<PAGE> 1
As filed August 14, 1996
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
Form 10-Q
X QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities
---------- Exchange Act of 1934
For the quarterly period ended JUNE 30, 1996
or
TRANSITION REPORT Pursuant to Section 13 or 15(d) of the
---------- Securities Exchange Act of 1934
Commission File Number 1-10718
TPC CORPORATION
(Exact name of registrant as specified in its charter)
(FORMERLY TEJAS POWER CORPORATION)
DELAWARE 76-0091595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 WESTLAKE PARK BOULEVARD
SUITE 1000
HOUSTON, TEXAS 77079
(Address of principal executive offices)
(713) 597-6200
(Registrant's telephone number, including area code)
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
--------- ---------
As of August 13, 1996, the registrant had outstanding 17,519,252 shares of
Class A Common Stock (net of 375,000 Treasury Shares), par value $.01 and
579,963 shares of Class B, Series A Common Stock, par value $.01.
- ------------------------------------------------------------------------------
<PAGE> 2
TPC CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 . . . . . . . . 3
Unaudited Consolidated Statements of Operations - Three Months and Six Months Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Unaudited Consolidated Statements of Cash Flows - Three Months and Six Months Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
<PAGE> 3
TPC CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 4,238 $ 6,102
Accounts and notes receivable . . . . . . . . . . . . . . . . . 67,254 65,621
Account receivable from MHP . . . . . . . . . . . . . . . . . . 8,969 8,989
Note receivable from MHP . . . . . . . . . . . . . . . . . . 14,320 --
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,105 8,362
Prepaid expenses and other current assets . . . . . . . . . . . 2,788 2,769
Assets held for resale . . . . . . . . . . . . . . . . . . . . 781 13,700
-------- ---------
Total Current Assets . . . . . . . . . . . . . . . 103,455 105,543
-------- ---------
Property and Equipment:
Natural gas gathering and processing facilities . . . . . . . . 205,775 205,470
Construction in progress . . . . . . . . . . . . . . . . . . . 8,507 5,069
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,738 3,207
Less accumulated depreciation . . . . . . . . . . . (44,974) (40,427)
-------- ---------
172,046 173,319
Note Receivable from MHP . . . . . . . . . . . . . . . . . . . . . . 16,700 25,021
Investment in MHP . . . . . . . . . . . . . . . . . . . . . . . . . 30,381 27,796
Assets of Business Transferred . . . . . . . . . . . . . . . . . . . 30,794 31,690
Intangible Assets, net . . . . . . . . . . . . . . . . . . . . . . . 5,647 5,809
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,594 6,738
-------- ---------
$365,617 $ 375,916
======== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE> 4
TPC CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,769 $ 53,416
Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,831 6,640
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7,451
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 28,782 23,832
---------- ----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 99,382 91,339
---------- ----------
Long-Term Debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . 125,845 146,515
Proceeds from Business Transferred . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500 17,500
Liabilities of Business Transferred . . . . . . . . . . . . . . . . . . . . . . . . . . 19,718 20,583
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,577 1,483
Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 55
Commitments and Contingencies:
Stockholders' Equity:
Common stock, Class A, $.01 par value; authorized 25,000,000 shares;
issued and outstanding 17,894,252 shares in 1996 and 1995 . . . . . . . . . . . 179 179
Common stock, Class B, convertible, $.01 par value; authorized
5,000,000 shares; issued and outstanding 579,963 shares . . . . . . . . . . . . 6 6
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,820 86,820
Unearned ESOP compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (823) (963)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,249 13,235
---------- ----------
101,431 99,277
Less: Treasury stock, 375,000 shares at cost . . . . . . . . . . . . . . . . . . . (836) (836)
---------- ----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . 100,595 98,441
---------- ----------
$ 365,617 $ 375,916
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE> 5
TPC CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------
1996 1995 1996 1995
-------------- --------------- ------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Natural gas marketing sales . . . . . . . . . . . . . . . . $ 146,932 $ 66,189 $ 279,209 $ 129,683
Natural gas gathering and processing . . . . . . . . . . . 7,071 2,203 16,356 4,228
Natural gas storage (including equity in
earnings of MHP) . . . . . . . . . . . . . . . . . . . . 2,148 1,735 4,862 3,547
----------- ------------ ----------- -----------
156,151 70,127 300,427 137,458
----------- ------------ ----------- -----------
Costs of Operations:
Natural gas marketing . . . . . . . . . . . . . . . . . . . 145,742 65,347 276,413 127,205
Natural gas gathering and processing . . . . . . . . . . . 3,888 2,746 8,798 4,649
Natural gas storage . . . . . . . . . . . . . . . . . . . . 1,178 1,010 2,633 2,602
----------- ------------ ----------- ------------
150,808 69,103 287,844 134,456
----------- ------------ ----------- ------------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . 5,343 1,024 12,583 3,002
Other Income (Expense):
Corporate administrative expense . . . . . . . . . . . . . (1,310) (512) (2,913) (1,545)
Interest expense . . . . . . . . . . . . . . . . . . . . . (3,323) -- (7,026) (704)
Interest income . . . . . . . . . . . . . . . . . . . . . . 778 205 1,439 978
Net earnings of business transferred . . . . . . . . . . . (440) (254) (782) (588)
Other income (expense) . . . . . . . . . . . . . . . . . . (134) 49 (165) 49
----------- ------------ ----------- ------------
(4,429) (512) (9,447) (1,810)
------------ ------------ ----------- ------------
Income Before Income Tax . . . . . . . . . . . . . . . . . . . 914 512 3,136 1,192
Benefit (provision) for income tax expense . . . . . . . . (338) (196) (1,122) (461)
----------- ------------ ----------- ------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 576 $ 316 $ 2,014 $ 731
=========== ============ =========== ============
Net Income Per Common Share . . . . . . . . . . . . . . . . $ 0.03 $ 0.02 $ 0.11 $ 0.05
=========== ============ ============ ============
Weighted Average Shares Outstanding . . . . . . . . . . . . 19,105,868 15,149,887 19,132,916 15,139,019
=========== ============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE> 6
TPC CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,014 $ 731
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 5,604 3,101
Amortization of deferred charges. . . . . . . . . . . . . . . . . . . . . . . . . 552 75
Equity in earnings of MHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,063) (1,027)
Changes in assets and liabilities, net of effects of business transferred:
(Increase) decrease in accounts and notes receivable. . . . . . . . . . . . . . . (1,613) (699)
(Increase) decrease in prepaid expenses, inventory and other assets . . . . . . . 3,238 (11,665)
Increase (decrease) in trade payables and other liabilities . . . . . . . . . . . 10,544 7,360
Increase in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 1,094 461
Increase (decrease) in deferred revenue . . . . . . . . . . . . . . . . . . . . . (55) 3
Decrease in unearned ESOP compensation . . . . . . . . . . . . . . . . . . . . . 140 42
--------- ---------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . 19,455 (1,618)
--------- ---------
Cash Flows from Investing Activities, net of effects of business transferred:
Capital and other asset additions . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,318) (1,039)
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,200 --
Increase in note receivable from MHP . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000) --
Change in assets and liabilities of business transferred . . . . . . . . . . . . . . . . (30) 905
--------- ---------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . 1,852 (134)
--------- ---------
Cash Flows from Financing Activities, net of effects of business transferred:
Net borrowings on unsecured revolving credit agreement . . . . . . . . . . . . . . . . . 2,000 --
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 199
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,720) (13)
Repayment of note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,451) --
--------- ---------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . (23,171) 186
--------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . (1,864) (1,566)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 6,102 8,720
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,238 $ 7,154
========= =========
Supplemental disclosures of cash flow information:. . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the period for interest, net of amounts capitalized . . . . . . . . . . $ 6,409 $ --
Cash paid during the period for income taxes . . . . . . . . . . . . . . . . . . . . . . -- --
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 7
TPC CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The consolidated financial statements of TPC Corporation (formerly Tejas
Power Corporation) and Subsidiaries ("TPC") included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations and cash flows for the periods
presented. Certain reclassifications have been made to the 1995 consolidated
statement of operations to conform to the 1996 presentation. For further
information on accounting policies, refer to the audited consolidated financial
statements and the notes thereto contained in TPC's annual report on Form 10-K
for the year ended December 31, 1995.
Because of the seasonal nature of TPC's operations, among other factors,
the results of operations for the interim period presented are not necessarily
indicative of the results to be expected for an entire year.
(2) SEAGULL TRANSACTION
In September 1995, TPC completed the acquisition of various natural gas
gathering systems offshore and onshore Texas and related assets from Seagull
Energy Corporation and four other sellers for $155.6 million in cash (the
"Seagull Transaction"). The purchase price was based on an effective date of
September 1, 1995 and was accounted for as a purchase. Transaction costs,
consisting primarily of fees paid to financial advisors, totaled approximately
$1,830,000.
The acquisition was financed through a combination of existing credit
facilities and $150 million under new credit facilities provided by ING Capital
Corporation ("ING Capital"). The $150 million in new credit facilities
included a subordinated secured $30 million bridge loan which was subsequently
repaid in November 1995 with proceeds of a public stock offering (see Note 5)
and two secured term loan tranches of $60 million each (collectively referred
to as the "Term Loan"). The first tranche amortizes on a quarterly basis
through its maturity on June 30, 2000. The second tranche is non-amortizing
and matures on September 30, 2000.
Interest on the Term Loan is, at TPC's discretion, either a Eurodollar
rate or a base rate, plus a LIBOR rate spread or base rate spread,
respectively, as defined in the loan agreements. The base rate is the average
of the prime rates publicly announced by The Chase Manhattan Bank, Citibank,
N.A., and Morgan Guaranty Trust Company of New York. The base and LIBOR rate
spreads for each tranche are calculated based on certain capitalization ratios
of TPC. The base rate spread for the tranches can be as high as 2.5% per annum
and as low as 0% per annum and the LIBOR rate spread can be as high as 4% per
annum and as low as 1% per annum.
The credit facilities require the maintenance of certain financial ratios
and other covenants, including minimum consolidated net worth, minimum
capitalization, and a ratio of current assets to current liabilities of not
less than 1 to 1. The Term Loan is secured by the assets acquired in the
Seagull Transaction. A number of the smaller non-core gathering systems
acquired in the Seagull Transaction were classified as "Assets Held for Sale"
at December 31, 1995. Sales of such assets totaling $13,200,000 were made in
the first quarter of 1996, with proceeds of $12,100,000 applied to reduction of
the Term Loan on a pro rata basis between the tranches. No gain or loss was
recorded on these sales.
In connection with obtaining the financing for the Seagull Transaction,
$4,590,000 in commitment fees, legal, accounting and other fees were incurred.
Such costs have been capitalized and included in the accompanying consolidated
balance sheet under the caption "Other Assets" and are being amortized over the
period of the Term Loan.
7
<PAGE> 8
TPC CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the unaudited pro forma revenues, net income
and net income per share for the six months ended June 30, 1996 and 1995
assuming that the Seagull Transaction and the sale of the smaller acquired
non-core gathering systems, which were made in the first quarter of 1996, had
occurred on January 1, 1995.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,226 $ 151,425
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,964 1,651
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.10 0.11
</TABLE>
(3) INVESTMENT IN AND RECEIVABLE FROM MHP
In December 1994, TPC formed Market Hub Partners, Inc. and Market Hub
Partners, L.P. (collectively referred to as Market Hub Partners or MHP) with
subsidiaries of NIPSCO Industries, Inc., New Jersey Resources Corporation, DPL
Inc., and Public Service Enterprise Group, Incorporated. Subsidiaries of TPC
and these four companies own the stock of Market Hub Partners, Inc. (the 1%
general partner of Market Hub Partners, L.P.) and are the limited partners of
Market Hub Partners, L.P. TPC contributed its interests in five market center
projects (in varying stages of operation or development) to MHP through a series
of mergers between the TPC subsidiaries in which it conducted its gas storage
business and subsidiaries of MHP.
TPC's contribution of interests to MHP upon formation included facilities,
market center locations, development plans, permits, leases, signed storage
service contracts and associated long-term debt and other liabilities relating
to its five market center projects. TPC's four partners agreed to contribute
$45,000,000 to MHP over the period 1994 through 1996, $13,000,000 of which was
paid at closing; additional amounts of $19,621,000 and $5,500,000 have been
received during the year ended December 31, 1995 and the six months ended June
30, 1996, respectively. TPC's limited partnership interest and stock ownership
in MHP provide it with a 66% voting and ownership interest. TPC has an
approximate 61% revenue and expense interest from the commencement of MHP
operations which increases to approximately 70% at such time as two of the
initial partners with reversionary interests receive distributions from MHP
equal to 150% of their cumulative capital contributions.
MHP owns and operates two natural gas market centers located in Texas (the
Moss Bluff Facility) and Louisiana (the Egan Facility) and it is anticipated
that MHP will construct, own and operate three such additional natural gas
market centers. The services that MHP markets or anticipates marketing include
"unbundled" high deliverability storage services, cash market trading, real
time title tracking and other hub services. The customers for these
"unbundled" services include natural gas producers, marketers, pipelines, local
distribution companies and end users.
As part of this transaction, the four minority partners have been afforded
participation in the governance of MHP and, under the terms of the Agreement of
Limited Partnership, certain decisions require the approval of TPC and at least
two other partners. Such matters include decisions involving financing and
acquisitions or divestitures. Because the MHP agreements do not permit
unilateral decisions by TPC in these and certain other circumstances, TPC's
investment in MHP has been accounted for on an equity basis since MHP's
formation in December 1994. TPC's share of the underlying equity in net assets
of MHP exceeded its original investment of $24,227,000 by approximately
$17,000,000 at the time of formation of MHP. This difference is being
amortized in relation to the lives of existing storage service contracts. The
amortization of this amount totaled $1,971,000 in the year ended December 31,
1995 and $986,000 in the six months ended June 30, 1996, and is included in
income as a part of TPC's equity in earnings of MHP.
8
<PAGE> 9
TPC CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the terms of the Agreement of Limited Partnership, MHP has assumed
an obligation to TPC for advances made by TPC after the effective date of the
formation to the gas storage projects in order to fund construction activities.
Additional advances were made to MHP to fund construction and development
activities in 1995 and in the first quarter of 1996 such that cumulative
advances at that date totaled $31,020,000. The outstanding balance is due
December 15, 1996 and accrues interest at the prime rate stated by First
Interstate Bank of Texas, N.A., which was a weighted average of 8.83% for the
year ended December 31, 1995; a total of $2,261,300 and $1,200,000 of interest
was accrued on the advances during the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively, and such amounts are included in the
current payable to TPC below.
On July 3, 1996, two of MHP's subsidiaries completed the issuance of $60
million of senior secured notes in a private placement transaction. The senior
secured notes bear interest at a rate of 8.10% per annum and are due in varying
amounts through December 31, 2006. Proceeds of the private placement were used
by MHP to acquire the remaining 50% interest in the Moss Bluff Facility owned
by a third party, to retire an outstanding bank loan on the Moss Bluff
Facility, to repay a portion of the promissory note owed by MHP to TPC, and to
pay the costs of the financing transaction. The portion of the promissory note
repaid by MHP to TPC with proceeds of the private placement amounted to
approximately $14,300,000 (TPC utilized such proceeds in early August 1996 to
reduce borrowings under its revolving credit facility). The remaining balance
of the promissory note payable by MHP to TPC is expected either to be repaid
through the issuance of additional debt at the MHP level or to be reduced by
the assumption of the other MHP partners of their proportionate share of the
outstanding balance of the amount owed by MHP to TPC at maturity in December
1996. Because of the uncertainty surrounding these matters, the $16,700,000
balance of the promissory note owed to TPC following the MHP private placement
financing has been classified by TPC as a non-current asset at June 30, 1996.
Audited financial statements of MHP are included as Exhibit 99 to TPC's
Annual Report on Form 10-K and unaudited financial statements of MHP are
included as Exhibit 99 in TPC's Quarterly Report on Form 10-Q. Summarized
financial information of MHP is presented below:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,400 $ 5,555
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 82,330 81,473
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . 23,281 16,087
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,258 2,970
---------- ----------
$ 114,269 $ 106,085
========== ==========
Payable to TPC - Trade account . . . . . . . . . . . . . . . . . . . . . $ 8,969 $ 8,989
- Promissory note. . . . . . . . . . . . . . . . . . . . . 31,020 25,021
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 3,057 6,496
Long-term debt, net of current portion. . . . . . . . . . . . . . . . . . 6,833 8,464
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,390 57,115
------ ------
$ 114,269 $ 106,085
========== ==========
</TABLE>
9
<PAGE> 10
TPC CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,100 $ 3,469
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,604 1,055
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,776 69
</TABLE>
(4) NOTE PAYABLE
At December 31, 1995, TPC had a current note payable to a bank with an
outstanding balance of $7,451,000. Such note payable represented financing
related to an inventory purchase, storage and resale transaction entered into
by TPC in June 1995 with a major midwestern interstate pipeline company. The
note bore interest at a rate of approximately 6.6% per annum and was secured by
TPC's inventory with a cost (including storage payments) equal to the amount of
the outstanding note. The note was paid in three monthly principal
installments of $2,483,666 each on January 25, 1996, February 25, 1996, and
March 25, 1996; such principal payment dates approximated the pipeline
customer's remittance dates to TPC based on the inventory delivery and resale
schedule (TPC's resale price to the customer was approximately $250,000 higher
than the cost of the inventory).
(5) STOCKHOLDERS' EQUITY
On November 15, 1995, TPC closed an offering of its Class A Common Stock
at a price to the public of $8.50 per share. Of the 3,900,000 shares offered,
3,600,000 were sold by TPC and 300,000 were sold by a stockholder of TPC. On
November 20, 1995, the underwriters for the offering purchased an additional
540,000 shares from TPC and 45,000 shares from the selling stockholder to cover
overallotments. Net proceeds to TPC from the combined stock sales were
approximately $32.7 million. Of this amount, $30 million was used to repay the
bridge loan incurred in the Seagull Transaction (see Note 2) and the balance
was added to TPC's working capital.
(6) CONTINGENCY
On April 25, 1996, the U.S. District Court for the Southern District of
Texas granted a partial summary judgment in favor of two plaintiffs in an
action against TPC and other defendants.
This suit arose out of a gas gathering contract entered into by the
parties in January 1989, pursuant to which the plaintiff producers delivered
gas for treatment to an offshore gas gathering system which, at the time, was
jointly owned by TPC and another defendant. The contract was amended in 1990.
The contract amendment, which the court found to be valid, provided that the
respective parties would make keep-whole payments to each other for any monthly
disparities between the amounts of natural gas and condensate delivered by the
plaintiffs into the gathering system and defendants' subsequent allocations to
each plaintiff producer at the redelivery points. The court held that the
plaintiffs were entitled to recover the keep-whole payments totaling
approximately $1.8 million previously paid to the defendants under the contract
amendment.
The defendants intend to vigorously defend their position and have filed a
motion for reconsideration with the court and, if necessary, will appeal the
lower court's decision to the Fifth Circuit Court of Appeals. At this time, no
final judgment has been rendered, and TPC does not believe that a material
adverse judgment against it will ultimately be rendered in this matter.
Accordingly, no accrual for a loss of this litigation has been made. The
subject gathering system in this matter is presently wholly owned by TPC and,
as part of the transaction whereby TPC acquired the interest previously held by
the other defendant, TPC agreed to provide indemnity against all known and
unknown prior claims or causes of action.
10
<PAGE> 11
TPC CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TPC operates in three business segments of the natural gas industry:
gathering and processing, marketing, and storage. The following tables present
certain data for major operating segments of TPC for the three month and six
month periods ended June 30, 1996 and 1995. Gross profit for each of the
segments is defined to be the revenues of the segment less segment related
costs and expenses as shown in the Consolidated Statements of Operations. In
order to more closely reflect the manner in which its business segments are
managed, TPC changed the method of reporting its segment results in the fourth
quarter of 1995 to include segment administrative expense and depreciation
expense as segment operating costs in its Consolidated Statement of Operations
(prior period amounts were reclassified to be comparable to the new
presentation).
NATURAL GAS GATHERING AND PROCESSING
As indicated in Note 2 - Seagull Transaction, in the Notes to the
Consolidated Financial Statements, TPC completed the acquisition of various
natural gas gathering systems offshore and onshore Texas and related assets
from Seagull Energy Corporation and four other sellers in September 1995.
Included in the amounts below for the six months ended June 30, 1996 are net
volumes of 132,442,000 Mcf and revenues of $9,423,000 derived from the natural
gas gathering systems and volumes of 10,997,000 gallons and revenues of
$3,137,000 representing TPC's share of natural gas liquids sold from processing
plants included in the Seagull Transaction.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
1996 1995 1996 1995
------ ------- -------- -------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
NATURAL GAS GATHERING AND PROCESSING
Revenues
Gathering . . . . . . . . . . . . . . . . . . . . . $ 5,726 $ 2,203 $ 13,219 $ 4,228
Processing . . . . . . . . . . . . . . . . . . . . . 1,345 -- 3,137 --
------- ------- -------- -------
7,071 2,203 16,356 4,228
Field operating expense (1,239) (1,113) (4,039) (1,834)
------- ------- -------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . 5,832 1,090 12,317 2,394
------- ------- -------- -------
Management and fee income . . . . . . . . . . . . . . . 210 220 999 440
Segment administrative expense . . . . . . . . . . . . (317) (535) (702) (622)
Depreciation and amortization . . . . . . . . . . . . (2,542) (1,318) (5,056) (2,633)
------- ------- -------- -------
Operating costs . . . . . . . . . . . . . . . . . . . . (2,649) (1,633) (4,759) (2,815)
------- ------- --------- -------
Operating income (loss). . . . . . . . . . . . . . . $ 3,183 $ (543) $ 7,558 $ (421)
======= ======== ========= =======
Operating volume
Gathering (Mcf) . . . . . . . . . . . . . . . . . . 80,673 15,516 162,144 30,147
Processing (Gallons) . . . . . . . . . . . . . . . . 5,484 -- 10,997 --
Gross profit
Gathering (per Mcf) . . . . . . . . . . . . . . . . 6.00c. 7.03c. 6.12c. 7.94c.
Processing (per Gallon) . . . . . . . . . . . . . . 18.07c. -- 21.78c. --
Operating income (loss)
Gathering (per Mcf) . . . . . . . . . . . . . . . . 2.95c. (3.50c.) 3.13c. (1.39c.)
Processing (per Gallon) . . . . . . . . . . . . . . 11.05c. -- 15.16c. --
</TABLE>
11
<PAGE> 12
TPC CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The gross throughput in TPC's gathering systems averaged approximately 49%
of capacity in the first six months of 1996 compared to approximately 47% of
capacity in the first six months of 1995, assuming that the systems acquired in
the Seagull Transaction had been owned from the beginning of 1995. Drilling
activity by producers in the Gulf of Mexico in areas adjacent to TPC's
gathering systems has increased in the last several quarters. In addition,
recent reported increases in 3-D seismic surveys and bidding activity at
federal and state offshore lease sales indicate that further increases in
drilling activity are likely. Increases in natural gas production resulting
from successful drilling activities in these areas should provide TPC with
access to additional natural gas supplies to gather and process. TPC believes
it has a comparative advantage in obtaining access to these supplies because of
its currently available unutilized capacity.
NATURAL GAS MARKETING
Gross profit and operating income for TPC's natural gas marketing segment
increased in the first six months of 1996 relative to the first half of 1995
primarily due to the increase in the volume of customer storage fill contracts
that TPC is managing on behalf of ten large local distribution company ("LDC")
customers. Gross profit per Mcf declined in the first six months of 1996
compared to 1995 as a result of favorable settlements of prior year natural gas
imbalance positions that reduced the cost of gas sold in the first six months
of 1995 by approximately $1.8 million. Such favorable settlements of prior
year natural gas imbalance positions totaled approximately $2.7 million in the
year ended December 31, 1995 and further settlements of prior period balances
are not expected to be material. TPC anticipates its comparative marketing
sales volumes to substantially increase in the remainder of 1996 due to
expected continued growth in TPC's storage fill program and increased use of
the Moss Bluff and Egan storage facilities owned by MHP.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
Natural Gas Marketing Segment
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 146,932 $ 66,189 $ 279,209 $ 129,683
Cost of natural gas sold . . . . . . . . . . . . . . . . (144,905) (64,649) (274,317) (125,480)
--------- -------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . 2,027 1,540 4,892 4,203
--------- -------- --------- --------
Segment administrative expense . . . . . . . . . . . . . (819) (681) (2,060) (1,691)
Depreciation and amortization . . . . . . . . . . . . . (18) (17) (36) (34)
--------- --------- --------- ---------
Operating costs . . . . . . . . . . . . . . . . . . . . (837) (698) (2,096) (1,725)
--------- -------- --------- ---------
Operating income . . . . . . . . . . . . . . . . . . $ 1,190 $ 842 $ 2,796 $ 2,478
========= ======== ========= =========
Sales volume (Mcf) . . . . . . . . . . . . . . . . . . . 48,816 34,523 98,894 72,488
Gross profit (per Mcf) . . . . . . . . . . . . . . . . . 4.15c. 4.46c. 4.95c. 5.80c.
Operating income (per Mcf) . . . . . . . . . . . . . . . 2.44c. 2.43c. 2.83c. 3.41c.
</TABLE>
TPC uses futures, option and swap contracts with maturities of eighteen
months or less to hedge against the volatility of the price of natural gas
purchases and sales. It is TPC's policy to maintain as nearly as practicable a
fully hedged position on its net natural gas purchase and sale commitments,
substantially all of which have pricing terms which are indexed to the NYMEX
futures contract. Gains or losses on hedging activities are deferred and
recognized as a part of the physical transactions hedged; net gains and losses
on hedging activities reflected in income, which are largely offset by net
gains and losses on physical transactions, amounted to a loss of $3,868,000 and
a gain of $1,227,000 in the six month periods ended June 30, 1996 and 1995,
respectively. At June 30, 1996, TPC had 184 net open futures contracts and
various option contracts which together covered an aggregate of 2,300,000 net
MMBtu's. The net unrealized gain on these instruments was approximately
$273,000 at June 30, 1996.
12
<PAGE> 13
TPC CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NATURAL GAS STORAGE
As indicated in Note 3 - Investment in and Receivable from MHP, in the
Notes to the Consolidated Financial Statements, the activities of TPC's natural
gas storage business were reflected in its consolidated financial statements
prior to the December 1994 formation of MHP. As a result of the formation of
MHP, the natural gas storage business previously conducted by TPC is now
conducted by MHP, in which TPC currently has an approximate 61% revenue and
expense interest. TPC's investment in MHP is accounted for under the equity
method. TPC's share of the underlying equity in the net assets of MHP exceeded
its investment by approximately $17 million at the date of formation of MHP and
such difference is being amortized to income over the lives of the existing
storage contracts at the storage facilities contributed to MHP (averaging
approximately nine years) at a rate of approximately $1.9 million per year.
Natural gas storage operations consist of the Moss Bluff Facility in Texas,
which went in to service in December 1990, and the Egan Facility in Louisiana,
which went into service in September 1995. In addition, prior to formation of
MHP, TPC's ownership interest in the Moss Bluff Facility changed twice. As a
result of certain options associated with the second ownership change, TPC
accounts for the 50% interest transferred to a third party as "Revenues of
Business Transferred" and "Expenses of Business Transferred." On July 3, 1996,
however, MHP acquired such 50% interest from the third party effectively
canceling the options between TPC and the third party to retransfer the
interest. TPC expects to recognize a third quarter after-tax gain of
approximately $1.5 million related to this transaction and MHP will commence
accounting for 100% of the Moss Bluff Facility's revenues and expenses in the
third quarter of 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ----------------------------
1996 1995 1996 1995
-------------- ------------- ------------ -----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C>
NATURAL GAS STORAGE SEGMENT
Revenues
Business transferred . . . . . . . . . . . . . . . . . . $ 1,303 $ 1,210 $ 2,582 $ 2,520
Equity in earnings of MHP . . . . . . . . . . . . . . . 845 525 2,063 1,027
Other . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 217 --
------- ------- ------- -------
2,148 1,735 4,862 3,547
------- ------- ------- -------
Operating expenses
Business transferred . . . . . . . . . . . . . . . . . . (863) (956) (1,800) (1,932)
Other . . . . . . . . . . . . . . . . . . . . . . . . . -- (7) (2) (7)
Segment administrative expense . . . . . . . . . . . . . . . (312) (44) (824) (657)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . (3) (3) (7) (6)
------- ------- ------- -------
Operating costs. . . . . . . . . . . . . . . . . . . . . . . (1,178) (1,010) (2,633) (2,602)
------- ------- ------- -------
Operating income. . . . . . . . . . . . . . . . . . . . . $ 970 $ 725 $ 2,229 $ 945
======= ======= ======= =======
Cavern turnover capacity leased to third
parties (Mcf). . . . . . . . . . . . . . . . . . . . . . . 9,182 3,082 18,227 6,481
Operating income per Mcf of turnover
capacity leased to third parties (1) . . . . . . . . . . . 10.56c. 23.52c. 12.23c. 14.58c.
</TABLE>
(1) Excludes net earnings of business transferred.
The increases in TPC's equity in earnings of MHP indicated above reflect
the startup of the Egan Facility and the addition of a third storage cavern at
the Moss Bluff Facility, both of which occurred in September 1995, as well as
the significant growth in hub services at both facilities. Detailed financial
information concerning MHP can be found in the combined financial statements of
MHP at Exhibit 99 to the TPC Quarterly Report on Form 10-Q.
13
<PAGE> 14
TPC CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OR OPERATIONS (CONTINUED)
OTHER INCOME, COSTS AND EXPENSES
For the six months ended June 30, 1996, corporate administrative expense
increased relative to the same period in 1995 due to increased employee bonuses
accrued under TPC's profit-based incentive compensation program as well as
increases in executive and administrative salaries and in professional fees.
Interest expense increased to approximately $7.0 million in the first six
months of 1996 from approximately $0.7 million in the first six months of 1995
with virtually all of the increase due to the issuance of new debt incurred in
connection with the Seagull Transaction which closed in September 1995.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
TPC's working capital decreased to $4.1 million at June 30, 1996, from
$14.2 million at December 31, 1995 due largely to the February 1996 sale of
certain non-core gathering systems acquired in the Seagull Transaction, which
were classified as current assets at December 31, 1995, and the application of
the $12.1 million net sales proceeds to payment of long-term debt (see
- -"Investing and Financing Activities - Seagull Acquisition"). In addition to
its working capital, TPC had unutilized borrowing capacity of $13 million
available under its $30 million revolving credit facility as of June 30, 1996.
TPC's net borrowings under its revolving credit facility were subsequently
reduced in early August 1996 by approximately $14 million (see -"Investing and
Financing Activities - Market Hub Partners").
OPERATING ACTIVITIES
TPC's net cash provided by operating activities was $19.5 million in the
first six months of 1996 compared to a deficit of $1.6 million in the first six
months of 1995. This significant increase was due to higher cash flow from
operations (net income plus depreciation and amortization, less equity in
earnings of MHP) as well as the decrease in inventory levels related to the
customer storage fill contracts that TPC is managing on behalf of ten large
local distribution companies and the completion of a storage delivery program
entered into with a major midwestern pipeline company customer. TPC anticipates
that its comparative cash flow from operations in the natural gas gathering and
processing segment will continue to be favorably impacted in the third quarter
of 1996 as a result of a full year's operations from the assets acquired in the
Seagull Transaction.
INVESTING AND FINANCING ACTIVITIES
SEAGULL ACQUISITION. On September 25, 1995, TPC completed the acquisition
from Seagull Energy Corporation and four other sellers of a number of natural
gas pipeline gathering assets, as well as a natural gas processing plant, which
serve areas offshore Texas adjacent to those currently served by TPC's existing
Matagorda Island (TOMCAT) and Galveston Island (GIGS) gathering systems. The
purchase price was $155.6 million. No significant future capital expenditures
are planned with regard to the assets acquired in the Seagull Transaction. TPC
will continue to seek project development and acquisition opportunities in this
segment, although TPC is not currently contemplating acquisitions of a size
comparable to the Seagull Transaction in the foreseeable future.
The acquisition of the gathering systems and related assets was financed
with existing credit facilities and $150 million of new credit facilities
provided by ING Capital. The new credit facilities consisted of $120 million of
five- year secured term loans and a $30 million secured subordinated bridge
loan which was repaid in November 1995 with proceeds of a public stock
offering. TPC and its subsidiaries are subject to certain financial and other
covenants under these credit facilities. TPC was also required to amend the
terms of its existing revolving credit agreement (the "Revolver") and its $35
million of senior unsecured notes to permit the acquisition. The amendments to
the Revolver consisted primarily of an increase in the interest rate spreads
during the periods that TPC's balance sheet leverage is above certain levels, a
more restrictive method of calculating its borrowing availability under the
Revolver and a reduction of the loan commitment, which was subsequently
increased to $30 million in December 1995. The amended
14
<PAGE> 15
TPC CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OR OPERATIONS (CONTINUED)
credit agreement currently requires TPC and certain subsidiaries to maintain a
total debt to total capitalization ratio of not more than 70%. With a total
debt to total capitalization ratio of 60%, TPC was in compliance with this
requirement at June 30, 1996. The $35 million of senior unsecured notes were
likewise amended to provide for, among other things, an increase in the interest
rate payable from 7.33% to 9.33% per annum. The interest rate will be reduced
to 8.33% if and when TPC and certain subsidiaries achieve a total debt to total
capitalization ratio of 60%. Further, if TPC's total debt to total
capitalization ratio reaches 50%, the interest rate will be reduced to 7.33%.
In February 1996, TPC completed the sale of a number of the smaller
non-core gathering systems acquired in the Seagull Transaction with the net
proceeds of $12.1 million applied to reduction of the Term Loan. Such
reduction as well as principal payments anticipated to be made in the third
quarter of 1996 are expected to reduce TPC's debt to capitalization ratio below
60% resulting in a prospective decline in the interest rate on the senior
unsecured notes from 9.33% to 8.33% per annum beginning in the third quarter.
TPC is presently pursuing additional debt financing alternatives in order
to improve its financial flexibility.
MARKET HUB PARTNERS. The December 1994 formation of MHP provided TPC and
its natural gas industry partners a vehicle for the construction and operation
of a network of five market center hubs with high deliverability storage. TPC
contributed its interest in the assets and facilities, market hub locations,
development plans, permits, leases and signed storage service contracts for
these market centers to MHP. TPC's four natural gas industry partners agreed
to contribute $45 million to MHP, of which $38.3 million was contributed through
June 30, 1996 and the remaining $6.7 million was contributed on July 3, 1996.
In addition to the July 3, 1996 issuance of $60 million of senior notes secured
by MHP's Moss Bluff and Egan Facilities, MHP will seek to arrange financings
(either at the individual project or overall partnership level) on the other
market hub facilities as development progresses. The combination of these
financings, the equity investments by the four natural gas industry partners,
MHP's internally generated cash flow and TPC's initial contributions to MHP are
presently expected to provide sufficient financing for the capital costs of the
MHP market hubs and high deliverability storage facilities over the next several
years assuming continuation of existing market conditions. Subsequent to the
December 1994 formation of MHP, the capital costs incurred by MHP on the Moss
Bluff and Egan Facilities aggregated approximately $67 million through June 30,
1996, and the projected capital costs for expansion of Egan and construction of
the Tioga Project aggregate approximately $108 million through the year 2000,
subject to approval by the MHP partners.
TPC holds a promissory note from MHP for $31.0 million as of June 30, 1996
primarily representing development capital costs incurred by TPC on the storage
facility projects contributed to MHP after the April 1, 1994 effective date and
prior to the December 1994 formation of MHP. Additional advances were also
made by TPC to MHP to fund construction and development activities in 1995 and
in the first six months of 1996. This receivable matures December 15, 1996 and
was originally intended to be paid to TPC out of the proceeds of MHP financings
(either at the individual project or overall partnership level) among other
sources. On July 3, 1996, two of MHP's subsidiaries completed the issuance of
$60 million of senior secured notes in a private placement transaction. The
senior secured notes bear interest at a rate of 8.10% per annum and are due in
varying amounts through December 31, 2006. Proceeds of the private placement
were used by MHP to acquire the remaining 50% interest in the Moss Bluff
Facility owned by a third party, to retire an outstanding bank loan on the Moss
Bluff Facility, to repay a portion of the promissory note owed by MHP to TPC,
and to pay the costs of the financing transaction. The portion of the
promissory note repaid by MHP to TPC with proceeds of the private placement
amounted to approximately $14,300,000 (TPC utilized such proceeds in early
August 1996 to reduce borrowings under its revolving credit facility). The
remaining balance of the promissory note payable by MHP to TPC is expected
either to be repaid through the issuance of additional debt at the MHP level or
to be reduced by the assumption of the other MHP partners of their
proportionate share of the outstanding balance of the amount owed by MHP to TPC
at maturity in December 1996. Because of the uncertainty surrounding these
matters, the $16,700,000 balance of the promissory note owed to TPC following
the MHP private placement financing has been classified by TPC as a non-current
asset at June 30, 1996.
15
<PAGE> 16
TPC CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Report are forward looking
statements. Such forward looking statements include, without limitation,
statements under (a) "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations - Natural Gas
Gathering and Processing" regarding TPC's expectations of potential increases
in drilling activity, resulting natural gas production, and TPC's ability to
obtain access to such natural gas supplies to gather and process, (b) "-
Natural Gas Marketing" regarding TPC's expectations for increases in natural
gas marketing volumes in 1996 and further settlements of prior year natural gas
imbalances, (c) "- Liquidity and Capital Resources - Operating Activities"
regarding TPC's expectations for the impact on cash flows from a full year's
operations of the assets acquired in the Seagull Transaction, (d) "- Investing
and Financing Activities" regarding TPC's expectations for a decline in the
interest rate payable on the senior unsecured notes and the likelihood of the
issuance of additional debt at the MHP level or the assumption by the other MHP
partners of their proportionate share of the outstanding balance of the amount
owed by MHP to TPC at maturity in December 1996. Although TPC believes that the
expectations reflected in such forward looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from
TPC's expectations ("Cautionary Statements") are disclosed in this Report,
including without limitation in conjunction with the forward looking statements
included in this Report. All subsequent written and oral forward looking
statements attributable to TPC or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
16
<PAGE> 17
TPC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 3, 1996, TPC held its annual stockholders meeting. The following
matters were voted upon at the meeting, with votes cast for and against as
specified.
1. To elect by the holders of the Class A Common Stock two directors to
Class I of the Board of Directors.
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST
------- --- -------
<S> <C> <C>
Larry W. Bickle 14,649,782 313,546
Thomas M. Jenkins 14,653,782 309,546
</TABLE>
2. To elect by the sole holder of the Class B Common Stock one director
to Class I of the Board of Directors.
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST
------- --- -------
<S> <C> <C>
Robert Cosson 579,963 -0-
</TABLE>
3. To amend TPC's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") to change the name of the company to
"TPC Corporation."
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
-------- ------- -------
<S> <C> <C>
15,321,598 11,753 209,940
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) Exhibit 11: Computation of Earnings Per Share
Exhibit 99: Financial Statements of Market Hub Partners
(b) Reports on Form 8-K
None
</TABLE>
17
<PAGE> 18
TPC CORPORATION AND SUBSIDIARIES
SIGNATURE
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.
TPC CORPORATION
(Registrant)
By: /s/ D. HUGHES WATLER, JR.
----------------------------------
D. Hughes Watler, Jr.
Controller
Date: August 13, 1996
18
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
Exhibit 99 Financial Statements of Market Hub Partners
<PAGE> 1
TPC CORPORATION AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Average common shares outstanding . . . . . . . . . . . . . . 18,099,215 13,959,215 18,099,215 13,959,215
Net effect of dilutive stock options - based on the treasury
stock method using average market price . . . . . . . . . . 1,006,653 1,190,672 1,033,701 1,179,804
----------- ---------- ----------- -----------
Weighted average shares outstanding . . . . . . . . . . . . . 19,105,868 15,149,887 19,132,916 15,139,019
=========== =========== =========== ===========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 576,000 $ 316,000 $ 2,014,000 $ 731,000
=========== =========== =========== ===========
Net income per common share . . . . . . . . . . . . . . . . . $ 0.03 $ 0.02 $ 0.11 $ 0.05
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,238
<SECURITIES> 0
<RECEIVABLES> 90,543
<ALLOWANCES> 0
<INVENTORY> 5,105
<CURRENT-ASSETS> 103,455
<PP&E> 217,020
<DEPRECIATION> 44,974
<TOTAL-ASSETS> 365,617
<CURRENT-LIABILITIES> 99,382
<BONDS> 125,845
<COMMON> 185
0
0
<OTHER-SE> 100,410
<TOTAL-LIABILITY-AND-EQUITY> 365,617
<SALES> 156,151
<TOTAL-REVENUES> 156,151
<CGS> 150,808
<TOTAL-COSTS> 150,808
<OTHER-EXPENSES> 1,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,323
<INCOME-PRETAX> 914
<INCOME-TAX> 338
<INCOME-CONTINUING> 576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 576
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<PAGE> 1
EXHIBIT 99
MARKET HUB PARTNERS
UNAUDITED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . $ 2,304 $ 872
Restricted cash . . . . . . . . . . -- 1,172
Accounts receivable . . . . . . . . . 1,246 1,549
Inventory . . . . . . . . . . . . . . 1,774 1,774
Prepaid expenses . . . . . . . . . . 76 188
----------- -----------
Total Current Assets . . . . . . 5,400 5,555
----------- -----------
Property and Equipment:
Natural gas storage facilities. . . . 85,530 83,107
Construction in progress . . . . . . 23,281 16,087
Less accumulated depreciation . . . (3,200) (1,634)
----------- -----------
105,611 97,560
----------- -----------
Other Assets . . . . . . . . . . . . . . 3,258 2,970
----------- -----------
$ 114,269 $ 106,085
=========== ===========
LIABILITIES AND CAPITAL
Current Liabilities:
Current portion of long-term debt . . $ 1,500 $ 1,350
Accounts payable:
Trade and other . . . . . . . . . . 1,095 2,371
Partners and affiliates . . . . . . 8,969 8,989
Note payable to TPC . . . . . . . . . 31,020 25,021
Deferred revenue . . . . . . . . . . -- 94
Accrued liabilities . . . . . . . . . 462 2,681
---------- ----------
Total Current Liabilities . . . 43,046 40,506
Long-Term Debt, net of current portion . 6,833 8,464
Capital . . . . . . . . . . . . . . . . . 64,390 57,115
---------- ----------
$ 114,269 $ 106,085
========== ==========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these statements.
1
<PAGE> 2
MARKET HUB PARTNERS
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1996 1995 1996 1995
------- ----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Salt cavern storage . . . . . . . . . . . $3,183 $1,255 $ 6,358 $2,565
Pipeline storage and transportation . . . 902 901 1,803 904
Other revenue . . . . . . . . . . . . . . 107 -- 939 --
------ ------ ------- ------
Total revenue . . . . . . . . . . . . . . 4,192 2,156 9,100 3,469
------ ------ ------- ------
Operating Expenses:
Operations and maintenance . . . . . . . 1,293 733 2,724 1,240
Plant administrative expense . . . . . . 546 661 1,085 672
Depreciation and amortization . . . . . . 841 242 1,687 502
------ ------ ------- ------
Total costs and expenses . . . . . . . . 2,680 1,636 5,496 2,414
------ ------ ------- ------
Operating Income . . . . . . . . . . . . . . 1,512 520 3,604 1,055
Other Income (Expense):
General and administrative expense . . . (363) (451) (697) (847)
Interest expense . . . . . . . . . . . . (600) (216) (1,195) (478)
Interest income . . . . . . . . . . . . . 32 172 64 339
------ ------ ------- ------
Net Income $ 581 $ 25 $ 1,776 $ 69
====== ====== ======= ======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these statements.
2
<PAGE> 3
MARKET HUB PARTNERS
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
------- --------
(IN THOUSANDS)
<S> <C>
Cash Flows from Operating Activities:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,776 $ 69
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 1,687 502
Adjustments to reconcile net income to net cash flows from operating
activities:
Decrease (increase) in Restricted Cash. . . . . . . . . . . . . . . . . . . . . 1,172 (36)
Decrease (increase) in Accounts Receivable . . . . . . . . . . . . . . . . . . 303 (237)
(Increase) decrease in Prepaid Expenses . . . . . . . . . . . . . . . . . . . . 112 64
Increase (decrease) in Trade Payables and Other Liabilities . . . . . . . . . . (3,346) 60
Increase in payable to partners and affiliates . . . . . . . . . . . . . . . . (21) 1,526
(Decrease) in Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . (94) (135)
-------- --------
Net Cash Provided by Operating Activities. . . . . . . . . . . . . . . . . . 1,589 1,813
-------- --------
Cash Flows from Investing Activities:
Capital and Other Asset additions . . . . . . . . . . . . . . . . . . . . . . . . . . (10,026) (17,922)
-------- --------
Cash Flows from Financing Activities:
Capital contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500 11,880
Increase in Note Payable to TPC . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 2,799
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,631) (650)
-------- --------
Net Cash Provided by Financing Activities. . . . . . . . . . . . . . . . . . 9,869 14,029
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . 1,432 (2,080)
Cash and Cash Equivalents at Beginning of Period . . . . . . . . . . . . . . . . . . 872 13,241
-------- --------
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . . . . $ 2,304 $ 11,161
======== ========
Supplemental Disclosure:
Cash paid during the period for interest, net of amounts capitalized . . . . . . . . $ 364 $ --
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these statements.
3
<PAGE> 4
MARKET HUB PARTNERS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND CONTROL
The accompanying financial statements of Market Hub Partners ("MHP") is a
combined presentation of the balance sheets and statements of operations and
cash flows of Market Hub Partners, Inc. ("MHI"), a Delaware corporation, and
Market Hub Partners, L.P. ("MHL"), a Delaware limited partnership, each formed
on December 21, 1994. MHP was formed to own, construct and operate underground
caverns capable of storing natural gas and related facilities capable of
injecting and withdrawing stored gas at high rates of delivery. TPC Corporation
("TPC"), a Delaware corporation, formed MHP with subsidiaries of NIPSCO
Industries, Inc., New Jersey Resources Corporation, DPL Inc., and Public Service
Enterprise Group, Incorporated. Subsidiaries of TPC and these four companies,
on a pro rata basis, own the stock of MHI, the 1% general partner of MHL, and
are the limited partners of MHL.
TPC contributed its interests in five market center projects (in
varying stages of operation or development) to MHP through a series of mergers
between the TPC subsidiaries, through which it previously conducted its gas
storage business, and subsidiaries of MHP. The interests contributed by TPC
include its market center facilities, market center locations, development
plans, permits, leases and signed storage service contracts, as well as
associated long-term debt and other liabilities, relating to its five market
center projects as of March 31, 1994 (herein referred to as the "Effective
Date"). See Note 3 - Long-term Debt and Note Payable to TPC for a description
of advances made by TPC after the Effective Date. TPC's four partners committed
to contribute $45,000,000 to MHP over a period extending from 1994 to 1996,
$13,000,000 of which was paid at inception and additional amounts of $19,621,000
and $5,500,000 which have been received during the year ended December 31, 1995
and the six months ended June 30, 1996, respectively. TPC's interest in net
income is approximately 61% at commencement of MHP operations and will increase
to approximately 70% at such time as two of the initial partners with
reversionary interests receive distributions from MHP equal to 150% of their
cumulative capital contributions.
MHP owns and operates two natural gas market centers located in Texas and
Louisiana and it is anticipated that MHP will construct, own and operate three
such additional natural gas market centers. The services that MHP markets
include "unbundled" high deliverability storage services, cash market trading,
real time title tracking and other hub services. The customers for these
"unbundled" services include natural gas producers, marketers, pipelines, local
distribution companies and end users. MHP's revenue, profitability and future
rate of growth are substantially dependent upon the supply and demand for
natural gas, the pace of natural gas industry deregulation at both the federal
and state levels, and the current and future positions regarding expiration of
customer contractual commitments for both firm transportation and storage
services. Such factors are largely beyond MHP's control.
MHP has a small administrative staff located in Leesburg, Virginia, near
Washington, D.C., which is responsible for managing the business affairs of MHP.
Through June 30, 1996, many of the day-to-day operating activities at each of
the market centers and storage locations were performed under contract by
employees of TPC and its affiliates and were governed by various service
agreements covering project development services, construction management
services, field operating services, storage sales services, gas title
information and administration services, financing support services, business
support services and technology access services. Effective July 1, 1996, the
TPC employees who were previously involved in providing project development
services, construction management services, storage sales services and gas title
information and administrative services to MHP became employees of MHP,
accordingly, the contracts between TPC and MHP relating to those services were
canceled. The remaining service contracts between TPC and MHP were not
affected.
Under the terms of the Agreement of Limited Partnership, certain decisions
require the approval of TPC and at least two other partners. Such matters
principally focus on decisions involving financing, acquisitions or divestitures
and approval of operating budgets.
4
<PAGE> 5
MARKET HUB PARTNERS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) DESCRIPTION OF MARKET CENTER PROJECTS
MOSS BLUFF FACILITY. This facility, which is located near Houston, Texas,
began operations in 1990. Moss Bluff Gas Storage Systems ("MBGSS"), is the
partnership that owns the facility, with MHP having a 50% partnership interest
in MBGSS (through July 3, 1996). The facility has three storage caverns that
provide approximately 8.2 Bcf of working storage capacity and a maximum 230
million cubic feet per day ("MMcf/d") and 1,200 MMcf/d of injection and
withdrawal capacities, respectively. During 1994, an estimated 0.6 Bcf of
storage capacity was added to the second cavern at the Moss Bluff Facility by
using technology developed by TPC for leaching natural gas storage caverns while
in operation. The third cavern was placed in service on September 18, 1995.
Construction expenditures related to this cavern were $6.5 million (net to MHP).
On July 3, 1996, MHP acquired the 50% interest in the Moss Bluff Facility
owned by CMS Energy Corporation ("CMS") for a net cash payment of approximately
$26.6 million and the transfer by MHP to CMS of MHP's 50% interest in a market
hub project in Michigan (see Midwest Area below). Financing for this
transaction was provided through the issuance of $60 million of senior secured
notes by MHP in a private placement (see Note 3).
EGAN GAS STORAGE FACILITY. The Egan Gas Storage Facility is located in
Acadia Parish, Louisiana. Construction began in 1994, following the signing of
long term service contracts with two major local distribution companies in the
Midwest as well as TPC. Initial service of 3.6 Bcf of working storage capacity
began September 1, 1995 with 135 MMcf/d of injection capacity and 750 MMcf/d of
withdrawal capacity. Construction expenditures of $60.6 million were incurred
through June 30, 1996.
COPIAH COUNTY PROJECT. This project includes the planned development of
salt caverns at a storage site located in Copiah County, Mississippi. The
first of two caverns was originally scheduled for completion in November 1997,
and the second was expected to be in service for the 1998 winter season,
however, development of this project has been delayed pending the recent
outcome of negotiations with MHP's 25% partner in the project. A total of $2.4
million (net to MHP) had been incurred in development related expenditures
through June 30, 1996.
In the first quarter of 1996, an agreement was reached between MHP's 25%
partner in the Copiah County Project and TPC whereby TPC agreed to purchase
such partner's interest in the project at the partner's cost. It is expected
that the general partnership owning the project site will ultimately be
dissolved and that MHP and TPC will each receive a proportionate share of the
project site acreage in order to enable them to pursue separate (but related)
projects in the respective areas of natural gas storage and compressed air
energy storage.
TIOGA PROJECT. The Tioga project is a market area project located in
Tioga County, Pennsylvania, near the New York border. MHP has received bids
from potential customers for natural gas storage services at the facility which
is expected to have 5.0 Bcf of storage capacity. The first phase of the
facility is targeted to begin operations in 1998. A total of $15.0 million has
been incurred in development expenditures through June 30, 1996.
MIDWEST AREA. In the Midwest area, MHP and CMS originally proposed to
develop a new market hub project at a permanent site near Grands Lacs, in
southeastern Michigan, with each company owning a 50% interest in the project.
Service in a third party facility at Grands Lacs began under an interim contract
in the second quarter of 1995. On July 3, 1996, MHP conveyed the interest in
this project to CMS in conjunction with the acquisition by MHP of the 50%
interest in the Moss Bluff Facility held by CMS. MHP is presently exploring
other potential sites for a midwestern area market hub.
5
<PAGE> 6
MARKET HUB PARTNERS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) LONG-TERM DEBT AND NOTE PAYABLE TO TPC
MOSS BLUFF FINANCING. MHP, through its half interest in MBGSS, was party
to a project financing agreement with a bank for an original amount of
$25,000,000 ($12,500,000 net to MHP) of debt through July 3, 1996 (see Note
Payable to TPC below). Borrowings under the agreement provided for
construction financing of the first two salt caverns and related surface
facilities. The outstanding loan balance at June 30, 1996 was $13,666,000
($6,833,000 net to MHP). The loan bore interest, at the option of MHP and its
partner, at the prime rate plus 1% or a Eurodollar index rate plus 1.65%
("Interest Index Margin"). Prior to June 30, 1996, terms of the loan required
MBGSS to deposit to accounts controlled by the lender certain amounts from
operating cash flow to equal certain future principal and interest payments.
NOTE PAYABLE TO TPC. Under the terms of the Agreement of Limited
Partnership, MHP has assumed an obligation to TPC for advances made by TPC
after the effective date of the formation to the gas storage projects in order
to fund construction activities. Additional advances were made to MHP by TPC
to fund construction and development activities during 1995 and the first
quarter of 1996 such that cumulative advances at that date totaled $31,020,000.
The outstanding balance is due December 15, 1996 and accrues interest at the
prime rate stated by First Interstate Bank of Texas, N.A., which was a weighted
average of 8.83% for the year ended December 31, 1995; a total of $2,261,300
and $1,200,000 of interest was accrued on the advances during the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively, and
such amounts are included as a current payable to TPC in the accompanying
combined balance sheet.
On July 3, 1996, two of MHP's subsidiaries completed the issuance of $60
million of senior secured notes in a private placement transaction. The senior
secured notes bear interest at a rate of 8.10% per annum and are due in varying
amounts through December 31, 2006. Proceeds of the private placement were used
by MHP to acquire the remaining 50% interest in the Moss Bluff Facility owned
by a third party, to retire an outstanding bank loan on the Moss Bluff
Facility, to repay a portion of the promissory note owed by MHP to TPC, and to
pay the costs of the financing transaction. The portion of the promissory note
repaid by MHP to TPC with proceeds of the private placement amounted to
approximately $14,300,000. The remaining balance of the promissory note
payable by MHP to TPC is expected either to be repaid through the issuance of
additional debt at the MHP level or to be reduced by the assumption of the
other MHP partners of their proportionate share of the outstanding balance of
the amount owed by MHP to TPC at maturity in December 1996.
6
