Houston,
Texas 77056 if by mail or (713) 439-4269 if by
facsimile transmission. Whenever any notice is
required to be given by law, the Articles of
Organization or this Agreement, a written waiver
thereof, signed by the Person entitled to notice,
whether before or after the time stated therein,
shall be deemed equivalent to the giving of such
notice.
16.3 Entire Agreement; Supersedure. This Agreement
constitutes the entire agreement of the Members and
their Affiliates relating to the Company and
supersedes all prior contracts or agreements with
respect to the Company, whether oral or written,
including, but not limited to, the Operating Agreement
of Cardinal Extension Company, LLC dated December 6,
1995.
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<PAGE>
16.4 Effect of Waiver or Consent. A waiver or consent,
express or implied, to or of any breach or default
by any Person in the performance by that Person of
its obligations with respect to the Company is not a
consent or wavier to or of any other breach or
default in the performance by that Person of the
same or any other obligations of that Person with
respect to the Company. Failure on the part of a
Person to complain of any act of any Person or to
declare any Person in default with respect to the
Company, irrespective of how long that failure
continues, does not constitute a waiver by that
Person of its rights with respect to that default
until the applicable statute-of-limitations period
has run.
16.5 Amendment or Modification. This Agreement may be amended or
modified from time to time only by a written instrument adopted by
the vote required by Section 7.1.4 of this Agreement.
16.6 Binding Effect. Subject to the restrictions on
Dispositions set forth in this Agreement, this
Agreement is binding on and inures to the benefit of
the Members and their respective heirs, legal
representatives, successors and assigns.
16.7 Governing Law; Severability. THIS AGREEMENT IS
GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE
WITH THE LAW OF THE STATE OF NORTH CAROLINA,
EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE
THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION
OF THIS AGREEMENT TO THE LAW OF ANOTHER
JURISDICTION. In the event of a direct conflict
between the provisions of this Agreement and (a) any
provision of the Articles of Organization, or (b)
any mandatory provision of the Act, the application
provision of the Articles of Organization or the Act
shall control. If any provision of this Agreement
or the application thereof to any Person or
circumstance is held invalid or unenforceable to any
extent, the remainder of this Agreement and the
application of that provision to other Persons or
circumstances is not affected thereby and that
provision shall be enforced to the greatest extent
permitted by law.
16.8 Further Assurances. In connection with this
Agreement and the transactions contemplated hereby,
each Member shall execute and deliver any additional
documents and instruments and perform any additional
acts that may be necessary or appropriate to
effectuate and perform the provisions of this
Agreement and those transactions.
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16.9 Indemnification. To the fullest extent permitted by
law, each Member shall indemnify the Company, each
Representative and each other Member and hold them
harmless from and against all losses, costs,
liabilities, damages, and expenses (including, without
limitation, costs of suit and attorney's fees) they
may incur on account of any breach by that Member of
this Agreement.
16.10 Notice to Members of Provisions of this Agreement. By executing
this Agreement, each Member acknowledges that it has actual notice
of (a) all of the provisions of this Agreement, including, without
limitation, the restrictions on the transfer of Membership
Interests set forth in Section 3 and (b) all of the provisions of
the Articles of Organization. Each Member hereby agrees that this
Agreement constitutes adequate notice of all such provisions, and
each Member hereby waives any requirement that any further notice
thereunder be given.
16.11 Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if all signing parties had
signed the same document. All counterparts shall be construed
together and constitute the same instrument.
IN WITNESS WHEREOF, the Members have executed this Agreement as of the date
first set forth above.
MEMBERS:
TRANSCARDINAL COMPANY PSNC CARDINAL PIPELINE COMPANY
By: /s/ Frank J. Ferazzi By:/s/Franklin H. Yoho
Name: Frank J. Ferazzi Name: Franklin H. Yoho
Title: Vice President Title: Vice President
Date of Execution: Date of Execution:
December 19, 1996 December 19, 1996
PIEDMONT INTRASTATE PIPELINE NCNG ENERGY CORPORATION
COMPANY
By: /s/ Thomas E. Skains By:/s/ Terrence D. Davis
Name: Thomas E. Skains Name: Terrence D. Davis
Title: Vice President Title: Vice President
Date of Execution: Date of Execution:
December 19, 1996 December 19, 1996
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<TABLE>
APPENDIX A
(SHARING RATIOS)
Commitment Sharing Ratio
<CAPTION>
Prior to After Prior to After
Effective Effective Effective Effective
Member Time Time* Time Time*
<S> <C> <C> <C> <C>
TransCardinal Company $20,169,840 $21,915,000 54.22% 45.00%
PSNC Cardinal Pipeline Company 14,790,720 16,071,000 39.76% 33%
Piedmont Intrastate Pipeline
Company 0 8,279,000 0% 17%
NCNG Energy Corporation 2,239,440 2,435,000 6.02% 5%
</TABLE>
* At the Effective Time, each of PSNC Cardinal and Piedmont Intrastate
shall be deemed to have made a capital contribution to the Company equal to the
net book value of its membership interest in Cardinal Pipeline Company, LLC at
the Effective Time. Piedmont Intrastate does not have any other obligation to
contribute to the capital of the Company. It is anticipated that Piedmont
Intrastate's contribution will equal 17% of the total contribution of all
Members. If, however, Piedmont Intrastate's contribution does not equal 17% of
the total of all contributions, the Membership Interests of the other Members
shall be adjusted on a pro rata basis based on each other Member's Commitment
and Sharing Ratio.
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APPENDIX B
Description of Facilities
The Facilities will consist of approximately 67 miles of 24-inch pipeline,
four meter stations and related appurtenant facilities commencing at the
terminus of the Existing Cardinal Pipeline southeast of Burlington, North
Carolina, and continuing in a southeasterly direction through Alamance, Orange,
Chatham, and Wake Counties until it terminates at interconnections with Public
Service Company of North Carolina ("PSNC") and North Carolina Natural Gas
Corporation ("NCNG") located at the Wake County, North Carolina/Johnston County,
North Carolina border as generally reflected on the map that is part of this
Appendix B. The Facilities in conjunction with improvements or additions to the
Existing Cardinal Pipeline will be designed to result in a pressure of no less
than 550 psig at the delivery points located near the terminus of the Existing
Cardinal Pipeline southeast of Burlington, North Carolina, and a minimum
pressure of no less than 500 psig at the Facilities terminus near the
Wake/Johnston County border. The meter station for NCNG at the Wake/Johnston
County border will be sized for 40 Mmcf/d, and the meter station for PSNC at the
Wake/Johnston County border will be sized for 100 Mmcf/d. These metering
facilities, as designed, do not include regulation.
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<PAGE>
APPENDIX C
Pre-Formation Date Expenditures
Cardinal Operating Company has incurred actual Pre-Formation Date
expenditures through October 31, 1995 of $64,706. The estimated pre-formation
date expenditures for November is $22,222. These expenditures were for
engineering and labor costs relating to the initial routing studies,
drafting/reproduction cost to prepare the alignment sheets and preliminary
meetings with the Corps of Engineers, Colonial Pipeline and Carolina Power and
Light to discuss use of their right of way.
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EXHIBIT 10-D-8
AMENDED
CONSTRUCTION, OPERATION AND MAINTENANCE AGREEMENT
BY AND BETWEEN
CARDINAL OPERATING COMPANY
AND
CARDINAL EXTENSION COMPANY, LLC
DATED DECEMBER 19, 1996
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions 1
2. Relationship of the Parties 2
2.1 Appointment as Operator 3
2.2 Operator's Authority to Execute Contracts 3
3. Operation of the Combined Facilities 3
3.1 Operator's Responsibilities 3
3.2 Minimum Pressure 6
3.3 Claims 7
4. Employees, Consultants and Subcontractors
4.1 Operator's Employees, Consultants and
Subcontractors 7
4.2 Use of Affiliated Entities or
Independent Contractors 8
4.3 Standards for Operator and its Employees 8
4.4 Non-Discrimination and Drugs 8
5. Financial and Accounting 9
5.1 Accounting and Compensation 9
5.2 Budgets and Reports 9
5.3 Disputed Charges 9
5.4 Rate Reviews 10
5.5 Audit and Examination 10
6. Intellectual Property; License to Operator 11
7. Indemnification 11
8. Insurance 13
9. Term 14
10. Survival of Obligations 15
11. Law of the Contract and Arbitration 15
11.1 Law of the Contract 15
11.2 Arbitration 15
12. Special and Consequential Damages 18
<PAGE>
13. General 18
13.1 Effect of Agreement; Amendments 18
13.2 Notices 18
13.3 Counterparts 19
13.4 Waiver 19
13.5 Assignability; Successors 19
13.6 Third Persons 20
13.7 Laws and Regulatory Bodies 20
13.8 Section Numbers; Headings 20
13.9 Severability 20
13.10 Further Assurances 20
13.11 Guarantee 20
13.12 Superseded Agreement 20
Exhibit A - Accounting Procedure
<PAGE>
AMENDED
CONSTRUCTION, OPERATION AND MAINTENANCE AGREEMENT
This agreement ("CO&M Agreement"), made and entered into as of the
19th day of December, 1996 is by and between Cardinal Operating Company, a
Delaware corporation ("Operator"), and Cardinal Extension Company, LLC, a North
Carolina limited liability company ("Company").
1. Definitions.
The definitions used in the Operating Agreement of the Company, dated
December 19, 1996 ("Operating Agreement"), shall, except as otherwise
specifically provided below, have the same meanings in this CO&M
Agreement.
1.1 Accounting Procedure. The accounting procedure set
forth in Exhibit A.
1.2 Combined Facilities. The Existing Cardinal Pipeline
and the New Facilities.
1.3 Day. A period of twenty four (24) consecutive
hours commencing at 8:00 a.m., Eastern Standard
Time.
1.4 Decision Notice. See Section 11.2.
1.5 Liabilities. Actions, claims, settlements, judgments, demands,
costs, expenses (including, without limitation, expenses
attributable to the defense of any actions or claims),
attorneys' fees and liabilities related to the Operation of the
Combined Facilities.
1.6 Meeting. See Section 11.2.
1.7 Month. A period of time beginning on the first Day of a calendar
month and ending at the same time on the first Day of the next
succeeding calendar month.
1.8 New Facilities. The approximately 67 miles of 24-
inch pipeline, four meter stations and related
facilities commencing at the terminus of the
Existing Cardinal Pipeline southeast of Burlington,
North Carolina and continuing in a southeastern
direction through Alamance, Orange, Chatham and
Wake Counties until it terminates at
interconnections with Public Service Company of
North Carolina, Inc. and North Carolina Natural Gas
Corporation at the Wake County, North
Carolina/Johnston County, North Carolina border as
generally reflected on the map that is part of
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<PAGE>
Appendix B to the Operating Agreement and any additions or
improvements to the Existing Cardinal Pipeline built in
conjunction with the new 67-mile pipeline.
1.9 Operate the Combined Facilities. Plan, design,
construct, test, maintain, repair, replace,
improve, expand and operate the New Facilities and
test, maintain, repair, replace, improve, expand
and operate the Combined Facilities, including,
without limitation, the duties identified in
Section 3.1 of this Agreement; provided, however,
that the Operator will have no duties with respect
to the Existing Cardinal Pipeline until the
Effective Time except with respect to any additions
or improvements to the Existing Cardinal Pipeline
built in conjunction with the New Facilities. Where
used in noun form, such term shall be "Operation of
the Combined Facilities."
1.10 Party. The Company or the Operator.
1.11 Pre-Completion Period. The period between the
Formation Date and the date that the New Facilities
are placed into service, which latter date shall be
certified in writing by the Operator.
1.12 Prohibited Conduct. Any action by the Operator
that constitutes bad faith, gross negligence or
willful misconduct.
1.13 Required Accounting Practice. The accounting rules
and regulations, if any, at the time prescribed by
the regulatory bodies under the jurisdiction of
which the Company is at the time operating and, to
the extent of matters not covered by such rules and
regulations, generally accepted accounting
principles on a consistent basis as practiced in
the United States at the time prevailing for
companies engaged in a business similar to that of
the Company.
1.14 Year. Each twelve (12) Month period beginning on
the first Day of a calendar year and ending at the
beginning of the first Day of the next calendar
year, provided that the first year hereunder shall
begin on the date hereof, and shall end at the
beginning of the first Day of the following
calendar year, and further provided that the last
contract year shall end at the expiration of the
term of this CO&M Agreement pursuant to Section 9
hereof.
2. Relationship of the Parties.
2
<PAGE>
2.1 Appointment as Operator. Subject to the terms and
conditions of this CO&M Agreement, the Company
hereby appoints the Operator to act hereunder, and
the Operator hereby accepts such appointment and
agrees to act pursuant to the provisions of this
CO&M Agreement and the applicable provisions of the
Operating Agreement. In performing services
pursuant to this CO&M Agreement, the Operator shall
be an agent of the Company.
2.2 Operator's Authority to Execute Contracts. Subject
to the terms of this CO&M Agreement, contracts in
connection with Operation of the Combined
Facilities may be negotiated and executed or
amended by the Operator as agent for the Company.
Copies of all contracts entered into by the
Operator on behalf of the Company shall be provided
to the Company. All contracts and permits, if any,
relating to Company business and executed by the
Operator prior to the Formation Date shall be
assigned by the Operator to the Company as soon as
practicable after the Formation Date.
3. Operation of the Combined Facilities.
3.1 Operator's Responsibilities. The Operator shall be
responsible for the Operation of the Combined
Facilities, and thus subject to the provisions of
the Operating Agreement the Operator shall:
3.1.1 Prepare, file, execute and prosecute
applications for the Necessary
Authorizations required by the Company and
make periodic filings required of the
Company by Governmental Authorities having
jurisdiction, including, without
limitation, the preparation, filing,
execution and prosecution of the NCUC
Application (and any amendments thereto),
the Company's tariff, and any rate case
filings.
3.1.2 Provide or cause to be provided the day-to-
day operating and maintenance services,
administrative liaison and related services
to the Company, including, but not limited
to, customer support, rates (including rate
cases), legal, accounting, electronic
bulletin board, engineering, construction,
repair, replacement, inspection,
operational planning, budgeting, tax and
technical services, and insurance and
regulatory administration.
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3.1.3 Prepare and/or cause to be prepared the
engineering design and specifications for
the New Facilities.
3.1.4 Negotiate and execute contracts for the purchase
of materials, equipment and supplies necessary for
the construction of the New Facilities and
Operation of the Combined Facilities.
3.1.5 Prepare, negotiate and execute in the name
of the Company rights-of-way, land in fee,
permits and contracts, and initiate and
prosecute eminent domain proceedings,
necessary for construction of the New
Facilities and the operation and
maintenance of the Combined Facilities, and
resist the perfection of any involuntary
liens against Company property.
3.1.6 Construct and install, or cause to be
constructed and installed, the New
Facilities.
3.1.7 Maintain accurate and itemized accounting records
for the Operation of the Combined Facilities,
together with any information reasonably required
by the Company relating to such records,
consistent with the applicable provisions of
Section 12 of the Operating Agreement.
3.1.8 Prepare the financial reports set forth in
Section 12 of the Operating Agreement.
3.1.9 Cause the Operation of the Combined
Facilities to be in accordance with the
requirements of all Governmental
Authorities having jurisdiction, including,
but not limited to, the requirements of the
United States Department of Transportation
set forth in 49 CFR Parts 192, 193 and 199
and in accordance with sound and prudent
natural gas pipeline industry practices,
and provide or cause to be provided such
appropriate supervisory, audit,
administrative, technical and other
services as may be required for the
Operation of the Combined Facilities.
3.1.10 Prepare and file all necessary federal and
state income tax returns and all other tax
returns and filings for the Company
(including making the elections set forth
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in Section 11.2 of the Operating Agreement). Each
Member shall furnish to the Operator all pertinent
information in its possession relating to Company
operations that is necessary to enable such
returns to be prepared and filed. The Operator
shall pay on behalf of the Company such taxes as
are required to be paid by the Company.
3.1.11 On behalf of the Company, maintain and
administer bank and investment accounts and
arrangements for Company funds, draw checks
and other orders for the payment of money,
and designate individuals with authority to
sign or give instructions with respect to
those accounts and arrangements. The
Company's funds shall not be commingled
with funds belonging to the Operator.
3.1.12 Negotiate, execute and administer the Service
Agreements in accordance with the Company's tariff
and applicable regulatory requirements, including,
but not limited to, the preparation and collection
of all bills to the Customers for services
rendered thereunder.
3.1.13 Receive requests and issue confirmations for
service and other gas transportation related
information from Customers and potential Customers
in accordance with the Company's tariff and any
applicable regulatory requirements.
3.1.14 Dispatch and allocate daily scheduled nominations
for natural gas quantities to be received,
transported and redelivered by means of the
Combined Facilities.
3.1.15 Utilize electronic flow measurement equipment for
volume determinations and natural gas
chromatographs, as deemed appropriate by the
Operator, for heating value determinations as
described in the Company's tariff.
3.1.16 Except as otherwise provided by applicable laws or
governmental regulations or as otherwise directed
by the Company, retain all records, books of
account, Company tax returns, plans, designs,
studies, reports and other documents related to
the Operation of the Combined Facilities for
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three (3) years from the date of completion of the
activity to which such records relate (or such
longer period as may be required by law).
3.1.17 Report to the Company as soon as
practicable all non-routine occurrences
that the Operator determines may have a
significant adverse impact upon the
Operation of the Combined Facilities, make
any necessary repairs as a result of such
occurrences as the Operator deems
necessary, and make a follow-up report at
an appropriate time on the Operator's
response to each non-routine occurrence;
provided, however, that the Operator shall
obtain the prior approval of the Company
prior to performing repairs with an
estimated cost of over $100,000 unless the
non-routine occurrence is of a nature that
immediate repair is required, in which
event the Operator may make such repair
without such prior approval but shall
provide a complete and accurate report to
the Company of such repair as soon as
practicable thereafter.
3.1.18 Perform any required major equipment
overhaul and replacement; provided,
however, that the Operator shall obtain the
prior approval of the Company prior to
performing such overhaul or replacement
with an estimated cost of over $100,000
unless such overhaul or replacement is of a
nature that immediate action must be taken,
in which event the Operator may perform
such overhaul or replacement without such
prior approval but shall provide a complete
and accurate report to the Company of all
such actions as soon as practicable
thereafter.
3.1.19 Perform such other duties as are reasonably
necessary or appropriate in the Operator's
discretion and enter into such other arrangements
as reasonably requested by the Company to
discharge the Operator's responsibilities under
this CO&M Agreement.
3.2 Minimum Pressure. Operator agrees to design the
New Facilities and to use reasonable efforts to
operate the Combined Facilities in such a manner to
provide a minimum pressure of 550 psig at the
points of delivery on the Existing Cardinal
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Pipeline near Burlington, North Carolina and a minimum pressure
of 500 psig at the interconnection of the Combined Facilities
and the facilities of North Carolina Natural Gas Corporation
near the Wake County/Johnston County, North Carolina border.
Operator agrees that reasonable efforts shall mean that Operator
will not provide firm transportation service in addition to the
270,000 Mcf/d using the Combined Facilities or fail to curtail
interruptible transportation service if such action or failure
to act will interfere with this pressure commitment.
3.3 Claims. Any and all claims against the Company
instituted by anyone other than the Operator
arising out of the Operation of the Combined
Facilities that are not covered by insurance in
accordance with Section 8 of this CO&M Agreement
shall be settled or litigated and defended by the
Operator in accordance with its best judgment and
discretion except when (a) the amount involved is
stated to be (or estimated to be, as the case may
be) greater than $100,000, or (b) criminal sanction
is sought. The settlement or defense of any claim
described in (a) or (b) above shall be decided by
the Members pursuant to the Operating Agreement.
4. Employees, Consultants and Subcontractors.
4.1 Operator's Employees, Consultants and
Subcontractors. The Operator shall employ or
retain and have supervision over the Persons
(including consultants and professional service or
other organizations) required or deemed advisable
by the Operator to perform its duties and
responsibilities hereunder in an efficient and
economically prudent manner. The Operator shall
pay all reasonable expenses in connection
therewith, including compensation, salaries, wages,
overhead and administrative expenses incurred by
the Operator, and if applicable, social security
taxes, workers' compensation insurance, retirement
and insurance benefits and other such expenses.
The compensation for the Operator's employees shall
be determined by the Operator, provided that the
amount and terms of such compensation shall be
comparable to those prevailing in the natural gas
industry where Operator's employees are located for
similar work. Subject to the other provisions of
this CO&M Agreement, all authorized expenses
pursuant to this Section 4.1 shall be reimbursed to
the Operator by the Company as provided in the
Accounting Procedure.
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4.2 Use of Affiliated Entities or Independent
Contractors. In addition, the Operator may
utilize, as it deems necessary or appropriate, the
services of any independent contractors or of its
or any Member's affiliated entity; provided,
however, that such services of the Operator's or
any Member's affiliated entity must be utilized on
terms no less favorable to the Company than those
prevailing at the time for comparable services of
nonaffiliated independent parties.
4.3 Standards for Operator and its Employees. The
Operator shall perform its services and carry out
its responsibilities hereunder, and shall require
all of its employees and contractors,
subcontractors and materialmen furnishing labor,
material or services for the Operation of the
Combined Facilities to carry out their respective
responsibilities in accordance with sound,
workmanlike and prudent practices of the natural
gas pipeline industry and in compliance with the
Company's approved tariff and all relevant laws,
statutes, ordinances, safety codes, regulations,
rules and authorizations of Governmental
Authorities having jurisdiction applicable to the
Combined Facilities.
4.4 Non-Discrimination and Drugs. In performing under
this CO&M Agreement, the Operator shall not
discriminate against any employee or applicant for
employment because of race, creed, color, religion,
sex, national origin, age or disability, and will
comply with all provisions of Executive Order 11246
of September 24, 1965 and any successor order
thereto, to the extent that such provisions are
applicable to the Operator or the Company. The
Company and the Operator do not condone in any way
the use of illegal drugs or controlled substances.
Any person known by the Operator to be in
possession of any illegal drug or controlled
substance will be removed by the Operator and not
permitted to work on or with respect to the
Combined Facilities. In addition, the Operator
shall meet all the applicable requirements imposed
by the Department of Transportation as specified in
49 C.F.R., Parts 40 and 199. Furthermore, upon
request and to the extent permitted by law, the
Operator will furnish the Company copies of the
records of employee drug test results required to
be kept under the provisions of 49 C.F.R. Part 199.
The provisions of this Section 4.4 shall be
applicable to any contractors, consultants and
subcontractors retained in connection herewith, and
the Operator shall cause the agreements with any
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contractor, consultant or subcontractor to contain
similar language.
5. Financial and Accounting.
5.1 Accounting and Compensation.
5.1.1 The Operator shall keep a full and complete
account of all costs, expenses and expenditures
incurred by it in connection with its obligations
hereunder in the manner set forth in the
Accounting Procedure.
5.1.2 The Operator shall be reimbursed by the
Company at the rate and in the manner set
forth in the Accounting Procedure for all
costs and expenses of the Operator in
connection with the Operation of the
Combined Facilities or otherwise to fulfill
the Operator's duties under this CO&M
Agreement; provided, however, that the
Company shall not be required to reimburse
the Operator for costs and expenses arising
out of Prohibited Conduct or claims for
non-payment of any and all contributions,
withholding deductions or taxes measured by
the wages, salaries or compensation paid to
Persons employed by the Operator or any of
its affiliated Companies in connection
herewith.
5.2 Budgets and Reports. The Operator shall prepare
and deliver to the Company for approval, on a
quarterly basis during the Pre-Completion Period
and thereafter as directed by the Company, a budget
reflecting the estimated costs to be incurred for
Operation of the Combined Facilities during the
ensuing 12 month period. Such budgets shall be
prepared in sufficient detail to satisfy the
requirements of any lending institution providing
financing for the New Facilities and/or the
Combined Facilities. The Operator shall also
prepare and deliver to each Member such forecasts,
cash flow projections and financial and operating
reports with respect to the Company as from time to
time may be reasonably requested by the Company,
including fiscal year reports for Members who
report financial results on a basis other than the
calendar year.
5.3 Disputed Charges. The Company may, within the
audit period referred to in Section 5.5 hereof,
take written exception to any bill or statement
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rendered by the Operator for any expenditure or any part thereof
on the ground that the same was not appropriate for
reimbursement under the terms of Section 5.1.2 above. The
Company shall nevertheless pay in full when due the amount of
all statements submitted by the Operator. Such payment shall not
be deemed a waiver of the right of the Company to recoup any
contested portion of any bill or statement; provided, however,
that if the amount as to which such written exception is taken
or any part thereof is ultimately determined in accordance with
Section 11.2 of this CO&M Agreement not to be appropriate for
reimbursement under the terms of Section 5.1.2 of this CO&M
Agreement, such amount or portion thereof (as the case may be)
shall be refunded by the Operator to the Company, together with
interest thereon at a rate (which in no event shall be higher
than the maximum rate permitted by applicable law) equal to two
percent (2%) per annum over the prime rate of Citibank, N.A. (or
its successor) from time to time publicly announced and in
effect, during the period from the date of payment by the
Company to the date of refund by the Operator.
5.4 Rate Reviews. Subject to Section 7.1.5 of the
Operating Agreement the Operator shall review from
time to time the rates and fees charged for natural
gas transportation services, and subject to the
receipt of any required regulatory approvals,
revise such rates and fees as the Operator may deem
appropriate for the Company, as such rates and fees
should in general reflect increased or decreased
costs or other changes in the conditions of
service.
5.5 Audit and Examination. The Company or any Member,
after thirty (30) Days' notice in writing to the
Operator, shall have the right during normal
business hours to audit or examine, at the expense
of the Company or the requesting Member as the case
may be, all books and records maintained by the
Operator, as well as the relevant books of account
of the Operator's contractors, relating to the
Operation of the Combined Facilities; provided,
however, that the total number of full audits
commenced in any Year pursuant to this Section 5.5
shall not exceed two. Such right shall include the
right to meet with the Operator's internal and
independent auditors to discuss matters relevant to
the audit or examination. The Company shall have
two Years after the close of a Year in which to
make an audit of the Operator's records for such
Year; provided, however, that any audits relating
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<PAGE>
to construction costs may be made up to twenty four (24) Months
after the in-service date of the New Facilities (not including
any Modifications) or after the date that construction of the
Modification in question was completed, as certified in writing
by the Operator, in the case of a Modification.
6. Intellectual Property; License to Operator. Each Member
hereby grants to the Operator an irrevocable, royalty-
free, non-exclusive and non-assignable license to use,
during the term of this CO&M Agreement, any confidential
information provided to the Company or the Operator by
said Member and designated as such by said Member. For
purposes of this Section 6, confidential information
shall include, but shall not be limited to, inventions
(whether patented or not) and copyrighted or
copyrightable material. As a condition precedent to the
effectiveness of such license to use, the Operator
hereby expressly agrees that it will utilize such
confidential information solely in connection with the
performance of its duties hereunder and further
expressly agrees that it will be subject to and bound by
the provisions set forth in Section 4.7.2 of the
Operating Agreement as if it were a Member. Upon
termination of this CO&M Agreement or its removal as
Operator, such license shall terminate and the Operator
shall return all confidential information that has been
provided to it, together with all reproductions thereof
in the Operator's possession, pursuant to such license
to use, to the Member from whom it obtained such
confidential information.
7. Indemnification. The Company agrees to indemnify, hold
harmless and defend the Operator and its affiliated
companies and their respective officers, directors,
employees and agents (but not including any Member of
the Company, in its capacity as such) from and against,
and the indemnified parties shall have no liability to
the Company for, any and all Liabilities incurred
arising out of or relating to this CO&M Agreement or the
Operation of the Combined Facilities, regardless of
cause, including Liabilities attributable to the sole,
joint or concurrent negligence of the indemnified
parties hereunder; provided, however, that the Company
shall not be required to indemnify or hold harmless the
indemnified parties from or against any Liabilities
attributable to the actions or omissions of Operator in
maintaining and administering accounts and arrangements
as set forth in Section 3.1.11 of this CO&M Agreement;
provided, further, that the Company shall not be
required to indemnify or hold harmless the indemnified
parties from or against any Liabilities attributable to
Prohibited Conduct or claims for non-payment of any and
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all contributions, withholding deductions or taxes measured by the
wages, salaries or compensation paid to Persons employed by the Operator
or any of its affiliates in connection herewith. In the event applicable
law limits in any way the extent to which indemnification may be
provided to an indemnitee, this Section 7 shall be automatically
amended, in keeping with the express intent of the parties hereto, as
necessary to render all the remainder of this CO&M Agreement valid and
enforceable and to provide that the indemnifications provided herein
shall extend and be effective only to the maximum extent permitted by
such law. Upon notice therefor, the Company shall advance to the
indemnified party the costs of any Liabilities for which indemnification
is to be sought hereunder upon the execution by the indemnified party of
a written undertaking to repay any costs for which indemnification
pursuant to this Section 7 is determined to be improper by mutual
agreement or pursuant to the procedures set forth in Section 11.2 of
this CO&M Agreement, together with interest thereon at a rate (which in
no event shall be higher than the maximum rate permitted by applicable
law) equal to two percent (2%) per annum over the prime rate of
Citibank, N.A. (or its successor) from time to time publicly announced
and in effect, during the period from the date of advancement by the
Company to the date of repayment by the indemnified party. With respect
to any claim against any indemnified party for which indemnification may
be sought hereunder, the Company shall not, without the indemnified
party's prior written consent, settle or compromise such claim or
consent to entry of any judgment in respect thereof which imposes any
future obligation on the indemnified party or which does not include, as
an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party a release from all liability in
respect of such claim. The Company (a) shall have the right to defend,
at its cost and expense, such claim in all appropriate proceedings, and
(b) shall have full control (including choice of counsel) of such
defense and proceedings, including any compromise or settlement thereof
(subject to the foregoing provisions of this Section 7), and the
indemnified parties shall cooperate in such defense in all reasonable
ways. The Company shall not be required to provide indemnification
pursuant to this Section 7 to the extent, if any, that the Liabilities
in question are not borne or incurred by the indemnified parties because
of the availability of insurance proceeds from the insurance required in
Section 8.2 of this CO&M Agreement to the indemnified parties.
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8. Insurance.
8.1 During the initial construction of the New
Facilities, the Operator shall cause to be carried
and maintained, either directly or through the
contractor building the New Facilities, with the
limits directed by the Company to cover liability
for personal injury or death, physical loss and
damage to property during construction, with a
deductible amount selected by the Operator. The
insurance shall name the Operator and the Company
as insureds.
8.2 At all times during the construction of the New
Facilities and during the Operation of the Combined
Facilities, the Operator shall provide (a) workers'
compensation insurance granting full compensation
under the worker's compensation law of any state in
which operations are conducted, and (b) employer's
liability insurance with limits of not less than
$2,000,000 per occurrence for all of the Operator's
employees engaged in work on the Combined
Facilities, and (c) automobile liability insurance
for all vehicles owned or used by the Operator,
covering injuries to or death of persons and damage
to property, with a combined single limit of not
less than $2,000,000 per occurrence.
8.3 If permitted by applicable law, the Operator may self-insure the
workers' compensation and employer's liability insurance
required above.
8.4 Operator shall procure and maintain for the benefit
of Company and Operator during the Operation of the
Combined Facilities, a general liability or excess
liability insurance policy with a combined single
limit of $10,000,000 per occurrence for bodily
injury and property damage, covering blanket
contractual liability, broad form property damage,
independent contractors, products/completed
operations, cross liability and explosion, collapse
and underground exposures. Operator and Company
shall be named insureds under this policy. The
member companies and their respective parent and
affiliated companies and Operator's parent and
affiliated companies shall be named as additional
insureds under this policy, but only for the
Operation of the Combined Facilities. This
insurance shall be endorsed to provide primary
insurance over any other insurance maintained by or
on behalf of the Operator or the member companies
or their respective parent and affiliated
companies, and to waive all rights of subrogation
in favor of Operator and the member companies and
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their respective parent and affiliated companies. Operator will
have a certificate of insurance issued evidencing this insurance
upon the specific request of the Company or any of its member
companies.
8.5 The costs for premiums, deductibles and retentions
for the insurance maintained by the Operator
pursuant to this CO&M Agreement shall be
reimbursable costs pursuant to Section 5 of this
CO&M Agreement. In addition, in the event that the
Operator self-insures the workers' compensation and
employer's liability insurance required above, the
Operator shall be reimbursed as provided in Section
3.09 of the Accounting Procedure.
8.6 After completion of construction of the New
Facilities, the Company shall at all times be
responsible for insuring against liability
exposures with regard to the Combined Facilities
and the operation, maintenance and construction
thereof, except as described in Section 8.2 of this
CO&M Agreement.
8.7 The Operator, the Company and the Members hereby
waive, and the insurers of any of them shall waive,
all rights of recovery against one another, the
affiliated companies of each and the insurers of
any of them with respect to damage to or loss of
property that is a part of the Combined Facilities
(collectively referred to as "Damages"). Such
waiver of recovery shall be effective regardless of
the cause of the Damages, including any Damages
attributable to the sole, joint or concurrent
negligence of the party causing the Damages, but
excluding any Damages attributable to the gross
negligence or willful misconduct of the party
causing the Damages. All such policies of
insurance purchased to cover the Combined
Facilities or any part thereof, or the Operation of
the Combined Facilities or any part thereof, or any
natural gas received, transported or delivered
using the Combined Facilities, shall be endorsed
properly to effectuate this waiver of recovery. In
addition, each Member's general liability insurance
(including excess insurance) policies shall be
worded to provide a waiver of all subrogation
rights in favor of the Operator, the Company and
the other Members.
9. Term. This CO&M Agreement shall be effective as of the
date hereof and shall continue for the term of the
Company as provided in the Company's Articles of
Organization; provided, however, that this CO&M
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Agreement shall be terminated earlier upon the first to occur of the
following: (a) the Operator or its affiliated company which is a Member
ceases to be a Member; or (b) the Operator commits a material default
under this CO&M Agreement and such material default continues for a of
120 days after notice thereof by the Company to the Operator (provided,
however, that no termination shall occur if the Operator has initiated
action to cure such material default but, despite its good faith
efforts, it has been unable to complete such cure within such 120 day
period).
10. Survival of Obligations. The termination of this CO&M
Agreement shall not discharge any Party from any
obligation which it owes to any other Party by reason of
any transaction, commitment or agreement entered into,
or any Liabilities that shall occur or arise (or the
circumstances, events or basis of which shall occur or
arise) prior to such termination. It is the intent of
the Parties that any obligation owed by a Party to the
other Party (whether the same shall be known or unknown
at the time of termination hereof, or whether the
circumstances, events or basis of the same shall be
known or unknown at the termination hereof) shall
survive the time of termination of this CO&M Agreement.
11. Law of the Contract and Arbitration.
11.1 Law of the Contract. THIS CO&M AGREEMENT SHALL BE GOVERNED BY
AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NORTH CAROLINA, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR
PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION
OF THIS CO&M AGREEMENT TO THE LAW OF ANOTHER JURISDICTION.
11.2 Arbitration.
11.2.1 In the event that the Parties are unable
to agree on any matter relating to this
CO&M Agreement, the Company or the
Operator may upon notice given to the
other call for submission of such matter
to arbitration. The Party requesting
arbitration shall set forth in such
notice in adequate detail the issues to
be arbitrated, and within ten (10) Days
from the receipt of such notice, the
other Party may set forth in adequate
detail additional related issues to be
arbitrated. Within ten (10) Days after
the giving of such latter notice, each
Party shall furnish to the other Party a
notice ("Decision Notice") setting forth
the decision (on a word-for-word basis)
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that such Party wishes the arbitrator(s) to make
with respect to the issues to be arbitrated.
Within ten (10) Days after the giving of the
latter of the two Decision Notices, the Parties
shall attend a meeting ("Meeting") at a mutually
acceptable time and place to discuss fully the
content of such Decision Notices and based
thereon determine whether either or both wish to
modify their Decision Notices in any way. Any
such modifications shall be discussed with each
other, so that when each Party finalizes its
Decision Notice, it shall do so with full
knowledge of the content of the other Party's
final Decision Notice. The finalization of such
Decision Notices and the delivery of same by
each Party to the other shall occur at the
Meeting unless by mutual agreement they agree to
have one or more additional Meetings for such
purposes. If arbitration is invoked by either
Party, the decision of the arbitrators shall be
final and binding upon all Parties, and neither
Party shall seek to have the applicable issues
litigated rather than arbitrated (except as may
be otherwise required by law).
11.2.2 It is the intent of the Parties that, to
the extent practicable, such binding
arbitration shall be conducted by a
person knowledgeable and experienced in
the type of matter that is the subject of
the dispute. In the event the Parties
are unable to agree upon such person
within ten Days after the last Meeting
held pursuant to Section 12.2.1 above,
then each Party shall select a person
that it believes has the qualifications
set forth above as its designated
arbitrator (which selection shall be
accomplished by notifying the other Party
of the identity of such person), and such
arbitrators so designated shall mutually
agree upon a similarly qualified third
person to complete the arbitration panel;
provided, however, that if one of the
Parties fails to select its designated
arbitrator as specified herein within ten
(10) Days of receiving notice from the
other Party that such other Party has
selected its designated arbitrator then
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the arbitration provided for herein shall be
conducted by the one arbitrator so designated.
In the event that the persons selected by the
Parties are unable to agree on a third member of
the panel within ten (10) Days after the
selection of the latter of the two arbitrators,
such person shall be designated by the American
Arbitration Association. Upon final selection of
the entire panel, such panel shall, as
expeditiously as possible (and if possible,
within ninety (90) Days after the selection of
the last arbitrator), render a decision on the
matter submitted for arbitration. Such panel
shall be required to adopt either the decision
set forth in the Operator's final Decision
Notice or the decision set forth in the
Company's final Decision Notice and shall have
no power whatsoever to reach any other result.
Such panel shall adopt the decision that in its
judgement is the more fair, equitable and in
conformity with this CO&M Agreement. The
arbitration shall be conducted in North Carolina
in accordance with the commercial arbitration
rules of the American Arbitration Association.
11.2.3 Upon the determination of any such
dispute, the arbitrators shall bill the
costs attributable to such binding
arbitration to the losing Party;
provided, however, that the arbitrators
shall be empowered to apportion such
costs between the Parties if they deem it
appropriate.
11.2.4 It is the intent of the Parties that,
once arbitration is invoked by either
Party pursuant to the provisions of this
Section 11, the matters set for
arbitration shall be decided as set forth
herein, and they shall not seek to have
this Section 11 rendered unenforceable or
to have such matter decided in any other
way; provided, however, that nothing
herein shall prevent the Parties from
negotiating a settlement of any issue at
any time.
11.2.5 Without limiting any of the foregoing,
for purposes of this CO&M Agreement an
17
<PAGE>
independent determination of whether an action
or failure to act constitutes Prohibited Conduct
shall be made by arbitration pursuant to this
Section 11, without regard to the findings of
any court or administrative body or the
settlement or compromise of any claim (other
than a settlement of the type referred to in
Section 11.2.4 above).
12. Special and Consequential Damages. The indemnification provided in
Section 7 of this CO&M Agreement shall include without limitation claims
made by any Person for special, indirect, consequential or punitive
damages; otherwise, neither Party shall have any liability hereunder to
the other Party for any special, indirect, consequential or punitive
damages.
13. General.
13.1 Effect of Agreement; Amendments. This CO&M
Agreement, together with the Operating Agreement,
reflects the whole and entire agreement among the
Parties with respect to the subject matter hereof
and supersedes all prior agreements and
understandings, oral and written, among the
Parties with respect to the subject matter hereof.
This CO&M Agreement can be amended, restated or
supplemented only by the written agreement of the
Operator and the Company.
13.2 Notices. Unless otherwise specifically provided
in this CO&M Agreement, any notice or other
communication shall be in writing and may be sent
by (a) personal delivery (including delivery by a
courier service), (b) telecopy to the following
telecopy numbers (until changed in accordance with
this Section 13.2) or (c) registered or certified
mail, postage prepaid, addressed as set forth
below (or at such other address as may be
designated in accordance with this Section 13.2):
13.2.1 If to the Operator:
Cardinal Operating Company
P.O. Box 1396
Houston, Texas 77251-1396
(2800 Post Oak Blvd. 77056)
Attention:
Vice President Operations & Engineering
Telecopy number: (713) 215-4269
13.2.2 If to the Company, to each of the
Members as set forth in the Operator Agreement.
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<PAGE>
Notices shall be deemed given upon receipt, and a notice to
the Company shall be deemed given when received by the last
Member to receive same. Any Party may change its address or
telecopy number for notices hereunder by providing notice of
any such change to each of the other Parties.
13.3 Counterparts. This CO&M Agreement may be executed in
counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same
instrument.
13.4 Waiver. No waiver by either Party of any default
by the other Party in the performance of any
provision, condition or requirement herein shall
be deemed to be a waiver of, or in any manner
release the other Party from, performance of any
other provision, condition or requirement herein,
nor shall such waiver be deemed to be a waiver of,
or in any manner a release of, the other Party
from future performance of the same provision,
condition or requirement. Any delay or omission
of either Party to exercise any right hereunder
shall not impair the exercise of any such right,
or any like right, accruing to it thereafter.
13.5 Assignability; Successors. This CO&M Agreement may
not be assigned by either Party without the
written consent of the other Party; provided,
however, that such consent shall not be withheld
unreasonably; provided, further, that this CO&M
Agreement may be pledged by the Company without
the consent of the Operator in connection with any
Financing Commitment. This CO&M Agreement and all
of the obligations and rights herein established
shall extend to and be binding upon and shall
inure to the benefit of the respective
19
<PAGE>
successors and permitted assigns of the respective Parties
hereto. Unless otherwise agreed, any assignment of this CO&M
Agreement shall not relieve the assigning Party of any of its
obligations hereunder.
13.6 Third Persons. Except as expressly provided in this CO&M
Agreement, nothing herein expressed or implied is intended or
shall be construed to confer upon or to give any Person not a
Party hereto any rights, remedies or obligations under or by
reason of this CO&M Agreement.
13.7 Laws and Regulatory Bodies. This CO&M Agreement
and the obligations of the Parties hereunder are
subject to all applicable laws, rules, orders and
regulations of Governmental Authorities having
jurisdiction, and to the extent of conflict, such
laws, rules, orders and regulations of
governmental authorities having jurisdiction shall
control.
13.8 Section Numbers; Headings. Unless otherwise
indicated, references to Section numbers are to
Sections of this CO&M Agreement. Headings and
captions are for reference purposes only and shall
not affect the meaning or interpretation of this
CO&M Agreement.
13.9 Severability. Any provision of this CO&M
Agreement that is prohibited or unenforceable in
any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of that prohibition
or unenforceability without invalidating the
remaining provisions hereof or affecting the
validity or enforceability of that provision in
any other jurisdiction.
13.10 Further Assurances. Each Party agrees to execute and deliver
all such other and additional instruments and documents and to
do such other acts and things as may be reasonably necessary
more fully to effectuate the terms and provisions of this CO&M
Agreement.
13.11 Guarantee. By its execution of this CO&M
Agreement as a Member of the Company, the Member
(in its individual capacity) that is an affiliate
of the Operator also hereby guarantees the
performance by the Operator of all the Operator's
obligations and liabilities under this CO&M
Agreement.
13.12 Superseded Agreement. This Construction,
Operation and Maintenance Agreement supersedes and cancels as
December 19, 1996 the Construction, Operation and Maintenance
Agreement dated December 6, 1995 between Operator and Company.
20
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this CO&M Agreement to be
executed by their duly authorized representatives as of the date first above
written.
OPERATOR:
CARDINAL OPERATING COMPANY
By: /s/ Frank J. Ferazzi
FRANK J. FERAZZI
Vice President
COMPANY:
Cardinal Extension Company, LLC
By each of its Members:
TRANSCARDINAL COMPANY PIEDMONT INTRASTATE
PIPELINE COMPANY
By: /s/ Frank J. Ferrazzi By: /s/ Thomas E. Skains
FRANK J. FERAZZI THOMAS E. SKAINS
Vice President Vice President
PSNC CARDINAL PIPELINE NCNG ENERGY CORPORATION
COMPANY
By: /s/ Franklin H. Yoho By: /s/ Terrence D. Davis
FRANKLIN H. YOHO TERRENCE D. DAVIS
Vice President Vice President
21
<PAGE>
EXHIBIT A
TO
CONSTRUCTION, OPERATION AND MAINTENANCE AGREEMENT
ACCOUNTING PROCEDURE
ARTICLE I
General Provisions
1.01 Statements and Billings. The Operator shall bill the Company on the
first Day of each Month or as soon as possible thereafter for the estimated
costs and expenses for the Month, including any adjustment that may be necessary
to correct prior estimated billings to actual costs. If requested by the
Company, the Operator will promptly provide reasonably sufficient support for
the estimated costs and expenses to be incurred for the Month. Actual bills will
be summarized by appropriate classifications indicative of the nature thereof
and will be accompanied by such detail and supporting documentation as the
Company may reasonably request.
1.02 Payment by Company. The Company shall pay all bills presented by the
Operator as provided in this CO&M Agreement on or before the fifteenth (15th)
Day after the bill is received. If payment is not made within such time, the
unpaid balance shall bear interest until paid at a rate (which shall in no event
be higher than the maximum rate permitted by applicable law) equal to two
percent (2%) per annum over the prime rate of Citibank, N.A. (or its successor)
from time to time publicly announced and in effect. Payment by or on behalf of
the Company shall not be deemed a waiver of the right to recoup any amount in
question.
1.03 Financial Records. The Operator shall maintain accurate books and
records in accordance with Required Accounting Practice covering all of the
Operator's actions under this CO&M Agreement.
1.04 Purchase of Materials. It is contemplated that all material,
equipment and supplies will be owned by the Company and purchased or furnished
for its account. So far as is reasonably practical and consistent with
efficient, safe and economical operation as determined by the Operator, only
such material shall be obtained for the Combined Facilities as may be required
for immediate use, and the accumulation of surplus stock shall be avoided. To
the extent reasonably possible, the Operator shall take advantage of discounts
available by early payments and pass such benefits on to the Company.
1
<PAGE>
1.05 Interest-Bearing Account. To the extent practicable, the funds of
the Company will be held in one or more interest-bearing accounts.
ARTICLE II
Capital Items
To the extent the Operator or any of its affiliated companies owns real
and/or personal property necessary or desirable for the Operation of the
Combined Facilities that (a) under Required Accounting Practice, might be
capitalized, and (b) the Operator or such affiliate in its sole discretion is
willing to transfer for consideration to the Company, the Operator or such
affiliate may, if approved by the Company, so transfer such property to the
Company. In the event of such a transfer, the Operator may charge the Company
the net book value thereof (as reflected on the books of the Operator or such
affiliate on the date of transfer).
The cost of natural gas utilized for installation, purging, testing and
line pack of the Combined Facilities shall be a capital item. Any major
modification to information systems requiring information processing and/or
programming services shall be a capital item.
ARTICLE III
Costs and Expenses
Subject to the limitations hereafter prescribed and the provisions of this
CO&M Agreement, the Operator shall charge the Company for all costs and expenses
provided for in Section 5.1.2 of this CO&M Agreement, including, but not limited
to, the following items:
3.01 Rentals. All rentals paid by the Operator.
3.02 Labor Costs. All applicable personnel generating the following labor
costs shall keep time sheets so that the portion of their salaries and wages
chargeable under this CO&M Agreement may be supported and calculated, and only
such proportionate part of such labor costs shall be charged pursuant to this
Section 3.02:
(a) Salaries and wages of employees of the Operator and its
affiliated companies engaged in connection with the construction, operation,
maintenance and administration of the Combined Facilities and, in addition,
amounts paid as salaries and wages of others temporarily employed in connection
therewith. Such salaries and wages
2
<PAGE>
shall be loaded to include the Operator's actual costs of bonuses, holiday,
vacation, sickness and jury service benefits and other customary allowances for
time not worked paid to persons whose salaries and wages are chargeable under
this Section 3.02(a). Direct labor charges may be billed from the following
areas: Operations, Engineering, Customer Services, Legal-Assigned, Accounting,
Tax, Rates and Planning.
(b) Expenditures or contributions made pursuant to
assessments imposed by Governmental Authority that are applicable to salaries,
wages and costs chargeable under Section 3.02(a) above, including, but not
limited to, FICA taxes and federal and state unemployment taxes.
(c) The costs of plans incurred by or on behalf of the
Operator for workers' compensation, employers' group life insurance,
hospitalization, disability, pension, retirement, savings and other benefit
plans, that are applicable to salaries and wages chargeable under Section
3.02(a) above. Such costs shall be charged on the basis of a percentage
assessment on the amount of salaries and wages chargeable under Section 3.02(a)
above.
(d) Overhead costs incurred to design and install information
processing and programming services during the construction period. The total
charges to the Company for these services will not exceed $50,000.
3.03 Reimbursable Expenses of Employees. Reasonable personal expenses of
employees whose salaries and wages are chargeable under Section 3.02(a) above.
As used herein, the term "personal expenses" shall mean out-of-pocket
expenditures incurred by employees in the performance of their duties and for
which such employees are reimbursed. The Operator shall maintain documentation
for such expenses in accordance with the standards of the Internal Revenue
Service.
3.04 Material, Equipment and Supplies. Material, equipment and supplies
purchased or furnished from the warehouse or other properties of the Operator's
affiliated companies, priced at cost plus the affiliate's appropriate purchasing
and stores overhead ordinarily in use by the affiliate.
3.05 Transportation. Transportation of employees, equipment and material
and supplies necessary for the Operation of the Combined Facilities.
3.06 Services. The cost of contract services and utilities procured from
outside sources.
3
<PAGE>
3.07 Legal Expenses and Claims. All costs and expenses of handling,
investigating and settling litigation or claims arising by reason of the
Operation of the Combined Facilities or necessary to protect or recover any
Combined Facilities or property, including, but not limited to, attorney's fees,
court costs, costs of investigation or procuring evidence and any judgments paid
or amounts paid in settlement or satisfaction of any such litigation or claims.
All judgments received or amounts received in settlement of litigation with
respect to any claim asserted on behalf of the Company shall be for the benefit
of and shall be remitted to the Company.
3.08 Taxes. All taxes (except those measured by income) of every kind and
nature assessed or levied upon or incurred in connection with the Operation of
the Combined Facilities or on the Combined Facilities or other property of the
Company and which taxes have been paid by the Operator for the benefit of the
Company, including charges for late payment arising from extensions of the time
for filing that are caused by the Company, or that result from the Operator's
good faith efforts to contest the amount or application of any tax.
3.09 Insurance. Net of any returns, refunds or dividends, all premiums,
deductibles and retentions paid and expenses incurred for insurance required to
be carried under this CO&M Agreement. In the event that the Operator self-
insures the workers' compensation and employer's liability insurance as provided
in Section 8 of this CO&M Agreement, the Operator shall be reimbursed only for
the amount equivalent to the standard premium(s) which would have been paid had
such insurance been acquired, and the Operator shall not be reimbursed for the
costs associated with any claims paid by the Operator as an insurer under such
self-insurance.
3.10 Permits, Licenses and Bond. Cost of permits, licenses and bond
premiums necessary in the performance of the Operator's duties.
3.11 General Overhead. All other administrative and general expenditures,
including salaries and wages, bonuses, related benefits and expenses of
personnel of the Operator and/or the Operator's Affiliates (excluding the
personnel referred to in Sections 3.02 of this Article III) who render services
for the benefit of the Operator (in the performance of its obligations
hereunder) or the Company, including but not limited to, administrative, public
relations, personnel, purchasing, legal and treasury, shall be charged as
follows:
Pre-Completion Period: two percent (2%) of direct
labor costs
Thereafter: five percent (5%) of direct labor
costs
4
<PAGE>
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<PERIOD-START> OCT-01-1997
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0
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<LONG-TERM-DEBT-NET> 174,050
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<EARNINGS-AVAILABLE-FOR-COMM> 7,193
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