<PAGE> 1
As filed March 10, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 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)
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)
(281) 597-6200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act (Each class is registered on the New York
Stock Exchange):
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE
Securities registered pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK, PAR VALUE $0.01 PER
SHARE, HELD BY NONAFFILIATES OF THE REGISTRANT AS OF MARCH 7, 1997 WAS
APPROXIMATELY $145,176,000.
AS OF MARCH 7, 1997, THE REGISTRANT HAD OUTSTANDING 17,424,252 SHARES OF CLASS
A COMMON STOCK (NET OF 470,000 TREASURY SHARES), PAR VALUE $.01 AND 579,963
SHARES OF CLASS B, SERIES A COMMON STOCK, PAR VALUE $.01.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TPC CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
ITEM 1. Business............................................................................ 2
ITEM 2. Properties.......................................................................... 15
ITEM 3. Legal Proceedings................................................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders................................. 15
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters................ 17
ITEM 6. Selected Financial Data............................................................. 17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
18
ITEM 8. Financial Statements and Supplementary Data......................................... 28
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
49
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................. 49
ITEM 11. Executive Compensation.............................................................. 52
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................... 56
ITEM 13. Certain Relationships and Related Transactions...................................... 59
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 60
SIGNATURES......................................................................................... 66
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
TPC Corporation (formerly Tejas Power Corporation) and its affiliates
("TPC") are engaged in gathering, processing, storage and marketing of natural
gas. TPC owns and operates gathering systems located in the Gulf of Mexico,
plus related natural gas processing facilities. With the completion of the
acquisition of various offshore natural gas gathering systems and related
assets onshore Texas from Seagull Energy Corporation and four other sellers
(the "Seagull Transaction") on September 25, 1995, TPC's gathering systems
currently consist of approximately 350 miles of pipe with 1,680 MMcf/day total
capacity and an average throughput for the year ended December 31, 1996 of 868
MMcf/day. TPC also has a majority voting and ownership interest in Market Hub
Partners ("MHP"), which is developing an integrated system of natural gas
market hubs with high deliverability salt cavern storage facilities, certain of
which are connected via third party pipelines to TPC's offshore gathering
systems. MHP has two supply area market hubs in operation in Texas and
Louisiana and three market hub projects in various stages of planning and
development in Pennsylvania, Mississippi and the Midwest area. MHP's existing
salt cavern storage facilities provide approximately 12.5 Bcf of working gas
storage capacity and 1.65 Bcf/d of natural gas deliverability which TPC
believes makes MHP the largest owner of natural gas salt cavern storage
deliverability in the United States. TPC believes it is well positioned in the
natural gas sales services market because of its combination of aggregation
capabilities, its access to high deliverability salt cavern storage facilities
located at the interconnection of multiple pipelines and its marketing and risk
management expertise. TPC is also actively pursuing emerging opportunities in
electric storage and power marketing.
The natural gas supply requirements of pipelines, local distribution
companies, utilities and other users of natural gas fluctuate over time. Large
fluctuations in supply needs in the markets TPC serves are primarily caused by
weather conditions. Demand for natural gas tends to peak in the winter months,
reflecting home heating needs, and is typically higher in the summer than in
the spring and fall, reflecting use by electric utilities to satisfy air
conditioning needs. In addition, demand related to weather conditions may vary
significantly over short periods of time due to sudden changes in temperature.
Users of natural gas also experience changes in their natural gas supply needs
unrelated to weather. For example, a natural gas utility (or an electric
utility using natural gas to fuel its generators) serving a city generally
requires more natural gas during the business week than on the weekend.
Operators of natural gas wells are generally unable to adjust output
levels precisely with changes in demand. Salt cavern storage facilities, such
as MHP's Moss Bluff Facility located near Houston, Texas, and its Egan Facility
in Acadia Parish, Louisiana, can modulate natural gas flow by injecting and
withdrawing natural gas as needed throughout the day. This type of storage is
well suited to respond to swings in natural gas supply and demand.
Historically, pipelines acted as merchants of natural gas, purchasing
natural gas from the producers and reselling natural gas, primarily to local
distribution companies, electric utilities and other users. In 1985, the FERC
commenced restructuring the regulation of interstate pipelines, requiring them
to grant transportation access to any creditworthy shipper, including producers
and other marketers of natural gas, on an open access, nondiscriminatory basis.
In the current market, a user may purchase natural gas from a number of
sources, and arrange for transportation and delivery on one or more pipelines
which act as common carriers and which do not take title to the natural gas
transported.
Over the last ten years there has been a general oversupply of natural
gas. Prior to the issuance of FERC Order No. 636 in 1992, users of natural gas
had been able to purchase sufficient natural gas from pipelines, on short
notice, to meet substantially all their natural gas supply needs, and pipelines
had been largely obligated by contract to supply these needs. TPC believes that
as general consumption of natural gas begins to more closely match supply,
natural gas may not be available in sufficient quantities on a timely basis to
satisfy short duration peak usage needs caused by temperature variation or
supply interruptions, and such events may cause the demand for flexible,
reliable natural gas supply services such as those provided by TPC to increase.
TPC was incorporated as a Delaware corporation in 1984. TPC's principal
executive offices are located at 200 WestLake Park Boulevard, Suite 1000,
Houston, Texas 77079, and its main telephone number is (281) 597-6200.
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FORWARD LOOKING STATEMENTS
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations Disclosure Regarding Forward Looking Statements" for
a discussion of forward looking statements contained above and elsewhere in
this Report.
DEFINITIONS AND OTHER MATTERS
A "market hub" is a geographic location where there is a natural gas
storage facility and multiple pipeline interconnections. The term "Bcf" means
billion cubic feet of natural gas, "MMcf" means million cubic feet of natural
gas and "Mcf" means thousand cubic feet of natural gas. The term "MMBtu" means
million British Thermal Units. The term "net" when used in connection with the
transportation or storage of a quantity of natural gas means the total amount
of natural gas transported or stored multiplied by TPC's or MHP's interest in
the joint venture or other entity that owns the gathering or storage facility.
"FERC" is the Federal Energy Regulatory Commission. References to TPC include
TPC, its subsidiaries and the joint ventures managed by TPC or its interest
therein, as the context requires. Injection and withdrawal capacities are
presented in average volumes (Mcf, MMcf or Bcf) of natural gas per day. The
principal factor affecting injection capacity is the pressure of the natural
gas when stored in the cavern. The nominal or average injection rates are
increased or decreased if actual cavern pressures are below or above pressures
used in determining the average injection rates. Withdrawal capacity is limited
by the capacity of pipeline metering stations that take natural gas away from
the storage facility, which in turn is limited by pipeline operating pressures
and sizes. Storage capacities of salt-dome caverns are estimated by sonar and
various other techniques and are presented herein on an estimated basis.
BUSINESS AND GROWTH STRATEGY
TPC's primary business objective is to achieve growth in cash flow and
earnings by increasing both the gross profit per Mcf and the volume of natural
gas that it gathers, processes and markets. TPC seeks to take advantage of
deregulation in the natural gas industry and the new technology that has
reduced the cost of delivering natural gas at the time and location required by
customers. TPC focuses on serving customers whose requirements to buy or sell
natural gas can fluctuate sharply ("swing") within short periods of time and
who value reliability of supply. TPC's strategy is to control natural gas
gathering and storage assets that provide the reliability, responsiveness and
flexibility needed to serve the swing market. TPC's gathering assets provide it
with access to a reliable supply of natural gas which, when combined with the
flexibility of MHP's innovative market hubs utilizing salt cavern storage
facilities and TPC's advanced natural gas title and administrative information
systems, have allowed TPC to become a major provider of premium services to the
natural gas swing market.
By anticipating the changes brought about by industry deregulation, TPC
believes it is competitively well positioned to serve its customers' current
and future natural gas market needs. TPC also believes domestic consumption of
natural gas as a fuel will continue to grow, as natural gas continues to be
recognized as cleaner-burning, less expensive and more abundant in North
America than oil.
Prior to the Seagull Transaction, TPC grew primarily through internal
development of natural gas gathering systems and storage facilities, and
through the expansion of its marketing activities. TPC expects future growth to
result from both internal project development and selected acquisitions.
RECENT DEVELOPMENTS
EVALUATION OF STRATEGIC ALTERNATIVES. On November 12, 1996, TPC announced
that its Board of Directors has retained an investment banking firm to assist
it in exploring strategic alternatives for increasing shareholder value,
including the possibility of a sale or merger of part or all of the Company. An
announcement regarding the results of the process is expected in the near
future.
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COMMON STOCK BUYBACK PROGRAM. On August 23, 1996, TPC was authorized by
its Board of Directors to repurchase up to $5 million of its Class A Common
Stock over a twelve month period. Pursuant to the Board's authorization, TPC
purchased a total of 95,000 shares of its Class A Common Stock at a cost of
$803,000 through October 9, 1996. No additional shares have been purchased
since that time. The buyback was financed out of available cash reserves and
borrowings under TPC's revolving credit facility.
CMS TRANSACTION AND RELATED FINANCING. On July 3, 1996, MHP and its
partner in the Moss Bluff Facility, CMS Energy Corporation ("CMS"), completed a
transaction whereby MHP purchased CMS's 50% interest in the Moss Bluff Facility
and CMS purchased MHP's 50% interest in the Grands Lacs market hub project
("Grands Lacs Project") under development in Michigan (the "CMS Transaction").
As a result of the CMS Transaction, MHP now owns 100% of Moss Bluff but has no
interest in the Grands Lacs Project. MHP is presently exploring other potential
sites for a Midwest area market hub.
Concurrent with the CMS Transaction, subsidiaries of MHP issued $60
million of senior secured notes with an investment grade rating in a private
placement transaction. The senior secured notes bear interest at 8.1% and are
due in varying amounts through December 31, 2006. In addition to financing the
CMS Transaction, net proceeds of the private placement were used to retire an
outstanding bank loan incurred by the Moss Bluff partnership and to repay $14.1
million of a loan made to MHP by TPC to fund development capital costs for
storage facilities. TPC's remaining note receivable from MHP totaled $16.9
million after this transaction (although another $3.9 million was subsequently
loaned by TPC to MHP in December 1996). TPC used the $14.1 million received
from MHP to reduce revolving bank debt (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Investing and
Financing Activities - Market Hub Partners").
SEAGULL TRANSACTION AND RELATED FINANCINGS/DIVESTITURES. On September 25,
1995, TPC completed the acquisition of seven gathering systems in the Gulf of
Mexico offshore Texas and related assets from Seagull Energy Corporation and
four other sellers for $155.9 million in cash. The acquired gathering systems
include the Seagull (renamed "Seahawk") Shoreline System ("SSS"), the Cavallo
Pipeline System, the Brazos Area Gathering System ("BAGS"), the El Gordo System
and three smaller systems, totaling 204 miles of offshore pipeline. These
acquired offshore systems have a capacity of approximately 1,080 MMcf/day. The
acquired assets included the Matagorda Gas Plant, a natural gas liquids
processing plant with approximately 250 MMcf/day of capacity, and the Oyster
Lake condensate stabilization facility with approximately 5,200 barrels per day
of capacity. TPC owns 100% of all such assets. The additional assets increased
TPC's total offshore gathering system capacity to approximately 1,680 MMcf/day
and approximately 350 miles of pipeline in nine systems. The purchase price was
financed with an existing credit facility and $150 million of new credit
facilities. The new credit facilities consisted of $120 million of five-year
secured term loans and a $30 million secured subordinated bridge loan. The
bridge loan was entirely repaid in November 1995 with the proceeds of a public
stock offering. During 1996, TPC completed the sale of a number of small
onshore gathering systems acquired in the Seagull Transaction. The net proceeds
from these sales of $13.7 million were used primarily to reduce the $120
million of term loans (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Investing and Financing Activities - Seagull Transaction and Related Financings
Divestitures").
NATURAL GAS GATHERING AND PROCESSING
In addition to the assets acquired in the Seagull Transaction, TPC owns
two other offshore gathering systems. The Galveston Island Gathering System
("GIGS") is located in the Galveston Island Area offshore Texas and consists of
an 18-mile, 16-inch offshore gathering system, two additional offshore 6-inch
segments of 4.6 miles and 5.5 miles in length, and an onshore 8-mile, 12-inch
portion that interconnects with two intrastate pipelines. The TOMCAT system,
located in the Matagorda Island Area offshore Texas, consists of a number of
gathering segments ranging in size from 1.5 miles of 3-inch pipe to 42 miles of
20-inch pipe, together with a condensate separation and dehydration plant
onshore, ultimately interconnecting with four interstate and intrastate
pipelines. TPC owns 100% of GIGS and TOMCAT, except that one of the TOMCAT
system segments, the Matagorda Island Area Gathering System,
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representing pproximately 43% of average throughput and 33% of total system
capacity on TOMCAT, is owned 83% by TPC and 17% by Amerada Hess.
With the additional gathering assets acquired in the Seagull Transaction,
TPC's systems interconnect to a total of seven intrastate and two interstate
natural gas pipelines, including five of the six pipelines connected to the
Moss Bluff Facility. These multiple pipeline interconnects enable TPC and
producers who use TPC's facilities to access multiple markets in disparate
geographic regions through several common pipeline interconnects. Generally,
the gathering systems transport the natural gas to a common point onshore where
it is brought into conformity with pipeline quality specifications prior to
redelivery to downstream pipelines. TPC charges a tariff to transport the
natural gas on its gathering facilities. Currently, approximately 90% of the
natural gas reserves connected to TPC's gathering systems are dedicated under
either life-of-lease gathering contracts, minimum volumetric dedications or
minimum term dedications.
The following table summarizes the approximate capacity and utilization
of TPC's gathering facilities, including those acquired in the Seagull
Transaction in September 1995, as if they had been owned from the beginning of
1995:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- ----------------------------
MAXIMUM
THROUGHPUT GROSS AVERAGE PERCENT GROSS AVERAGE PERCENT
AREA CAPACITY THROUGHPUT CAPACITY THROUGHPUT CAPACITY
(MMCF/DAY) (MMCF/DAY UTILIZED (MMCF/DAY) UTILIZED
---------- ------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Matagorda Island . . . . . . . . . 1,350 691 51% 670 50%
Galveston/Brazos . . . . . . . . . 330 177 54% 151 46%
--- --- -- --- --
1,680 868 52% 821 49%
===== === == === ==
</TABLE>
Drilling activity by producers has increased recently in the Gulf of
Mexico in areas adjacent to TPC's gathering systems, including those acquired
in the Seagull Transaction. 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 that the combination of its previously
existing gathering systems with the systems acquired in the Seagull Transaction
has increased its franchise position in the Gulf of Mexico. Further, TPC
believes it has a competitive advantage in obtaining access to these supplies
because of its currently available unutilized capacity.
In connection with the Seagull Transaction, TPC agreed to be responsible
for certain contingent liabilities associated with the acquired assets, both
known and unknown, including certain environmental liabilities. However, TPC is
not currently aware of any such liabilities of a material nature.
NATURAL GAS STORAGE
MARKET HUB PARTNERS FORMATION. In December 1994, TPC formed MHP with
subsidiaries of NIPSCO Industries, Inc., New Jersey Resources Corp., DPL Inc.
(Dayton Power & Light), and Public Service Enterprise Group, Inc. Subsidiaries
of TPC and these four companies (i) are the limited partners of Market Hub
Partners, L.P. and (ii) own the stock of Market Hub Partners, Inc., the 1%
general partner of Market Hub Partners, L.P.
TPC contributed its interest in the market hub assets and facilities,
market hub locations, development plans, permits, leases and signed storage
service contracts relating to its five market hub projects to MHP upon
formation. The contributed storage contracts had terms ranging from
approximately two to twenty years. In addition, TPC's four partners agreed to
contribute $45 million to MHP over the period 1994 through 1996, all of which
was contributed by July 1996. TPC's limited partnership interest and stock
ownership in MHP provide it with (i) a collective 66% voting and ownership
interest and (ii) a revenue and expense interest which varies from
approximately 61% at commencement
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of MHP operations to approximately 70% at such time as two partners with
reversionary revenue interests receive distributions from MHP equal to 150% of
their capital contributions.
MHP owns and operates market hubs located in natural gas supply areas in
Texas (the Moss Bluff Facility) and Louisiana (the Egan Facility) and owns and
is in various stages of planning and development of market hub projects in
market areas in Pennsylvania (Tioga Project), Mississippi (MS-1 Project) and
the Midwest area. With the September 1995 completion of a third salt storage
cavern at the Moss Bluff Facility and of the first salt storage cavern at the
Egan Facility, MHP's existing salt cavern storage facilities provide
approximately 1.65 Bcf/day of natural gas deliverability and approximately 12.5
Bcf of high deliverability working gas storage capacity. MHP is currently in
the process of adding a second cavern with 2.0 Bcf of working gas storage
capacity at the Egan Facility of which 1.0 Bcf of capacity is expected to be
placed into service in December 1997 and the balance by June 1998. This
capacity will be combined with an additional 1.0 Bcf of capacity to be created
in the first cavern at Egan by September 1997 utilizing a proprietary
technology developed by TPC called Solution Mining Under Gas ("SMUG"), which
allows expansion to take place in operating caverns without taking them out of
service. MHP also plans to add 1.0 Bcf of capacity at Moss Bluff in 1997 using
SMUG technology.
Presently, all of the capacity of MHP's Moss Bluff and Egan Facilities is
leased under long-term contracts that generally require the payment of
demand/reservation charges regardless of usage. The remaining terms of these
contracts range from three months to nearly twenty years. MHP is currently
negotiating cavern leases covering the planned facility expansions indicated in
the table below.
The following table sets forth selected information regarding certain of
MHP's existing and certain of its planned facilities as of February 28, 1997.
MHP SYSTEM SUMMARY
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED WORKING GAS PERCENT LEASED
INJECTION WITHDRAWAL STORAGE PROJECTED UNDER
CAPACITY CAPACITY CAPACITY IN-SERVICE LONG-TERM
(MMCF/DAY) MMCF/DAY) (BCF) DATE CONTRACT
---------- ---------- ----------- ---------- ----------------
EXISTING
<S> <C> <C> <C> <C>
Moss Bluff 200 900 7.8 In Service 100%
Egan 185 750 4.7 In Service 100%
--- ----- ----
Sub Total 385 1,650 12.5
--- ---- ----
PLANNED EXPANSIONS
Moss Bluff 75(1) --(2) 1.0(3) September 1997 In negotiations
Egan 75(1) --(2) 3.0(3) June 1998 In negotiations
Tioga 1A 125 250 1.2 September 1999 In negotiations
Tioga 1B 125 250 1.3 September 2000 In negotiations
--- ----- ----
Sub Total 400 500 6.5
--- ----- ----
Totals 785 2,150 19.0
=== ===== ====
</TABLE>
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(1) Represents additional compression to be added to serve incremental capacity.
(2) No additional withdrawal capacity is currently planned.
(3) Includes additional capacity to be added through use of a proprietary
technology developed by TPC known as Solution Mining Under Gas ("SMUG") of
1.0 Bcf at Moss Bluff and 1.0 Bcf at Egan.
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FACILITIES. Salt cavern storage facilities offer certain significant
advantages over conventional reservoir natural gas storage facilities. In
conventional reservoir storage, which utilizes both depleted natural gas
reservoirs and aquifers, natural gas is injected for approximately 200 to 250
days per year when demand is lower and withdrawn during the 100 to 150 day
period of increased demand. Because the natural gas is withdrawn in relatively
constant amounts, reservoir storage is well suited for seasonal increases,
seasonal price arbitrage and limited protection against supply interruptions.
Salt cavern storage can easily switch from full injection to full withdrawal
several times each day. Accordingly, TPC believes that salt cavern storage
facilities are better suited to meet short duration load swings, such as
intraday heating and air conditioning based demand, and to serve peak demand
during major supply interruption events, such as hurricanes and loss of
production due to extremely cold weather causing wellhead freeze-off such as
occurred in early February 1996.
A salt cavern is formed by drilling and leaching an underground cavern in
a naturally existing salt formation and installing related surface equipment.
The typical salt cavern storage facility consists of a solution mining plant,
which provides fresh water to dissolve cavities within the underlying salt,
brine handling and disposal facilities, and the necessary surface facilities to
compress natural gas into the cavity and allow it to flow back into a pipeline.
Natural gas is injected under pressure and is generally not subject to loss
because salt is essentially impermeable. All storage facilities which MHP owns
and all storage facility projects which MHP is currently planning or developing
are salt cavern storage facilities.
The Moss Bluff Facility was placed into service in December of 1990 with
one salt cavern. The Moss Bluff Facility currently provides an aggregate of 7.8
Bcf of estimated working gas capacity, 200 MMcf/day of estimated injection
capacity and 900 MMcf/day of estimated withdrawal capacity from three salt
caverns. The Moss Bluff Facility has four compressors and three
filter/separators and serves as an aggregation point for major interstate and
intrastate pipelines on the Texas Gulf Coast as well as a reserve for
short-term peak natural gas requirements. Currently, all of Moss Bluff's 7.8
Bcf of capacity is leased. Since July 3, 1996, the Moss Bluff Facility has been
100% owned by MHP (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Investing and Financing Activities - Market Hub Partners").
The Egan Facility is located in Acadia Parish, Louisiana on the Jennings
Salt Dome. Construction of Phase I, a single cavern which currently has
approximately 4.7 Bcf of estimated working natural gas capacity all of which is
presently leased. The Egan Facility currently has three compressors and two
filter/separators and provides service to customers on five interstate
pipelines. Egan's current estimated injection capacity is 185 MMcf/day and its
current estimated withdrawal capacity is 750 MMcf/day. It is wholly owned by
MHP.
The planned Tioga facility is a market area project located in Tioga
County, Pennsylvania, near the New York border, which is ultimately planned for
10.0 Bcf of working gas storage and is targeted to begin operations in 1999 -
2000 with initial capacity of 2.5 Bcf. It is currently estimated that Tioga
will initially have withdrawal capacity of 500 to 600 MMcf/d and injection
capacity of 250 MMcf/d growing to an anticipated 1.0 Bcf/day of withdrawal
capacity and 500 MMcf/day of injection capacity as subsequent planned phases
are completed. Construction is expected to start in the spring of 1997. Total
costs are estimated to be approximately $150 million for the fully developed
project. MHP is currently negotiating storage service contracts with potential
customers for 9.0 Bcf of capacity and has also recently negotiated a brine
supply agreement with a major salt processing company to build a salt
evaporation plant at Tioga to utilize the brine created from the leaching of
caverns. MHP owns 100% of the Tioga project.
MS-1 is located in Copiah County, Mississippi, southwest of Jackson,
Mississippi. This project was formerly a joint venture between a subsidiary of
MHP, which had a 75% partnership interest, and an affiliate of Texas Eastern
Transmission Company ("TETCO"), which had a 25% partnership interest. In the
first quarter of 1996, TPC purchased TETCO's interest in the project at TETCO'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 possibly related) projects in the respective areas of natural gas storage
and compressed air energy storage.
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In the Midwest area, TPC and CMS originally proposed to develop the
Grands Lacs Project, in southeastern Michigan, with each company owning a 50%
interest in the project. Service in a third party facility began under an
interim contract in the second quarter of 1995. On July 3, 1996, MHP conveyed
its interest in the Grands Lacs 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.
NATURAL GAS STORAGE CONTRACTS. Storage services are marketed by TPC on a
"bundled" basis and by MHP on an "unbundled" basis. The unbundled storage
services are marketed to local distribution companies, pipelines, marketers and
producers and permit the customer to contract for injection, storage space and
withdrawal capacities. These unbundled services are currently offered on a
firm, secondary firm and interruptible basis. In a firm basis contract, the
user pays a demand charge for the availability of the storage space and of the
injection and withdrawal rights regardless of usage. In a secondary firm
arrangement, the user customarily pays a lesser demand fee than in a firm basis
contract because the facility has the right to make the storage capacity or
injection and withdrawal facilities unavailable to the secondary firm customer
if a customer with a firm contract requires the space or facilities.
Interruptible contracts are similar to secondary firm contracts, except that no
demand fee is paid, and the facility is allowed to give prior access to both
firm and secondary firm customers. The facility may charge a fee for the actual
use of its storage capacity and the use of its injection and withdrawal
facilities in addition to the demand fees charged to reserve availability of
capacities. The number of contracts and their terms for a given storage cavern
depend upon the physical limitations of available space and injection and
withdrawal capacity.
MHP also offers short-term firm and interruptible "hub" services to its
customers. These services include parking, wheeling, balancing and loaning
natural gas. Parking services are one-turn services where a customer injects a
specific amount and must withdraw this amount by a certain time. Wheeling
services are the transportation of gas at the hub from one pipeline to another
over the surface interconnects, and do not involve any storage service.
Balancing services involve the ability to inject, withdraw and store within
specified volumetric ranges over a short period of time. Loaning transactions
are done with creditworthy counterparties and only involve the loaning of
"extra" gas that MHP has obtained title to through in-kind fuel payments and
non-critical pad gas. Any of these hub services can last for a few hours, days
or weeks and are being used to generate incremental revenue for the projects.
These services also provide potential long-term customers with an inexpensive
way to try to use these services in their natural gas portfolios. MHP believes
that this will lead to additional long-term contracts over time.
NATURAL GAS MARKETING
TPC, which has marketed natural gas since its inception in 1984, focuses
on providing services on a bundled basis to large electric and natural gas
utilities in the Midwest, Mid-Atlantic, Ohio Valley and Northeast regions of
the United States. As a result of deregulation and increased competition, TPC
believes there are increased opportunities for marketers of natural gas which
can compete on the basis of reliability, flexibility and price. Some natural
gas purchasers look to find a "one-stop shopping" substitute for the bundled
sales packages that were previously provided by interstate pipelines, while
others pick and choose their services from specialist providers. TPC rebundles
its own storage leases at various MHP and other storage facilities with third
party transportation services and its access to natural gas supplies to provide
its customers innovative energy services, effectively creating a rebundled
pipeline merchant function. The flexibility of MHP's storage facilities,
however, allows TPC to capture high margin opportunities in both the volatile
day-to-day market as well as reliably manage longer term, higher margin
contracts. TPC's marketing objective is to increase market share and margins in
both current and new wholesale markets over the next few years by offering
bundled service alternatives. Increases in TPC's access to additional salt
cavern storage capacity through MHP will also expand its ability to offer
premium priced natural gas marketing services. TPC believes this can be
achieved primarily by combining its aggregation capabilities with its high
deliverability storage sites located at the interconnection of multiple
pipelines to provide more reliable, responsive and flexible services. TPC
believes these capabilities differentiate it from many other providers of
natural gas sales services.
NATURAL GAS PURCHASES, SALES AND SUPPLY. TPC focuses on relatively
specialized services which generate higher margins and continues to
de-emphasize the sale of natural gas on a "baseload" basis due to the declining
margins
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associated with this type of business. TPC has developed certain variations on
standard contract services to create its own sales products and services.
An increasingly important portion of the marketing operations of TPC is
directed to the local distribution companies which, in a climate of
deregulation, have generally been unable or unwilling under current market and
regulatory conditions to restructure transportation and storage contracts to
reduce end-user price because of being committed to previously existing bundled
service arrangements with terms that extend for several more years. Because of
TPC's high deliverability, interconnected storage and gathering assets, and
experience in risk management and marketing, TPC has been able to provide local
distribution companies with access to the economic benefits of unbundling
before they are otherwise able to fully take advantage of unbundling
efficiencies. This "asset optimization" strategy has helped local distribution
companies realize more value for their transportation, storage and natural gas
supply assets. In a typical asset optimization program, TPC agrees to place a
customer's natural gas in storage at prices below the applicable market index
by taking advantage of its storage flexibility combined with its risk
management expertise. In return, the customer assigns to TPC the customer's
storage and transportation capacities (which TPC uses in its trading and
marketing activities) and TPC gives the customer a portion of the profits from
such activities. This control by TPC of third party natural gas, production
area supply, aggregation and storage assets allows both the customer and TPC to
gain access to broader geographic markets, drives down costs per unit of
natural gas, enhances usage of MHP storage assets, increases margins, gives TPC
access to markets without the necessity of owning production in those
geographic areas, and provides TPC a significant opportunity to further develop
the market hub strategy prior to MHP's asset base being fully in place. Recent
sales of TPC's summer storage fill asset optimization program have led to the
development of a winter storage asset management program for local distribution
companies, and TPC intends to market these programs aggressively in the future.
The contracts under which TPC purchases the natural gas supply it markets
and those under which it sells natural gas are comparable to each other and
have provisions that are relatively standardized in the industry. Over 95% of
TPC's natural gas supply is purchased offshore and onshore in Texas and
Louisiana. TPC maintains direct supply relationships and arrangements with
producers, marketers and financial counterparties.
An important aspect of TPC's natural gas supply practice is that it does
not seek to match the term of its firm, long-term sales commitments with the
term of firm, long-term supply commitments because of its ability to utilize
deliverability from MHP's market hub storage facilities to match flows
(volumes). In this way, TPC can use lower cost, firm baseload supply contracts
and interruptible transportation to supply its firm long-term swing sales
obligations, and use its inventoried natural gas at MHP's storage facilities as
a backup supply. Although these sources of supply are used, TPC typically
contracts for firm supply for over 90% of its requirements each month with the
majority of such commitments being made for periods of six months or less.
Substantially all of TPC's firm sale and supply commitments have pricing terms
which are indexed to market rates. Such commitments, to the extent practicable,
are reflected in TPC's hedged portfolio position. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition - Results of
Operations Natural Gas Marketing."
TRANSPORTATION ARRANGEMENTS. Each sale of natural gas made by TPC takes
place at one or more acceptable delivery points at which TPC agrees to deliver
title to the purchaser. In general, TPC is responsible for arranging any
necessary transportation on third party pipelines, which allows its purchased
natural gas to be delivered to the customer's desired location. TPC attempts in
two ways to minimize the risk that TPC will not be able to deliver natural gas
it has contracted to deliver. For those situations in which third party
transportation is necessary or desirable, TPC maintains a portfolio of
transportation contracts, which frequently allow it to have multiple
transportation paths from the receipt points of the purchased natural gas to
the delivery points of its natural gas sales. Alternatively, to avoid the use
of third party transportation, TPC sometimes takes title to purchased natural
gas directly at the point at which TPC is obligated to deliver natural gas to
its customers. Since 1993, TPC has also been increasingly successful in using
the Moss Bluff Facility as an approved delivery point for customers utilizing
pipelines connected at that market hub. This arrangement allows TPC more
flexibility in aggregating natural gas supply and managing transportation risk.
TPC intends to utilize the Egan Facility to the same advantage. TPC's customers
are responsible for arranging transportation from the point of purchase to the
point of ultimate consumption.
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PORTFOLIO SERVICES AND RISK MANAGEMENT. TPC's policy is to seek as nearly
as possible to fully hedge its commodity risk and basis risk. Commodity risk is
a measure of the difference between physical sales commitments and physical
purchase commitments. TPC has managed this risk primarily by taking appropriate
positions in NYMEX natural gas futures contracts or options on such contracts.
Basis risk refers to pricing supply contracts on a different index than sales
contracts. TPC manages this risk by using various derivative products with a
number of investment grade counterparties. In addition, TPC has undertaken an
active role in educating its sales customers on the benefits of using NYMEX
related pricing, which further reduces TPC's exposure to basis risk.
Although the Portfolio Services' activities are typically conducted in
order to manage TPC's "cash market" positions, TPC has identified certain
storage arbitrage opportunities in the past which it would expect to take
advantage of in the future, if applicable. An example of this storage arbitrage
activity would be a purchase by TPC of natural gas at a certain price in the
cash market along with the sale of natural gas futures contracts for an
equivalent volume for near month delivery at a higher price. The purchased
natural gas would be stored at TPC's market hub storage facilities and would be
delivered against the futures contract to complete the arbitrage.
MAJOR CUSTOMERS AND SUPPLIERS. TPC is not dependent upon any single
customer for sales or supplies of natural gas. TPC's diverse sources of supply,
its network of customers, its access to necessary transportation services, and
its storage capabilities give it the flexibility to make reallocations among
the matching groups quickly and smoothly in response to changing market
conditions. In 1996 and 1995, the largest customer accounted for 9% and 11%,
respectively, of the revenues for the natural gas marketing segment. Management
does not believe that the natural gas marketing segment's loss of such customer
would have a material adverse effect on TPC.
TECHNOLOGY
With the corporate objective of becoming a leading low-cost provider of
safe and reliable salt cavern storage services, TPC has maintained an extensive
technical development program. Key elements in TPC's program have been an
exclusive technology agreement with the French state-owned natural gas company,
Gaz de France ("GDF"), and a long standing research agreement with Sandia
National Laboratories ("Sandia"), located in Albuquerque, New Mexico. The
cooperative effort in technology is primarily focused on natural gas storage
cavern design, construction and operation. As a result of receiving a patent
for a new method of constructing storage caverns in horizontal salt formations
in January 1995 and the development and announcement of other proprietary
techniques, TPC is gaining recognition for technical leadership within the
industry.
In 1991, TPC entered into an exclusive technology agreement with a U.S.
subsidiary of GDF, which was renewed in 1994. The new agreement focuses on
technology for storage of natural gas in salt caverns and has a term of three
to five years as determined by TPC with a minimum average annual cost to TPC of
approximately $490,000. GDF, which owns approximately 23% of TPC's common
stock, is recognized as a world leader in natural gas related research and
development, with related expenditures of approximately $200 million per year.
Over several decades GDF has constructed dozens of salt cavern storage
facilities and acquired an extensive patent estate and a depth of operating
skill.
Sandia originally developed technology for the United States Department
of Energy for the Strategic Petroleum Reserve, which stores crude oil in salt
caverns. As a result of this work, TPC believes Sandia is the leading source in
the United States of technology for hydrocarbon storage. Under the Sandia
Natural Gas Storage Development Support Agreement, TPC is receiving three
dimensional computer simulation, long-term creep and stress relaxation studies,
mineral property testing, linear programming and other advanced support at an
approximate cost to TPC over the life of the contract of $585,000. The Sandia
contract was originally entered into in May 1990 for an initial twelve month
period, and was subsequently amended and extended several times, most recently
through November 1998. TPC's patent for creating horizontal caverns in bedded
salt formations was a product of TPC's work with Sandia.
OTHER
COMPRESSED AIR ENERGY STORAGE. TPC believes that opportunities similar to
those presented by the storage of natural gas in salt caverns are emerging in
the electric power industry. TPC believes it is well positioned to offer
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energy storage services which are not widely available at the present time,
including the effective storage of electricity through use of compressed air
energy storage ("CAES"). Specifically, TPC is currently analyzing opportunities
to develop and offer CAES electric services from existing salt cavern storage
sites or from new facilities.
In CAES, air would be compressed during off-peak generating hours using
low-cost electricity. The compressed air would be stored below ground in a salt
cavern designed exclusively for CAES service. During peak generating hours, the
compressed air is returned to the surface and used to drive turbines that
generate electricity, with the expectation that the peak hour electricity would
be sold at a price above the cost of the off-peak electricity used to compress
the air. TPC believes that as a result of the combination of its salt cavern
construction and operating expertise together with GDF's engineering and design
capabilities and Sandia's knowledge of salt cavern structures, TPC is
competitively well placed to develop and provide CAES service. TPC also
believes that electric generators are aware of the effects of deregulation of
prices in the natural gas industry, and recognize that storage has contributed
to reducing the cost of natural gas to consumers and made users of storage more
competitive. TPC believes that for the electric industry, the potential
benefits of storage are similarly compelling. There can be no assurance that
TPC will pursue opportunities in the CAES business or that any such efforts
will be successful.
POWER MARKETING. As the electric industry in the United States moves
toward the open access system presently existing in the natural gas industry,
TPC believes that significant opportunities will arise for independent power
marketers. TPC is currently evaluating a number of business arrangements under
which it may pursue such opportunities either on its own or in association with
one or more other companies. TPC's strategy in power marketing will be similar
to its strategy in gas marketing (i.e., low load factor, weather sensitive,
high reliability services). TPC's goal is to create energy hubs by positioning
its CAES facilities alongside MHP's gas storage facilities or third party gas
storage facilities. Energy hubs utilizing salt cavern gas and electric storage
should allow TPC to offer unique marketing services and should create a wide
range of arbitrage opportunities across both commodities (gas and electricity)
and related physical and financial products. There can be no assurance that TPC
will pursue opportunities in the power marketing business or that any such
efforts will be successful.
COMPETITION
The natural gas industry is highly competitive. TPC competes against
other companies in the gathering, processing, marketing, and storage business
for supplies of natural gas to gather or sell and for customers to which it
sells such natural gas or storage services. Competition for natural gas
supplies is primarily based on efficiency, reliability, availability of
transportation and price. In marketing natural gas, TPC has numerous
competitors, including interstate pipelines and their marketing affiliates,
major producers, and local and national gatherers, brokers, and marketers of
widely varying sizes, financial resources and experience. Many of these
competitors, such as the major producers and certain large marketers, have
capital and other resources many times greater than TPC and control or have
access to substantially more diverse and greater supplies of natural gas.
Competition for marketing customers is primarily based upon reliability,
flexibility and price. For customers that have the capability of using
alternative fuels, such as oil and coal, TPC also competes against companies
capable of providing such alternative fuels, and that competition is based
primarily on price.
REGULATION
Various aspects of the transportation, sale and marketing of natural gas
are subject to or affected by extensive federal regulation under the Natural
Gas Act ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA"), the Natural Gas
Wellhead Decontrol Act of 1989 ("Decontrol Act") and regulations promulgated by
the FERC.
NATURAL GAS TRANSMISSION INDUSTRY. Historically, interstate pipeline
companies acted as wholesale merchants by purchasing natural gas from
producers, transporting that natural gas from the fields to their markets, and
reselling the natural gas to local distribution companies and large end-users.
Prior to the enactment of the NGPA in 1978 and the Decontrol Act of 1989, all
sales of natural gas for resale in interstate commerce, including sales by
producers, were subject to the rates and service jurisdiction of the FERC under
the NGA and NGPA. However, as a result of the NGPA and the Decontrol Act, by no
later than January 1, 1993, all so-called "first sales" of natural gas were
federally
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deregulated, thus allowing all types of non-pipeline and non-local distribution
sellers to market their natural gas free from federal controls. Moreover,
pursuant to Section 311 of the NGPA, the FERC promulgated regulations by which
wholly intrastate natural gas pipeline companies could engage in interstate
transactions without becoming subject to the FERC's full rates and service
jurisdiction under the NGA. At the same time, however, the FERC has retained
its traditional jurisdiction over the activities of interstate pipelines. Thus,
under the NGA and NGPA, the transportation and sale of natural gas by
interstate pipeline companies have been subject to extensive regulation, and
the construction of new facilities, the extension of existing facilities and
the commencement and cessation of sales or transportation services by pipeline
companies generally have required prior FERC authorization.
Commencing in 1985, the FERC adopted regulatory changes that have
significantly altered the transportation, sale and marketing of natural gas.
These changes were intended to foster competition in the natural gas industry
by, among other things, transforming the role of the interstate pipeline
companies from wholesale marketers of natural gas to primarily natural gas
transporters, and mandating that interstate pipeline companies provide open and
nondiscriminatory transportation services to all producers, distributors,
marketers and other shippers that seek such services (so-called "open access"
requirements). As an incentive to cause the interstate pipeline companies to
revamp their services, the FERC also sought to expedite the certification
process for new services, facilities and operations of those pipeline companies
providing "open access" services. Throughout the early years of this process,
the FERC's actions in these areas were subject to extensive judicial review and
generated significant industry comment and proposals for modification to
existing regulations.
In April 1992, the FERC issued its latest and most comprehensive
restructuring ruling, Order No. 636, a complex regulation that has had a major
impact on natural gas pipeline operations, services and rates. Among other
things, Order No. 636 generally required each interstate pipeline company to
"unbundle" its traditional wholesale services and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services and firm and interruptible transportation services)
and to adopt a new rate making methodology to determine appropriate rates for
those services. To the extent the pipeline company or its sales affiliate makes
natural gas sales as a merchant in the future, it will do so pursuant to a
blanket sales certificate that puts those entities in direct competition with
all other sellers pursuant to private contracts; however, pipeline companies
were not required by Order No. 636 to remain merchants of natural gas, and
several of the interstate pipeline companies have elected to become
transporters only. The FERC required that each pipeline company develop the
specific terms of service in individual restructuring proceedings by means of a
compliance filing that set forth the pipeline company's new, detailed
procedures. In subsequent orders and on judicial review by the federal
appellate courts, the court and the agency have largely affirmed the
significant features of Order No. 636 and numerous related orders pertaining to
the individual interstate pipelines. Nevertheless, because the FERC continues
to review and modify its open access regulations, the outcome of any such later
proceedings and the ultimate impact that they may have on TPC's business is
uncertain.
REGULATION OF TPC'S FACILITIES. Including the assets acquired in the
Seagull Transaction, TPC owns gathering facilities located in waters offshore
Texas. Facilities whose primary function is natural gas gathering are exempt
from the FERC's jurisdiction under the NGA and the FERC regulations promulgated
with respect thereto. However, as described above, interstate transmission
facilities are subject to the FERC's jurisdiction and its regulations.
Historically, the FERC has based its determination of the extent it will
regulate the gathering facilities of an interstate transmission company on
whether the primary function of the facilities in question is gathering, based
on the facts of the case. In June and September 1992, respectively, the FERC
disclaimed jurisdiction over TPC's TOMCAT and GIGS gathering systems. These
facilities are therefore not subject to the FERC's NGA jurisdiction and
regulations. The FERC reached its decision that both facilities qualified for
the gathering exemption after reviewing the primary function of the facilities
in light of certain physical parameters as well as twelve other relevant facts
and circumstances. As long as the nature and use of the facilities and other
factors remain substantially unchanged, these facilities should continue to be
exempt from jurisdiction under the NGA. Moreover, in a series of orders issued
in 1994, and in a statement of policy issued in 1996, the FERC rearticulated
its criteria for determining whether a specific facility is gathering or
transmission, the general effect of which was to call for an evaluation of the
factors in a way more conducive to a finding of gathering. TPC believes that
these orders do not alter or affect the regulatory status of TPC's existing
gathering facilities. Also, Texas regulates the transportation of natural gas
and the rates charged by pipelines, but does not regulate gathering facilities
in those instances in which the gatherer has certified its status as gatherer
to the state
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agency. The distinction between a natural gas gathering system and a pipeline
facility under such regulation is not entirely clear, but TPC believes that its
natural gas gathering systems are exempt from rates and service regulations.
However, in the fall of 1996, the Texas Railroad Commission (the "TRC")
conducted a workshop seeking industry input respecting whether and to what
extent different or additional state agency regulation of gathering services
and facilities was appropriate in light of the FERC's recent decision, approved
on appeal, to limit its further oversight of natural gas gatherers previously
part of the interstate pipeline industry. TPC cannot predict at this time
whether or to what extent the Texas agency may increase its regulation of
gathering activities in that state.
Of the assets acquired by TPC in the Seagull Transaction, all but one
currently are considered to be gathering facilities for purposes of both state
and federal regulation. As such, they are not subject to service or rate
regulation by the FERC or the TRC, subject to the outcome of the TRC inquiry
described above. Under applicable FERC and TRC policies and precedents, TPC
believes these assets are properly considered to be gathering facilities. Of
the assets acquired in the Seagull Transaction, the renamed "Seahawk" Shoreline
System is considered to be an intrastate pipeline system and is subject to rate
and service jurisdiction of the TRC. This asset also provides interstate
service pursuant to Section 311 of the NGPA. These Section 311 services are
rate regulated by the FERC, and TPC's rates for these services are required to
be maintained at levels that are "fair and equitable" as that term is defined
in the FERC's precedents and regulations. TPC has petitioned the FERC to have
the system declared non-jurisdictional.
Certain of the operations of the Moss Bluff Facility are subject to FERC
regulation and other of its activities are subject to TRC regulation. The Moss
Bluff Facility is classified by the FERC as a so-called "Hinshaw pipeline,"
exempt from the FERC's rates and service jurisdiction under the NGA. The Moss
Bluff Facility is subject to regulation under the state utility statutes and
its only interstate activity has been the receipt, from time to time, of
natural gas produced outside of Texas for ultimate consumption within Texas.
However, under regulations promulgated by the FERC, Hinshaw pipelines can
engage in other interstate transactions by complying with certain reporting and
other regulations applicable to such transactions. In this regard, the FERC has
issued a limited-jurisdiction certificate to Moss Bluff authorizing Moss Bluff
to engage in the sale, transportation (including storage), or assignment of
natural gas that is subject to the FERC's jurisdiction under the NGA to the
same extent that intrastate pipelines are authorized to engage in such
activities pursuant to Section 311 of the NGPA. Further, the FERC has
authorized Moss Bluff to charge rates for its interstate services equal to the
intrastate rates approved by the TRC. Pursuant to the Texas Gas Utility
Regulatory Act, intrastate rates are deemed to be just and reasonable and
approved by the TRC if they have been negotiated at arm's length with pipeline
companies or large industrial customers. Moss Bluff has requested that the FERC
grant it authority to charge market-based rates for its services performed
under Section 311 of the NGPA. If market-based rate authority is denied, Moss
Bluff will continue to charge rates for interstate services equal to the
intrastate rates approved by the TRC.
Egan Hub Partners, L.P., the MHP subsidiary that owns and operates the
Egan Facility, is an interstate pipeline and storer of natural gas. In October
1996, Egan Hub Partners, L.P., received a certificate of public convenience and
necessity from the FERC for its storage facility. This certificate grants Egan
Hub Partners, L.P., the authority under Section 7 of the Natural Gas Act to own
and operate its existing facilities and to build a second salt cavern storage
facility at the Egan site capable of serving customers via a recently completed
interconnection with Columbia Gulf Transmission Company. Egan's natural gas
storage and hub services will be offered at market-based rates. Egan is the
first hub in the United States with FERC authorization to charge market-based
rates for natural gas hub services.
The Tioga Project is also being developed to provide services in
interstate commerce. Accordingly, a certificate of public convenience and
necessity has been requested from the FERC for the Tioga Project. NE Hub
Partners, L.P., a subsidiary of MHP, has also requested market-based rate
authority for the Tioga Project. If market-based rate authority is not granted,
the Tioga Project's rates will be regulated by the FERC on a cost basis and
will be maintained at a "just and reasonable" level required by the FERC's
precedent and regulations. NE Hub Partners, L.P., also recently received an
Area Wide Permit from the U.S. Environmental Protection Agency for the
construction and operation of the Tioga Project.
ENVIRONMENTAL AND SAFETY MATTERS. TPC and MHP are subject to
environmental risks normally incident to the operation and construction of
pipelines, plants and other facilities for gathering, processing, treating,
storing and
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transporting natural gas and other products including, but not limited to,
uncontrollable flows of natural gas, fluids and other substances into the
environment, fires, pollution, and other environmental and safety risks. The
following is a discussion of certain environmental safety concerns related to
TPC and MHP. It is not intended to constitute a complete discussion of the
various federal, state and local statutes, rules, regulations, or orders to
which TPC's and MHP's operations may be subject. For example, TPC, without
regard to fault, could incur liability under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or state
counterparts, in connection with the disposal or other releases of hazardous
substances. Further, the recent trend in environmental legislation and
regulations is toward stricter standards, and this will likely continue in the
future.
TPC's activities in connection with the operation and construction of
pipelines, plants, injection wells, storage caverns, and other facilities for
gathering, processing, treating, storing, and transporting natural gas and
other products are subject to environmental and safety regulation by federal
and state authorities, including, without limitation, the Texas Natural
Resource Conservation Commission ("TNRCC"), the Louisiana Office of
Conservation, the TRC, and the Federal Environmental Protection Agency ("EPA"),
which can increase the costs of designing, installing and operating such
facilities. In most instances, the regulatory requirements relate to the
discharge of substances into the environment and include measures to control
water and air pollution.
Environmental laws and regulations may require the acquisition of a
permit before certain activities may be conducted by TPC. Further, these laws
and regulations may limit or prohibit activities on certain lands lying within
wilderness areas, wetlands, areas providing habitat for certain species or
other protected areas. TPC is also subject to other federal, state, and local
laws covering the handling, storage or discharge of materials used by TPC, or
otherwise relating to protection of the environment, safety and health.
An example of state environmental regulation affecting TPC is the Texas
Clean Air Act ("TCA Act") as administered by the TNRCC. The TCA Act restricts
emission of air pollutants from wells, pipelines, and processing plants, and
the TNRCC may curtail operations not meeting applicable standards.
Additionally, the TRC has the authority to take any steps necessary to ensure
compliance with applicable safety regulations through pipeline construction
standards and to issue permits and regulations necessary to prevent
environmental pollution by pipeline operations. These regulations are subject
to change from time to time. The design, construction, operation, and
maintenance of TPC's natural gas pipeline facilities are subject to the safety
regulations established by the Secretary of the Department of Transportation
pursuant to the Natural Gas Pipeline Safety Act of 1968, as amended ("1968
Act"), or by state agency regulations meeting the requirements of the 1968 Act.
The Moss Bluff Facility is subject to environmental regulations monitored by
the TRC that pertain to natural gas storage, disposal of salt water, brine pit
operations and noxious emissions.
Management believes TPC and MHP have obtained and are in current
compliance with all necessary and material permits and that TPC and MHP are in
substantial compliance with applicable material environmental and safety
regulations.
TPC and MHP maintain insurance coverages that they believe are customary
in the industry, although they are not fully insured against all environmental
and safety risks. TPC and MHP are not aware of any existing environmental or
safety claims that would have a material impact upon their financial position
or results of operations.
EMPLOYEES
As of March 7, 1997, TPC had 143 full-time employees (including 19
employed full-time at MHP). TPC is not a party to any collective bargaining
agreement and has experienced no work stoppages or strikes as a result of labor
disputes. TPC considers relations with its employees to be excellent.
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ITEM 2. PROPERTIES
See "Item 1. Business" for a discussion of properties and locations and
"Notes to Consolidated Financial Statements, Note 5 - Long-Term Debt and Credit
Arrangements" contained in Part II, Item 8 for a discussion of any liens or
encumbrances.
ITEM 3. LEGAL PROCEEDINGS
TPC is currently a party to several lawsuits which, in management's
opinion, will not have a significant adverse impact on TPC's financial position
or results of operations. See additional discussion in Note 14 - Commitments
and Contingencies, in the Notes to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is a list of TPC's executive officers and their business
experience. All executive officers are expected to hold their office until the
next annual meeting of the TPC Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
Larry W. Bickle........................... 51 Chairman of the Board of Directors and Chief Executive Officer
John A. Strom............................. 43 President
J. Chris Jones............................ 41 Senior Vice President and Chief Operating and Financial Officer
Marilyn I. Eckersley...................... 42 Vice President - Administration
Joseph J. DiNorscia....................... 44 Vice President - Risk Management
Robert D. Kincaid......................... 36 Treasurer
Michael E. Calderone...................... 40 Vice President - Gas Marketing
Patrick J. Peldner........................ 48 Vice President - Power Marketing
M. Scott Jones............................ 42 Vice President, General Counsel and Secretary
Ronald H. Benson.......................... 51 Vice President - Corporate Development
D. Hughes Watler, Jr...................... 48 Controller
</TABLE>
LARRY W. BICKLE, 51, has been Chairman of the Board of Directors and
Chief Executive Officer since December 1990. Mr. Bickle, as a co-founder of
TPC, has served as a director of the company since its founding in 1984, and
President from 1984 until February 1994.
JOHN A. STROM, 43, as a co-founder of TPC, has served as its President
since February 1994. From April 1992 until February 1994 Mr. Strom served as
Senior Vice President of TPC.
J. CHRIS JONES, 41, has served as Senior Vice President and Chief
Operating and Financial Officer of TPC since January 1996. From May 1993 to
January 1996, Mr. Jones served as Senior Vice President and Chief Operating
Officer, and from January 1986 until June 1993 as Vice President and Chief
Financial Officer of TPC.
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MARILYN I. ECKERSLEY, 42, has been Vice President -- Administration since
February 1996. From May 1994 until February 1996 Mrs. Eckersley served as
Manager -- Administration, and from January 1986 when she joined TPC until May
1994, Mrs. Eckersley held various administrative positions.
JOSEPH J. DINORSCIA, 44, has been Vice President -- Risk
Management of TPC since February 1994. Mr. DiNorscia joined TPC in 1990 as
Manager of Portfolio Services. Prior to joining TPC, Mr. DiNorscia served
as Manager of Risk Management and Strategy Development for Lyondell
Petrochemical Company.
ROBERT D. KINCAID, 36, has been Treasurer of TPC since September 1992,
and has been engaged as a consultant and, subsequently, an employee of TPC
since December 1991. From 1990 to 1991, he was associated with EnCap Partners,
a private partnership engaged in the management of institutional debt and
equity funds for energy related investments.
MICHAEL E. CALDERONE, 40, has been Vice President -- Gas Marketing of TPC
since February 1994. Mr. Calderone joined TPC in 1992 as Manager of
Transportation and Exchange and, since that time, has held the positions of
Director of Profit Optimization and Manager of Marketing.
PATRICK J. PELDNER, 48, has been Vice President -- Power Marketing since
July 1996 and was Vice President Storage from February 1994 until that time.
Mr. Peldner joined TPC in October 1992 as Manager of Storage Development. Prior
to joining TPC, Mr. Peldner was Vice President of Property Acquisitions and a
member of the executive committee for Nicor Oil and Gas Corporation from 1987
to 1992.
M. SCOTT JONES, 42, joined TPC in 1992 as Vice President, General Counsel
and Secretary. Mr. Jones was a shareholder of the Houston, Texas law firm of
Dickerson, Carmouche & Jones from May 1991 to October 1992, and was associated
with various Houston, Texas law firms prior to that time.
RONALD H. BENSON, 51, has been Vice President -- Corporate Development
of TPC since November 1994. From March 1993 to November 1994, Mr. Benson
acted as an independent consultant in the energy business. Mr. Benson was
President of Phibro Energy Production Inc. from December 1989 to March 1993.
D. HUGHES WATLER, JR., 48, joined TPC as Controller in September
1995. Prior to joining TPC, Mr. Watler was Chief Financial Officer of
Texoil, Inc. from 1992 to 1995, and prior thereto was a partner with the
accounting firm, Price Waterhouse.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF CLASS A COMMON STOCK
TPC's Class A Common Stock was traded on the American Stock Exchange
("AMEX") through December 10, 1996 and has been traded on the New York Stock
Exchange ("NYSE") since December 11, 1996, in both cases under the symbol
"TPC." The following table sets forth, for the periods indicated, the high and
low closing sales prices per share for the Class A Common Stock as reported on
the AMEX or NYSE Composite Tape:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ended December 31, 1995:
First quarter . . . . . . . .$10 1/8 $ 9 1/8
Second quarter. . . . . . . . 9 7/8 8 1/4
Third quarter . . . . . . . . 10 8
Fourth quarter. . . . . . . . 9 1/2 8 1/4
Year ended December 31, 1996:
First quarter . . . . . . . . 9 1/4 7 1/4
Second quarter. . . . . . . . 6 5/8 9
Third quarter . . . . . . . . 8 7/8 6 3/8
Fourth quarter. . . . . . . . 9 1/2 7 7/8
</TABLE>
On March 7, 1997, the closing price per share for TPC's Class A Common
Stock was $10 5/8. As of March 7, 1997, there were approximately 2,200
beneficial owners of Class A Common Stock. The transfer agent for TPC's Class A
Common Stock is ChaseMellon Shareholder Services, L.L.C., 2323 Bryan Street,
Suite 2300, Dallas, Texas 75201. There is one stockholder of record of Class B
Common Stock and there is no established public market for this class of stock.
DIVIDENDS
TPC has not paid cash dividends on its Class A or Class B Common Stock
and does not contemplate that it will pay any cash dividends on either issue in
the foreseeable future. Any payment of future dividends and the amounts thereof
will depend upon the earnings, financial condition, capital requirements, and
other factors deemed relevant by TPC's board of directors.
TPC's bank credit facilities and other debt agreements contain covenants
that generally restrict the circumstances under which TPC or its subsidiaries
may pay dividends. The most restrictive of TPC's debt agreements would allow
for dividends to be paid in an aggregate maximum amount of $5 million plus 50%
of TPC's Consolidated Net Income (as defined in such debt agreements), or if
such Consolidated Net Income is a deficit, then minus 100% of such deficit,
from June 30, 1995 to and including the date of payment. See Note 5 of Notes to
Consolidated Financial Statements for a discussion of TPC's debt agreements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates
indicated, selected historical consolidated financial data for TPC. This
financial data has been derived from and should be read in conjunction with the
consolidated financial statements of TPC and notes thereto included in Part II,
Item 8.
17
<PAGE> 19
TPC holds a majority voting interest in MHP. However, partners were
afforded participation in the governance of MHP such that certain decisions
require approval of TPC and at least two other partners. Accordingly, TPC's
investment in MHP has been accounted for under the equity method of accounting
beginning in December 1994. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ 617,292 $ 311,565 $ 294,162 $ 257,226 $ 184,186
Operating Income ....................... 24,102 12,898 11,544 14,428 12,215
Income (Loss) Before Extraordinary Item
5,044 494 3,317 4,545 3,086
Extraordinary Item, net of income tax
provision of $107,000 in 1995 and
income tax benefit of $105,000 in 1994 -- 207 (195) -- --
Net Income ............................. $ 5,044 $ 701 $ 3,122 $ 4,545 $ 3,086
--------- --------- --------- --------- ---------
Net Income Per Common Share Before
Extraordinary Item ................... $ .27 $ .04 $ .22 $ .31 $ .23
Extraordinary Item ..................... -- .01 (.01) -- --
--------- --------- --------- --------- ---------
Net Income Per Common Share ............ $ .27 $ .05 $ .21 $ .31 $ .23
========= ========= ========= ========= =========
Weighted Average Shares Outstanding .... 18,695 15,609 15,222 14,858 13,386
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working Capital ........................ $ 20,072 $ 14,204 $ 14,899 $ 3,485 $ 1,051
Total Assets ........................... 348,611 375,916 166,589 153,357 120,140
Long-term Debt ......................... 138,532 146,515 36,064 39,294 23,556
Redeemable Preferred Stock ............. -- -- 1,200 22,516 22,516
Common Stockholders' Equity ............ 102,880 98,441 65,021 40,758 29,491
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the historical financial condition and
results of operations of TPC should be read in conjunction with the
consolidated financial statements and related notes contained in Part II, Item
8.
GENERAL
TPC operates in three business segments of the natural gas industry:
gathering and processing, marketing, and storage. In its gathering and
processing businesses, TPC receives revenues from tariffs charged to producers
connected to its gathering facilities. As a result of the Seagull Transaction,
results in this segment since September 1995 also include revenues from the
share of natural gas liquids ("NGLs") received under processing contracts with
producers of natural gas; such contracts are on a "percentage of proceeds"
basis whereby TPC receives a flat percentage (usually 20%) of the NGL revenues
as a fee for processing the producers' gas. TPC's gathering tariffs are
established by negotiation between the producers of natural gas and TPC.
Currently, approximately 90% of the natural gas reserves
18
<PAGE> 20
connected to TPC's gathering systems are dedicated under either life-of-lease
gathering contracts, minimum volumetric dedications or minimum term
dedications.
In its marketing business, TPC realizes gross profit representing the
difference between the prices at which TPC purchases and the prices at which it
sells, transports and stores natural gas. TPC purchases and sells natural gas
under short- and long-term contracts. Short-term contracts have terms as short
as one hour or as long as a full month. Short-term contract prices are
typically based on the spot-market price of natural gas, while long-term
contract prices are based on market indices and may include a premium in
addition to the index average.
TPC's storage business is presently conducted through its majority owned
subsidiary, MHP. In this business, MHP receives fees for use of its salt cavern
storage facilities, which generally include a contractual demand charge for the
reservation of storage space or the use of injection and withdrawal facilities
and a fee for actual use of storage space and injection and withdrawal
facilities. In addition, MHP also offers short-term and interruptible "hub"
services, including parking, wheeling, balancing and loaning of natural gas to
its customers (see "Business - Natural Gas Storage - Natural Gas Storage
Contracts"). TPC holds a 66% majority voting interest in MHP. However, partners
were afforded participation in the governance of MHP such that certain
decisions require approval of TPC and at least two other partners. Accordingly,
TPC's investment in MHP has been accounted for under the equity method of
accounting since December 1994, whereas prior thereto the activities of TPC's
natural gas storage business were reflected in its consolidated financial
statements. TPC's equity in the net earnings of MHP is reflected in the
revenues of the natural gas storage segment in TPC's Consolidated Statements of
Operations.
RESULTS OF OPERATIONS
The following tables present certain data for major operating segments of
TPC for each of the three years ended December 31, 1996. A discussion follows
of certain significant factors that have affected TPC's operating results
during these periods. 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.
19
<PAGE> 21
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. The
effective date of the transaction was September 1, 1995. Accordingly, the
operating results applicable to the assets acquired in the Seagull Transaction
for the last four months of 1995 and the full year 1996 are reflected in the
tables below. Such amounts for the year ended December 31, 1996 and the four
months ended December 31, 1995, respectively, include net volumes of
258,420,000 and 91,484,000 Mcf and revenues of $17,851,000 and $7,147,000
derived from the natural gas gathering systems and volumes of 28,675,000 and
6,824,000 gallons and revenues of $6,625,000 and $1,571,000 representing TPC's
share of natural gas liquids sold from processing plants included in the
Seagull Transaction.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
NATURAL GAS GATHERING AND PROCESSING
Revenues
Gathering ................... $ 25,439 $ 15,149 $ 13,346
Processing .................. 6,625 1,571 --
--------- --------- ---------
32,064 16,720 13,346
Field operating expense ......... (7,737) (5,030) (3,205)
--------- --------- ---------
Gross profit ................ 24,327 11,690 10,141
--------- --------- ---------
Management and fee income ....... 1,286 882 390
Segment administrative expense .. (1,739) (607) (465)
Depreciation and amortization ... (10,171) (6,717) (6,215)
--------- --------- ---------
Operating costs ................. (10,624) (6,442) (6,290)
--------- --------- ---------
Operating income ............ $ 13,703 $ 5,248 $ 3,851
========= ========= =========
Operating volumes
Gathering (Mcf) ............. 316,739 150,039 90,579
Processing (net gallons) .... 28,675 6,824 --
Gross profit
Gathering (per Mcf) ......... 6.03(cent) 7.00(cent) 11.20(cent)
Processing (per net gallon) . 18.18(cent) 17.27(cent) --
Operating income
Gathering (per Mcf) ......... 3.18(cent) 2.99(cent) 4.25(cent)
Processing (per net gallon) . 12.68(cent) 11.02(cent) --
</TABLE>
The decline in unit gross profit in TPC's gathering business in 1996
relative to 1995 reflects a full year's impact of the Seagull Transaction in
1996 (versus only four months in 1995) and the fact that the average tariffs on
the gathering systems acquired in the Seagull Transaction were less than those
on TPC's existing gathering systems. TPC believes that it will be able to
increase average tariff rates in future years. Since completing the Seagull
Transaction, TPC has
20
<PAGE> 22
added new gathering volumes from various gas producers totaling approximately
75 MMcf per day at an average tariff rate of approximately 12.8(cent) per Mcf.
TPC has also increased net liquids production in its processing plants by
approximately 22,600 gallons per day while reducing monthly operating expenses
of its combined gathering and processing systems by approximately 19%. The
gross throughput in TPC's gathering systems averaged approximately 52% of
capacity in the year ended December 31, 1996 compared to approximately 49% of
capacity in the year ended December 31, 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 years. 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 competitive
advantage in obtaining access to these supplies because of its currently
available unutilized capacity.
NATURAL GAS MARKETING
Volumes sold during 1996 and 1995 increased compared to the prior periods
due to expanding spring and summer period gas sales contracts. The greatest
portion of this increase is due to large volume customer optimization contracts
that TPC is managing on behalf of several large local distribution company
customers. Operating profits from gas sales and storage related services for
1995 decreased, however, due to the lower margins that were experienced in the
initial year of the optimization program as well as the impact of certain
operational decisions which were made in December 1995 that resulted in a
greater portion of the gross margin that was ultimately recognized in TPC's
winter optimization program being deferred to 1996. Due to a more favorable
pricing environment, unit gross margins increased to 4.18(cent) per Mcf in 1996
from 2.97(cent) per Mcf in 1995 after adjusting for the settlements of prior
year natural gas imbalance positions that reduced the cost of gas sold by
approximately $0.9 and $2.7 million in the years ended December 31, 1996 and
1995, respectively. TPC anticipates its marketing volumes to increase in 1997
due to continued growth in TPC's optimization program and increased use of its
leased capacity at the Moss Bluff and Egan storage facilities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
NATURAL GAS MARKETING ........... (IN THOUSANDS, EXCEPT PER UNIT DATA)
Revenues ..................... $ 577,249 $ 286,602 $ 272,486
Cost of natural gas sold ..... (568,081) (279,326) (263,511)
--------- --------- ---------
Gross profit ............. 9,168 7,276 8,975
--------- --------- ---------
Segment administrative expense (3,690) (3,012) (2,644)
Depreciation and amortization (72) (230) (230)
--------- --------- ---------
Operating costs .............. (3,762) (3,242) (2,874)
--------- --------- ---------
Operating income ......... $ 5,406 $ 4,034 $ 6,101
========= ========= =========
Sales volume (Mcf) ........... 197,940 154,305 134,474
Gross profit (per Mcf) ....... 4.63(cent) 4.72(cent) 6.67(cent)
Operating income (per Mcf) ... 2.73(cent) 2.61(cent) 4.54(cent)
</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 seek 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 losses of $866,000
and
21
<PAGE> 23
$3,336,000 in the years ended December 31, 1996 and 1995, respectively. At
December 31, 1996, TPC had 483 net open futures and various option contracts
which together covered an aggregate of 4,830,000 MMBtu. The net unrealized loss
on these instruments was approximately $63,000 at December 31, 1996.
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 and accounts for its investment 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 from the date of formation of MHP). MHP's 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 the formation of MHP, TPC sold a 50% interest in the
partnership owning the Moss Bluff Facility to a third party in March 1994. As a
result of certain options associated with that transaction, TPC accounted for
the 50% interest transferred to the third party as "Revenues of Business
Transferred" and "Expenses of Business Transferred" through June 30, 1996. On
July 3, 1996, MHP acquired such 50% interest from the third party effectively
canceling the options between TPC and the third party to retransfer the
interest. TPC recognized an after-tax gain of approximately $1.5 million
related to this transaction (see "- Other Income, Costs and Expenses") and MHP
commenced accounting for 100% of the Moss Bluff Facility's revenues and
expenses in the third quarter of 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
NATURAL GAS STORAGE
Revenues
Business transferred .............. $ 2,581 $ 5,347 $ 3,484
Equity in earnings (loss) of MHP .. 5,111 2,536 (403)
Other ............................. 287 360 5,249
-------- -------- --------
7,979 8,243 8,330
-------- -------- --------
Operating expenses
Business transferred .............. (1,800) (3,438) (2,707)
Other ............................. (2) (23) (2,919)
Segment administrative expense .......... (1,174) (1,154) 233
Depreciation ............................ (10) (12) (1,345)
-------- -------- --------
Operating costs ......................... (2,986) (4,627) (6,738)
-------- -------- --------
Operating income ........................ $ 4,993 $ 3,616 $ 1,592
======== ======== ========
Cavern turnover capacity leased
to third parties (Mcf) ................ 44,145 21,521 15,198
Operating income per Mcf of turnover .... 9.54(cent) 7.94(cent) 5.36(cent)
capacity leased to third parties (1)
</TABLE>
- ----------------
(1) Excludes net earnings of business transferred.
22
<PAGE> 24
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 growth in hub services (short term storage and other services) at both
facilities. Detailed financial information concerning MHP can be found in the
combined financial statements of MHP at Exhibit 99 to this Form 10-K.
OTHER INCOME, COSTS AND EXPENSES
For the year ended December 31, 1996, corporate administrative expense
increased relative to the same period in 1995 due to increased employee bonuses
being accrued under TPC's profit-based incentive compensation program
(resulting from higher corporate profits) as well as increases in executive and
administrative salaries, professional fees and a one time listing fee to the
New York Stock Exchange. For the year ended December 31, 1995, corporate
administrative expense increased relative to the same period in 1994 as a
result of organizational expansions within TPC.
Interest expense increased from $2.1 million in 1994 to $6.5 million in
1995 and $13.4 million in 1996 with virtually all of both increases due to the
issuance of new debt incurred in connection with the Seagull Transaction which
closed in September 1995.
Interest income increased for the years ended December 31, 1996 and 1995
due primarily to TPC recording increasingly greater portions of its share of
the interest income on a promissory note receivable from MHP. See "- Liquidity
and Capital Resources - Financing and Investing Activities - Market Hub
Partners."
In the third quarter of 1996, TPC recognized in "Other Income" a pre-tax
gain of approximately $2.5 million ($1.5 million after-tax) on the transfer of
a 50% interest in the Moss Bluff Facility (see "- Natural Gas Storage"). Such
amount was attributable to a previously deferred gain resulting from a 1994
transaction between TPC and a third party prior to the formation of MHP (see
Note 3 - Investment in and Receivable from MHP, in the Notes to the
Consolidated Financial Statements).
In December 1995, TPC repurchased 1,000 shares of its Series B Preferred
Stock that were held by its former parent company in exchange for all of the
former parent's preferred stock held by TPC. An extraordinary gain of $207,000
(net of income taxes) was recorded on this transaction. In March 1994, TPC
issued $35 million of senior unsecured notes due in 2004 through a private
placement. Proceeds from the sale of the notes were used to retire term notes
payable to TPC's former bank resulting in an extraordinary loss of $195,000
(net of income taxes).
INCOME TAXES
As indicated in Note 1 to the Consolidated Financial Statements, TPC
follows Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires an asset and liability method of
accounting for income taxes. Under this method, TPC's effective tax rates for
the years ended December 31, 1996 and 1994 were 33% and 37%, respectively,
compared to the federal statutory rate of 34%. The effective tax rate for the
year ended December 31, 1996 was less than the statutory rate due to a
non-recurring credit while the 1994 effective tax rate exceeded the statutory
rate primarily due to permanent differences caused by the amortization of
intangible assets. In 1995, TPC determined that certain deferred tax
liabilities accrued during the former parent company's ownership of TPC were no
longer required, therefore, an adjustment of $610,000 was made to eliminate
such liabilities resulting in a negative effective tax rate for the year.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
TPC's working capital increased to $20.1 million at December 31, 1996
from $14.2 million at December 31, 1995 due to a number of items including the
December 1996 operational decision to significantly build natural gas
23
<PAGE> 25
inventories in TPC's natural gas marketing business in anticipation of higher
commodity prices in the first quarter of 1997. In addition to its working
capital, TPC had unutilized borrowing capacity of $23.5 million available under
its $40 million revolving credit facility as of December 31, 1996 (see "-
Investing and Financing Activities"). In the prior year, TPC's working capital
decreased moderately to $14.2 million at December 31, 1995 from $14.9 million
at the end of 1994.
The cash and cash equivalents reported by TPC on a consolidated basis at
December 31, 1996 are available for its marketing and gathering and processing
operations and should be sufficient, in combination with TPC's $40 million
revolving credit line, to fund working capital requirements during 1997. At
December 31, 1996, TPC holds a $20.8 million receivable due March 31, 1997 from
MHP which represents storage facility development costs advanced by TPC on
behalf of MHP. Amounts to be paid under this receivable are expected to have a
positive impact on the liquidity of TPC. Although the entire balance of this
receivable is due by its terms on March 31, 1997, the portion that is expected
to be repaid within the next twelve months is approximately $8,800,000;
accordingly, this amount has been classified by TPC as a current asset at
December 31, 1996. See "- Investing and Financing Activities - Market Hub
Partners."
Since the outside investors in MHP were afforded participation in the
governance of the partnership including decisions concerning financing,
acquisitions or divestitures, and other matters, TPC cannot make unilateral
decisions on all aspects of the partnership's operations. Therefore, for
accounting purposes, MHP is treated as an unconsolidated affiliate of TPC.
Accordingly, since the formation of MHP in December 1994, the operating cash
flow from the natural gas storage facilities formerly owned by TPC and the
working capital utilized in the business have been reported on the financial
statements of MHP and not those of TPC. Cash flows will be reported by TPC as
distributions, if any, are made from MHP.
OPERATING ACTIVITIES
TPC's net cash provided by operating activities was $17.0 million in the
year ended December 31, 1996 compared to a deficit of $16.3 million in the year
ended December 31, 1995. This significant increase was due to higher cash flow
from operations (net income plus depreciation and amortization, less equity in
earnings of MHP) associated with the assets acquired in the Seagull Transaction
as well as the decrease in inventory and accounts receivable growth related to
1996 being the second year (rather than the initial year) of the customer
optimization program that TPC is managing on behalf of several large local
distribution companies.
TPC's net cash used in operating activities was $16.3 million in 1995 in
contrast to the net cash provided by operations of $9.3 million in 1994. This
comparative decrease was due to lower net income as well as significant
increases in inventory and receivable levels related to the customer storage
fill contracts that TPC is managing on behalf of several large local
distribution companies and to a storage delivery program entered into with a
major midwestern pipeline company customer. Such inventory and receivable
balances were substantially reduced in 1996 as payments were received and the
inventories were delivered.
INVESTING AND FINANCING ACTIVITIES
SEAGULL TRANSACTION AND RELATED FINANCINGS/DIVESTITURES. 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 TOMCAT and Galveston Island gathering
systems. The purchase price was $155.9 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.
The acquisition of the gathering systems and related assets was financed
with existing credit facilities and $150 million of new credit facilities
provided by Internationale Nederlanden (U.S.) Capital Corporation ("ING
Capital").
24
<PAGE> 26
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 (see "- Public
Stock Offering"). Under these credit facilities, TPC and its subsidiaries are
subject to certain financial and other covenants, one of which was amended in
the fourth quarter of 1996 (see Note 2 - Seagull Transaction, in the Notes to
the Consolidated Financial Statements). 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 Revolver, as
amended, was subsequently increased to $30 million in December 1995 and $40
million in October 1996. The amended 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 59%
(determined as specified in the amended credit agreement), TPC was in
compliance with this requirement at December 31, 1996. The $35 million of
senior unsecured notes were likewise amended in connection with the Seagull
Transaction to provide for, among other things, an increase in the interest
rate payable from 7.33% to 9.33% per annum (reducible to 8.33% and 7.33% if and
when TPC and certain subsidiaries achieve total debt to total capitalization
ratios of not more than 60% and 50%, respectively).
In February 1996, TPC completed the sale of a number of the smaller
non-core gathering systems acquired in the Seagull Transaction for $12.1
million with the net proceeds applied to reduction of the ING Capital term
loan. Such reduction as well as the regularly scheduled principal payments made
in the first two quarters of 1996 reduced TPC's debt to capitalization ratio
below 60% resulting in a decline in the interest rate on the senior unsecured
notes from 9.33% to 8.33% per annum beginning in the third quarter of 1996.
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 hub centers 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 from closing through 1996, all of which has been
contributed to date. In addition to the July 3, 1996 issuance of $60 million of
senior secured notes by MHP's Moss Bluff and Egan Facilities, MHP will seek to
arrange debt financings (either at the individual project or overall
partnership level) on the other market hub facilities as development
progresses. The combination of these planned financings, MHP's internally
generated cash flow, and possible additional equity investments by the MHP
partners 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. The
capital costs incurred by MHP on the Moss Bluff and Egan Facilities aggregated
approximately $108 million through December 31, 1996, and the projected capital
costs for expansion of Egan and construction of the Tioga Project aggregate
approximately $160 million through the year 2000, subject to approval by the
MHP partners.
Under the terms of the Agreement of Limited Partnership, MHP has assumed
an obligation to TPC for advances made by TPC to the gas storage projects after
the effective date of the formation 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. Interest on the outstanding balance
was accrued through December 1996 at the prime rate stated by Wells Fargo Bank
and the principal was originally intended to be paid to TPC out of the proceeds
of MHP financings. 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 $14,100,000. The remaining balance of the promissory
note payable by MHP to TPC, which was originally due in December 1996, was
extended through March 31, 1997 at an annual interest rate of 12%; an
additional $3,900,000 was also loaned by TPC to MHP on the same terms in
December 1996. Repayment of approximately $8,800,000 of the promissory note is
expected to be made from the proceeds of a new MHP private placement debt
financing that is anticipated to close on or around March 31, 1997
25
<PAGE> 27
(commitments from the lenders have been obtained for this financing).
Accordingly, such portion of the promissory note has been classified as a
current receivable and the balance, which is expected to be refinanced on a
long-term basis, has been classified by TPC as a non-current asset at December
31, 1996. It is also expected that the non-TPC partners in MHP will participate
in such refinanced long-term loans to the extent of their equity interest in
MHP resulting in a further reduction of TPC's note receivable from MHP of
approximately $4,000,000.
PUBLIC STOCK OFFERING. 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
and the balance was added to TPC's working capital.
On August 23, 1996, TPC was authorized by its Board of Directors to
repurchase up to $5 million of its Class A Common Stock over a twelve month
period. Pursuant to the Board's authorization, TPC purchased a total of
95,000 shares of its Class A Common Stock at a cost of $803,000 through
October 9, 1996. No additional shares have been purchased since that time. The
buyback was financed out of available cash reserves and borrowings under TPC's
revolving credit facility.
GENERAL. Increased natural gas marketing inventories in 1996 resulted in
additional demands on funds. These extra demands related to the growth of TPC's
customer storage fill program, and are expected to continue and perhaps
increase in 1997. TPC anticipates that cash flow from operations will be
sufficient to meet its foreseeable requirements for working capital, capital
expenditures and other cash requirements. However, because future cash flows
are subject to a number of variables, such as changes in supply and demand,
general economic conditions and other market conditions over which TPC has no
control, there can be no assurance that TPC's capital resources will be
sufficient to meet such requirements. Cash flow generated by the gathering and
processing facilities, including facilities acquired in the Seagull
Transaction, is dependent on production of natural gas reserves presently
dedicated to flow through the systems. Production from these reserves will
decline in future years. In order for cash flow from TPC's natural gas
gathering and processing facilities to be maintained at current levels or
increased, additional successful drilling and production will have to occur in
areas adjacent to the facilities. TPC has no control over future drilling or
production activity in the Gulf of Mexico.
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. When used in this Report, other
TPC documents or oral presentations, the words "anticipate," "estimate,"
"expect," "objective," "projection," "forecast," "goal," and similar
expressions are generally intended to identify forward-looking statements. 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) "Business General" regarding TPC's
expectations for future demand for its natural gas supply services, (b) "-
Business and Growth Strategy" regarding TPC's expectations for domestic
consumption of natural gas, (c) "- Recent Developments - Evaluation of
Strategic Alternatives" regarding TPC's expectation that an announcement
regarding the results of the evaluation process is expected to be made in the
near future, (d) "- 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, (e) "- Natural Gas Storage" regarding MHP's
plans for natural gas storage projects at the Moss Bluff Facility, the Egan
Facility and the Tioga project and its belief that the use by its customers of
"hub" services will lead to additional long-term contracts over time, (f) "-
Natural Gas Marketing" regarding TPC's marketing objectives over the next
several years and its ability to provide premium priced natural gas marketing
services, TPC's intentions regarding the marketing of its summer storage fill
asset optimization and winter storage asset management programs, TPC's plans to
use the Egan Facility as an approved delivery point for customers utilizing
pipelines connected at that market hub, and TPC's expectations regarding its
use of storage arbitrage activities, (g) "- Other" regarding TPC's plans and
expectations for compressed air energy storage and power marketing, (h) "-
Regulation of
26
<PAGE> 28
TPC's Facilities" regarding the TOMCATand GIGS Systems' exemption from
jurisdiction under the NGA and TPC's plans for the development of the Tioga
project to provide services in interstate commerce, (i) "- Regulation -
Environmental and Safety Matters" regarding TPC's expectations for the
continuations of trends towards stricter standards in environmental law and
regulation, (j) "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations Natural Gas Gathering and
Processing" regarding TPC's belief that it will be able to increase average
tariff rates in future years, TPC's expectations for increases in natural gas
production resulting from successful drilling activities in areas served by
TPC's gathering systems and the likelihood of such activities providing TPC
with access to additional natural gas supplies to gather and process, (k)
"Natural Gas Marketing" regarding TPC's expectations for increases in natural
gas marketing volumes in 1997, (l) "- Liquidity and Capital Resources - Working
Capital" regarding TPC's anticipation of higher commodity prices in the first
quarter of 1997 and the likely affect of repayments by MHP of its note to TPC
on TPC's liquidity, (m) "- Investing and Financing Activities" regarding TPC's
expectations for a lack of future significant capital expenditures in
connection with the assets acquired in the Seagull Transaction, TPC's plans for
project development and acquisition opportunities in the natural gas gathering
and processing segment, and TPC's expectations regarding the timing and effect
to TPC of an anticipated new MHP private placement debt financing as well as
TPC's expectation that the non-TPC partners in MHP will also participate in the
refinancing of a long-term loan to MHP to the extent of their equity interest
in MHP, and (n) "- General" regarding TPC's expectation that cash flow from
operations will be sufficient to meet its foreseeable requirements for working
capital, capital expenditures and other cash requirements as well as TPC's
expectations with regard to production of natural gas reserves and future
drilling or production activity in the Gulf of Mexico. 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.
27
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TPC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................................... 29
Consolidated Balance Sheets as of December 31, 1996 and 1995....................................... 30
Consolidated Statements of Operations for the three years ended December 31, 1996.................. 32
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1996........ 33
Consolidated Statements of Cash Flows for the three years ended December 31, 1996.................. 34
Notes to Consolidated Financial Statements......................................................... 35
</TABLE>
The information required by Schedules I, II, III, IV and V is not
applicable to TPC.
28
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
TPC Corporation:
We have audited the accompanying consolidated balance sheets of TPC
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TPC
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1997
29
<PAGE> 31
TPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................... $ 1,536 $ 6,102
Accounts and notes receivable ................. 96,410 65,621
Account receivable from MHP ................... 1,818 8,989
Note Receivable from MHP ...................... 8,800 --
Inventory ..................................... 13,451 8,362
Prepaid expenses and other current assets ..... 2,512 2,769
Assets held for resale ........................ -- 13,700
--------- ---------
Total Current Assets ................ 124,527 105,543
--------- ---------
Property and Equipment:
Natural gas gathering and processing facilities 206,657 205,470
Construction in progress ...................... 11,709 5,069
Other ......................................... 1,926 3,207
Less accumulated depreciation ............ (49,464) (40,427)
--------- ---------
170,828 173,319
--------- ---------
Note Receivable from MHP .......................... 12,000 25,021
Investment in MHP ................................. 29,154 27,796
Assets of Business Transferred .................... -- 31,690
Intangible Assets, net ............................ 5,486 5,809
Other Assets ...................................... 6,616 6,738
--------- ---------
$ 348,611 $ 375,916
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
30
<PAGE> 32
TPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
--------- ---------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Trade payables........................................................ $ 83,325 $ 53,416
Accrued liabilities and other......................................... 10,909 6,640
Note payable.......................................................... -- 7,451
Current portion of long-term debt..................................... 10,221 23,832
---------- ----------
Total Current Liabilities........................................ 104,455 91,339
--------- ----------
Long-Term Debt, net of current portion.................................... 138,532 146,515
Proceeds from Business Transferred........................................ -- 17,500
Liabilities of Business Transferred....................................... -- 20,583
Deferred Income Taxes..................................................... 2,614 1,483
Deferred Revenue.......................................................... 130 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............................ 179 179
Common stock, Class B, convertible, $.01 par value;
authorized 5,000,000 shares; issued and outstanding 6 6
579,963 shares......................................................
Additional paid-in capital............................................ 86,820 86,820
Unearned ESOP compensation............................................ (765) (963)
Retained earnings .................................................... 18,279 13,235
---------- ----------
104,519 99,277
Less: Treasury stock, at cost, 470,000 shares and 375,000 shares of
Class A Common Stock at December 31, 1996 and 1995, respectively.... (1,639) (836)
---------- ------------
Total Stockholders' Equity....................................... 102,880 98,441
--------- ----------
$348,611 $375,916
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
31
<PAGE> 33
TPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Natural gas marketing sales .................................. $ 577,249 $ 286,602 $ 272,486
Natural gas gathering and processing ......................... 32,064 16,720 13,346
Natural gas storage (including equity in earnings of MHP) .... 7,979 8,243 8,330
--------- --------- ---------
617,292 311,565 294,162
--------- --------- ---------
Costs of Operations:
Natural gas marketing ........................................ 571,843 282,568 266,385
Natural gas gathering and processing ......................... 18,361 11,472 9,495
Natural gas storage .......................................... 2,986 4,627 6,738
--------- --------- ---------
593,190 298,667 282,618
--------- --------- ---------
Operating Income ................................................ 24,102 12,898 11,544
Other Income (Expense):
Corporate administrative expense ............................. (7,416) (6,266) (5,238)
Interest expense ............................................. (13,386) (6,472) (2,063)
Interest income .............................................. 2,404 1,705 1,092
Net earnings of business transferred ......................... (782) (1,908) (777)
Other income (expense) ....................................... 2,584 84 705
--------- --------- ---------
(16,596) (12,857) (6,281)
--------- --------- ---------
Income Before Income Tax and Extraordinary Item ................. 7,506 41 5,263
Benefit (provision) for income tax expense ................... (2,462) 453 (1,946)
--------- --------- ---------
Income Before Extraordinary Item ................................ 5,044 494 3,317
Extraordinary Item, net of income tax provision of
$107,000 in 1995 and income tax benefit of $105,000 ...... -- 207 (195)
in 1994 .................................................. -- -- --
Net Income ...................................................... $ 5,044 $ 701 $ 3,122
========= ========= =========
Net Income Per Common Share Before Extraordinary Item ........... $ .27 $ .04 $ .22
Extraordinary Item ........................................... -- .01 (.01)
--------- --------- ---------
Net Income Per Common Share ..................................... $ .27 $ .05 $ .21
========= ========= =========
Weighted Average Shares Outstanding ............................. 18,695 15,609 15,222
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
32
<PAGE> 34
TPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL UNEARNED
------------------ ---------------- PAID-IN ESOP RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS STOCK TOTAL
---------- ------ ------- ------ ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ... 10,210,623 $102 579,963 $ 6 $32,594 $ (520) $ 9,412 $ (836) $ 40,758
---------- ---- ------- ------ ------- ------- ------- ------- ---------
Conversion of
Series A ............... 3,467,036 35 -- -- 21,273 -- -- -- 21,308
Preferred Stock
Common Stock
purchased by ........... -- -- -- -- -- (787) -- -- (787)
ESOP
ESOP awards .............. -- -- -- -- -- 275 -- -- 275
Options exercised ........ 76,593 1 -- -- 344 -- -- -- 345
Net income ............... -- -- -- -- -- -- 3,122 -- 3,122
Balance, December 31, 1994 . 13,754,252 138 579,963 6 54,211 (1,032) 12,534 (836) 65,021
---------- ---- ------- ------ ------- ------- ------- ------- ---------
Class A Common
Stock public ........... 4,140,000 41 -- -- 32,609 -- -- -- 32,650
offering
ESOP awards .............. -- -- -- -- -- 69 -- -- 69
Net income ............... -- -- -- -- -- -- 701 -- 701
---------- ---- ------- ------ ------- ------- ------- ------- ---------
Balance, December 31, 1995 . 17,894,252 179 579,963 6 86,820 (963) 13,235 (836) 98,441
---------- ---- ------- ------ ------- ------- ------- ------- ---------
Class A Common
Stock buyback .......... -- -- -- -- -- -- -- (803) (803)
program
ESOP awards .............. -- -- -- -- -- 198 -- -- 198
Net income ............... -- -- -- -- -- -- 5,044 -- 5,044
---------- ---- ------- ------ ------- ------- ------- ------- ---------
Balance, December 31, 1996 . 17,894,252 $179 579,963 $ 6 $86,820 $ (765) $18,279 $(1,639) $ 102,880
========== ==== ======= ====== ======= ======= ======= ======= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
33
<PAGE> 35
TPC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ................................................... $ 5,044 $ 701 $ 3,122
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................ 11,214 7,654 8,124
Amortization of deferred charges ......................... 1,156 341 131
Equity in earnings of MHP ................................ (5,111) (2,536) 403
Gain on sale of storage assets ........................... (2,466) -- --
Changes in assets and liabilities, net of effects of business
transferred:
(Increase)decrease in accounts and notes receivable ...... (23,618) (43,950) 651
(Increase)decrease in prepaid expenses, inventory and .... (9,494) 335
other assets ........................................... (4,832)
Increase (decrease)in trade payables and other
liabilities............................................. 34,174 31,150 (2,642)
Increase (decrease)in deferred income taxes .............. 1,131 (232) (1,042)
Increase (decrease)in deferred revenue ................... 75 29 (70)
Decrease in unearned ESOP compensation ................... 198 69 275
--------- --------- ---------
Net cash provided by (used in) operating activities . 16,965 (16,268) 9,287
--------- --------- ---------
Cash Flows from Investing Activities, net of effects of business
transferred:
Capital and other asset additions ............................ (9,482) (159,075) (41,446)
Proceeds from sales of assets ................................ 13,700 1,996 --
Net proceeds from transfer of business ....................... -- -- 17,500
Net decrease in note receivable from MHP ..................... 4,221 -- --
Change in assets and liabilities of business transferred ..... (123) 1,102 (1,212)
--------- --------- ---------
Net cash provided by (used in)investing activities .. 8,316 (155,977) (25,158)
--------- --------- ---------
Cash Flows from Financing Activities, net of effects of business
transferred:
Issuance of Class A Common Stock net of expenses of
$2,540,000 in 1995 and $10,000 in 1994)...................... -- 32,650 345
Net borrowings (repayments)on unsecured revolving credit
agreement ................................................... 1,500 15,000 --
Issuance of long-term debt (net of expenses of $4,650,000 in
1995 and $504,000 in 1994) .................................. 575 145,609 34,496
Repayment of long-term debt .................................. (23,668) (31,083) (22,435)
Issuance (repayment) of note payable ......................... (7,451) 7,451 --
Class A Common Stock repurchased (for treasury in 1996 and
for ESOP in 1994) ........................................... (803) -- (788)
---------
Net cash provided by (used in) financing activities . (29,847) 169,627 11,618
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............. (4,566) (2,618) (4,253)
Cash and cash equivalents at beginning of period ................. 6,102 8,720 12,973
--------- --------- ---------
Cash and cash equivalents at end of period ....................... $ 1,536 $ 6,102 $ 8,720
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net of amounts
capitalized ................................................. $ 12,693 $ 4,468 $ 1,397
Cash paid during the period for income taxes ................. 1,343 614 2,480
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
34
<PAGE> 36
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION - The Consolidated Financial
Statements include the accounts of TPC Corporation (formerly Tejas Power
Corporation) and its subsidiaries ("TPC"). Material intercompany balances and
transactions have been eliminated.
TPC is engaged in gathering, processing, marketing and storage of natural
gas; it owns and operates gathering systems located in the Gulf of Mexico, plus
related onshore natural gas processing facilities. TPC also has a majority
voting and majority ownership interest in its equity investee, Market Hub
Partners, Inc. and Market Hub Partners L.P. (collectively, "MHP", see Note 3),
which owns, operates and is developing an integrated system of natural gas
market hubs utilizing high deliverability salt cavern storage facilities. TPC's
revenue, profitability and future rate of growth are substantially dependent
upon the price of, and demand for natural gas. Prices for natural gas are
subject to wide fluctuation in response to relatively minor changes in the
supply of and demand for natural gas, market uncertainty and a variety of
additional factors that are beyond TPC's control.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of demand
deposits and highly liquid investments purchased with an original maturity of
three months or less.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject TPC to concentration of credit risk consist primarily of temporary cash
investments and trade receivables derived principally from uncollateralized
sales to customers in the oil and gas and natural gas utility industries. The
concentration of credit risk in these industries affects TPC's overall exposure
to credit risk because customers may be similarly affected by changes in
economic and other conditions.
INVENTORIES - Inventories of natural gas are carried at the lower of
weighted average cost or market value.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Natural gas gathering and processing facilities and equipment are depreciated
primarily on the straight-line method over their estimated useful lives ranging
from ten to thirty years. Other property is depreciated on the straight-line
method over estimated useful lives, which range from three to five years.
Additions, renewals and betterments that add materially to productive capacity
or extend the life of an asset are capitalized. Expenditures for maintenance
and repairs are expensed as incurred. Interest cost is capitalized during the
construction period of major facilities and amounted to approximately $737,000,
$1,640,000 and $1,551,000 in 1996, 1995 and 1994, respectively. In addition,
TPC capitalized certain internal costs in such years of approximately $100,000,
$938,000 and $1,966,000, which are directly related to projects under
development. In 1996, TPC adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Since adoption,
SFAS No. 121 has had no impact on TPC's financial statements.
HEDGING ACTIVITIES - TPC periodically enters into physical and financial
derivative transactions for the purpose of hedging against the volatility of
natural gas prices. These activities are accomplished through the use of
forwards, futures, options, and price swap contracts with maturities of
eighteen months or less. Gains or losses on hedging activities are deferred and
recognized as a part of the physical transactions hedged.
INCOME TAXES - TPC provides deferred income taxes for temporary
differences between financial and income tax reporting in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
35
<PAGE> 37
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER COMMON SHARE - Earnings per common share are based upon the
weighted average number of shares of both TPC's Class A and Class B Common
Stock and common stock equivalents, if dilutive, outstanding during the year.
Common stock equivalents consist of shares issued assuming all stock options
are exercised using the treasury stock method. The difference between earnings
per common share on a primary and a fully diluted basis is not significant.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements relate to the
depreciable lives of property and equipment as well as to the determination of
liabilities for gas purchase costs and deferred income taxes.
(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 $155.9 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
$2.1 million.
The acquisition was financed through a combination of existing credit
facilities and $150 million under new credit facilities provided by a group of
lenders led 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 ("Tranche A")
amortizes on a quarterly basis through its maturity on June 30, 2000. The
second tranche ("Tranche B") 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. In the fourth quarter of 1996, the lenders agreed to amend
one of the financial covenants in the credit agreement and to also amend the
Tranche A amortization schedule, while retaining the June 30, 2000 maturity
date. 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 $13,700,000 were made in the first three
quarters of 1996, with proceeds of $12,100,000 applied in February 1996 to the
reduction of both tranches of the Term Loan on a pro rata basis. No gain or
loss was recorded on these sales.
In connection with obtaining the financing for the Seagull Transaction,
$4,650,000 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.
The following table presents the unaudited pro forma revenues, income
before extraordinary item, net income and net income per share for the years
ended December 31, 1996 and 1995 assuming that the Seagull Transaction and the
sale of the smaller acquired non-core gathering systems, which were made
primarily in the first quarter of 1996, had occurred on January 1, 1995.
36
<PAGE> 38
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ....................... $614,902 $333,865
Income before extraordinary item 4,994 984
Net income ..................... 4,994 1,191
Net income per share ........... 0.27 0.08
</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, all of which
was contributed by July 1996. 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 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 up to three such additional natural
gas market centers. Prior to the formation of MHP, TPC sold a 50% interest in
the partnership owning the Moss Bluff Facility to a third party in March 1994.
As a result of certain options associated with that transaction, TPC deferred
recognition of an approximate $6 million gain and accounted for balance sheet
transactions related to the 50% interest transferred to the third party as
"Assets of Business Transferred" and "Liabilities of Business Transferred"
while the related income statement transactions through June 30, 1996 were
accounted for as "Revenues of Business Transferred" and "Expenses of Business
Transferred." On July 3, 1996, MHP acquired such 50% interest from the third
party effectively canceling the options between TPC and the third party to
retransfer the interest. After eliminating the portion of the deferred gain on
the March 1994 transaction applicable to TPC's ownership interest in MHP, TPC
recognized in "Other Income" a pre-tax gain of approximately $2.5 million ($1.5
million after-tax) related to this transaction and MHP commenced accounting for
100% of the Moss Bluff Facility's revenues and expenses in the third quarter of
1996.
The four minority partners in MHP have been afforded participation in its
governance 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, adjusted for the aforementioned July 3, 1996
transaction involving the Moss Bluff Facility, is being amortized in relation
to the lives of existing storage service contracts. The amortization of this
amount totaled
37
<PAGE> 39
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$2,189,000 and $1,971,000 in the years ended December 31, 1996 and 1995, and is
included in income as a part of TPC's equity in earnings of MHP.
Under the terms of the Agreement of Limited Partnership, MHP has assumed
an obligation to TPC for advances made by TPC to the gas storage projects after
the effective date of the formation 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 dated totaled $31,020,000. Interest on the outstanding balance
was accrued through December 1996 at the prime rate stated by Wells Fargo Bank,
which was a weighted average of 8.25% and 8.83% for the years ended December
31, 1996 and 1995; a total of $2,037,000 and $2,261,300 of interest was accrued
on the advances during the years ended December 31, 1996 and 1995,
respectively, and the unpaid portions of 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 $14,100,000. The remaining balance of the promissory note payable
by MHP to TPC, which was originally due in December 1996, was extended through
March 31, 1997 at an annual interest rate of 12%; an additional $3,900,000 was
also loaned by TPC to MHP on the same terms in December 1996. Repayment of
approximately $8,800,000 of the promissory note is expected to be made from the
proceeds of a new MHP private placement debt financing that is anticipated to
close on or around March 31, 1997 (commitments from the lenders have been
obtained for this financing). Accordingly, such portion of the promissory note
has been classified as a current receivable and the balance, which is expected
to be refinanced on a long-term basis, has been classified by TPC as a
non-current asset at December 31, 1996.
Audited financial statements of MHP are included as Exhibit 99 to TPC's
Annual Report on Form 10-K. Summarized financial information of MHP is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets ........................... $ 6,781 $ 5,555
Property and equipment, net .............. 119,443 81,473
Construction in progress ................. 26,493 16,087
Other noncurrent assets .................. 4,018 2,970
-------- --------
$156,735 $106,085
======== ========
Payable to TPC - Trade account ........... $ 1,818 $ 8,989
- Promissory note ......... 8,800 25,021
Other current liabilities ................ 6,454 6,496
Note payable to TPC (long-term) .......... 12,000 --
Long-term debt, net of current portion ... 53,492 8,464
Capital .................................. 74,171 57,115
-------- --------
$156,735 $106,085
======== ========
</TABLE>
38
<PAGE> 40
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues .................................................................. $ 20,517 $10,664
Operating income .......................................................... 10,327 3,401
Net income ................................................................ 4,816 929
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets represent the cost paid by Harken Energy Corporation
("HEC"), TPC's former parent, in excess of TPC's net assets at January 1, 1989,
and are amortized over twenty-five years using the straight-line method. The
balances at December 31, 1996 and 1995 were $5,486,000 and $5,809,000, net of
accumulated amortization of $2,582,000 and $2,259,000, respectively.
Amortization expense of $323,000 was recorded for each of the years ended
December 31, 1996, 1995 and 1994.
(5) LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes payable secured by natural gas gathering and processing facilities (A) $ 95,417 $119,000
Senior notes, unsecured (B) ................................................ 35,000 35,000
Revolving credit facility (C) .............................................. 16,500 15,000
Other ...................................................................... 1,836 1,347
-------- --------
148,753 170,347
Less: Current portion ..................................................... 10,221 23,832
-------- --------
$138,532 $146,515
======== ========
</TABLE>
- ----------------
(A) This represents the Term Loan in the original amount of $120 million
payable to a consortium of lenders led by ING Capital incurred in
connection with the Seagull Transaction on September 25, 1995 (see Note
2). At December 31, 1996, the balances outstanding of Tranches A and B of
the Term Loan were $41,518,000 and $53,899,000 and the effective interest
rates at that date were 7.0625% and 8.4375%, respectively.
(B) On March 25, 1994, TPC issued $35,000,000 of senior unsecured notes,
due March 15, 2004, through a private placement. Interest is paid
semi-annually with annual principal payments of $5,000,000 beginning March
15, 1998. Proceeds from the sale of the notes were used to retire, prior
to the scheduled repayment, a $19,400,000 balance on TPC's term notes
payable to its former bank. As a result of this debt retirement, an
extraordinary loss of $195,000 (net of income taxes) was recorded. The
interest rate on the notes was initially set at 7.33%. In connection with
the financing for the Seagull Transaction (see Note 2), the senior
unsecured notes were amended to provide for, among other things, an
increase in the interest rate payable from 7.33% to 9.33% per annum
(reducible to 8.33% and 7.33% if and when TPC and certain subsidiaries
achieve total debt to total capitalization ratios of not more than 60% and
50%, respectively). TPC's total debt to total capitalization ratio was
reduced below 60% in the third quarter of 1996; accordingly, the interest
rate in effect at December 31, 1996 was 8.33%.
39
<PAGE> 41
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(C) On March 25, 1994, TPC entered into a $15,000,000 unsecured revolving
credit agreement with its banks, which was subsequently amended and
increased to $30,000,000 on December 28, 1995 and $40,000,000 on October
30, 1996. Borrowings under the revolving credit facility mature January 1,
1999. Interest on the credit facility 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 .5% per annum and as low as 0% per annum and
the LIBOR rate spread can be as high as 2.25% per annum and as low as 1.5%
per annum. In addition, TPC pays a commitment fee of .375% per annum on
the unused portion of the revolving credit facility. The unsecured
revolving 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 59% (determined as
specified in the amended credit agreement), TPC was in compliance with
this requirement at December 31, 1996. At December 31, 1996, $16,500,000
of the facility was utilized and the remaining available balance was
$23,500,000.
TPC is subject to certain financial covenants under each of the above
described credit agreements. These agreements require TPC to maintain minimum
consolidated net worth, a ratio of current assets to current liabilities of not
less than 1 to 1 and other various coverage ratios. TPC was in compliance with
such financial covenants, as amended, at December 31, 1996. Maturities of
long-term debt for the five fiscal years following December 31, 1996 are as
follows:
AMOUNT
------------
(IN THOUSANDS)
1997 ........................................... $ 10,221
1998 ........................................... 15,148
1999 ........................................... 31,664
2000 ........................................... 70,598
2001 ........................................... 5,201
Thereafter ...................................... 15,921
--------
$148,753
========
At December 31, 1995, TPC also 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).
40
<PAGE> 42
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
The following table presents the carrying amounts and estimated fair
values of TPC's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,536 $ 1,536 $ 6,102 $ 6,102
Liabilities:
Long-term debt ........... 148,753 147,554 170,347 169,978
Hedging Financial Instruments:
Commodity price hedges ... 866 803 538 736
</TABLE>
The following methods and assumptions were used to estimate the fair
value of the financial instruments summarized in the table above. The carrying
value of trade receivables and trade payables included in the accompanying
Consolidated Balance Sheets approximated fair value at December 31, 1996 and
1995.
CASH AND CASH EQUIVALENTS - The carrying amounts of cash and cash
equivalents approximated fair value due to their short-term nature.
DEBT - The fair value of long-term debt is estimated using discounted
cash flow analysis, based on the borrowing rate currently available to TPC for
loans with similar terms and maturity.
COMMODITY PRICE HEDGES - 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 seek 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 losses of $866,000
and $3,336,000 in the years ended December 31, 1996 and 1995, respectively. At
December 31, 1996, TPC had 483 net open futures contracts and various option
contracts which together covered an aggregate of 4,830,000 net MMBtu. The fair
value of such contracts is determined by reference to quoted market prices and
the net unrealized loss on these instruments was approximately $63,000 at
December 31, 1996.
(7) REDEEMABLE PREFERRED STOCK
SERIES A PREFERRED STOCK - In June 1991, TPC sold and issued 25,000
shares of Series A Preferred Stock to a group of three investors. The aggregate
proceeds were $22,500,000. Those investors also purchased shares of Class B
Common Stock in connection therewith. See Note 8 - Common Stockholders' Equity.
In March 1994, the group of three investors exercised their option to
convert their 25,000 shares of Series A Preferred Stock into 3,467,036 shares
of Class A Common Stock. The conversion, in conjunction with the Class B Common
Stock already owned, resulted in the investors then owning approximately 25% of
the common stock of TPC. Immediately prior to year end 1994, one of the three
investors purchased all of the Class A and Class B Common Stock of the other
two investors.
41
<PAGE> 43
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SERIES B PREFERRED STOCK - In May 1991, TPC issued 1,000 shares of its
Series B Preferred Stock to its former parent company, HEC (see Note 4), in
connection with a distribution of TPC's common stock to the stockholders of
HEC. In December 1995, TPC repurchased such shares in exchange for all of HEC's
Series C Cumulative Preferred Stock held by TPC. An extraordinary gain of
$207,000 (net of income taxes) was recorded on this transaction.
(8) COMMON STOCKHOLDERS' EQUITY
CLASS A COMMON STOCK - In March 1994, 3,467,036 shares of Class A Common
Stock were issued to a group of three investors as a result of their exercise
of an option to convert their 25,000 shares of Series A Preferred Stock in
Class A Common Stock. See Note 7 - Redeemable Preferred Stock.
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.
On August 23, 1996, TPC was authorized by its Board of Directors to
repurchase up to $5 million of its Class A Common Stock over a twelve month
period. Pursuant to the Board's authorization, TPC purchased a total of 95,000
shares of its Class A Common Stock at a cost of $803,000 through December 31,
1996. Such repurchased shares have been accounted for as treasury stock. The
buyback was financed out of available cash reserves and borrowings under
TPC's revolving credit facility.
CLASS B COMMON STOCK - In June 1991, TPC sold and issued 565,065 shares
of Class B Common Stock to a group of three investors. The aggregate proceeds
were $2,500,000 for the common stock. Each share of Class B Common Stock is
convertible at any time into one share of TPC Class A Common Stock. The stock
was sold in conjunction with the Series A Preferred Stock. The holders of Class
B Common Stock are entitled to elect the greater of three directors or
two-sevenths of the members (rounded to the next whole number) of TPC's board
of directors. An additional 9,079 and 5,819 shares of Class B Common Stock were
issued in 1992 and 1993, respectively, in connection with an anti-dilution
provision. See Note 7 - Redeemable Preferred Stock.
(9) STOCK-BASED COMPENSATION PLANS
TPC has two stock option plans for its employees (the "1991 Plan" and the
"1994 Plan," collectively referred to as the "Employee Plans") and two stock
option plans for its non-employee directors (the "1992 Plan" and the "1995
Plan," collectively referred to as the "Director Plans"). Options granted under
the Employee and Director Plans are for a period not to exceed ten years and at
an exercise price equal to the fair market value of TPC's Class A Common Stock
at the date of the grant. TPC accounts for these plans under APB Opinion No. 25
under which no compensation expense has been recognized in the Consolidated
Statements of Operations. Had compensation cost for options issued under these
plans in the years ended December 31, 1996 and 1995 been determined consistent
with the measurement provisions of SFAS No. 123, TPC's income before
extraordinary item, net income and net income per share amounts for such years
would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995
------------- ------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Income (Loss) before extraordinary item ..... $4,253 $ (88)
Net income .................................. 4,253 119
Net income per share ........................ 0.23 0.01
</TABLE>
42
<PAGE> 44
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TPC may grant options for a total of up to 3,736,370 shares under the Employee
Plans and a total of up to 148,000 shares under the Director Plans. Options for
a total of 243,661 shares are available for issue under the Employee Plans and
options for a total of 48,000 shares are available for issue under the Director
Plans at December 31, 1996. A summary of transactions in the Employee and
Director Plans for the three years ended December 31, 1996 is presented below:
<TABLE>
<CAPTION>
SHARES
<S> <C>
Outstanding, January 1, 1994 (option price $4.16 - $7.25)..................................... 2,305,377
Granted (option price $9.31 - $11.25)...................................................... 860,000
Exercised.................................................................................. (76,993)
Cancelled.................................................................................. (138,750)
----------
Outstanding, December 31, 1994................................................................ 2,949,634
Granted (option price $9.12 - $9.38)....................................................... 318,500
Exercised.................................................................................. --
Cancelled.................................................................................. (85,100)
-----------
Outstanding, December 31, 1995................................................................ 3,183,034
Granted (option price $8.00 - $8.25)....................................................... 410,100
Exercised.................................................................................. --
Cancelled.................................................................................. (84,316)
-----------
Outstanding, December 31, 1996................................................................ 3,508,818
=========
Exercisable
December 31, 1994.......................................................................... 1,963,417
December 31, 1995.......................................................................... 2,194,257
December 31, 1996.......................................................................... 2,535,801
</TABLE>
Of the 3,508,818 options outstanding at December 31, 1996, 1,807,918
having an exercise price of $4.16 per share expire in May 1997. All of these
options are currently exercisable. The remaining 1,700,900 options outstanding
at December 31, 1996 have exercise prices ranging between $5.00 and $11.25 per
share, with a weighted average exercise price of $9.36 per share. Of these
options, 727,883 are currently exercisable and their weighted average exercise
price is $9.38 per share.
For purposes of meeting the pro forma disclosure requirements of SFAS
No. 123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rates of 6.206% and 5.374%; expected volatility of 33% and
26%; and no dividend yield. An expected option term of four years was used for
options granted in both 1996 and 1995. Based upon the above assumptions, the
weighted average fair value per share of options granted in 1996 and 1995 was
$2.92 and $2.77, respectively.
43
<PAGE> 45
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 1992, TPC established an Employee Stock Ownership
Plan (the "ESOP") for eligible employees. In September 1992, the ESOP borrowed
$1,034,000 from TPC to purchase 250,000 shares of Class A Common Stock
previously owned by HEC (see Note 4). The loan obligation of the ESOP is
considered unearned employee compensation and, as such, recorded as a reduction
of TPC's stockholders' equity. Compensation expense of $198,000, $69,000 and
$275,000 was recorded in 1996, 1995 and 1994, respectively.
During the third quarter of 1994, TPC purchased 75,000 shares of its
Class A Common Stock. The ESOP purchased these shares from TPC with the
proceeds of a loan from TPC. The loan obligation of the ESOP is considered
unearned employee compensation and, as such, is recorded as a reduction of
TPC's stockholders' equity. Both the loan obligation and the unearned
compensation are reduced by the amount of any loan repayments made by the ESOP.
(11) INCOME TAXES
TPC is subject to federal income tax and certain state income taxes. An
analysis of the combined provision for income taxes for 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current, Federal .................. $ 983 $ 150 $ 1,942
Current, State .................... 50 50 50
Deferred .......................... 1,429 (546) (151)
------- ------- -------
$ 2,462 $ (346) $ 1,841
======= ======= =======
</TABLE>
TPC's effective tax rates for the years ended December 31, 1996 and 1994
were 33% and 37%, respectively, compared to the federal statutory rate of 34%.
The effective tax rate for the year ended December 31, 1996 was less than the
statutory rate due to a non-recurring credit while the 1994 effective tax rate
exceeded the statutory rate primarily due to permanent differences caused by
the amortization of intangible assets (see Note 4). In 1995, TPC determined
that certain deferred tax liabilities accrued during the former parent
company's ownership of TPC (see Note 4) were no longer required, therefore, an
adjustment of $610,000 was made to eliminate such liabilities resulting in a
negative effective tax rate for the year. Deferred tax liabilities at December
31, 1996 and 1995 are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net deferred tax liability:
Accelerated depreciation and other ....... $ 2,959 $ 1,633
Net deferred tax assets:
Alternative minimum tax credits .......... (345) (150)
------- -------
Total deferred taxes ............... $ 2,614 $ 1,483
======= =======
</TABLE>
No deferred tax asset valuation allowances were considered to be
necessary at December 31, 1996 or 1995.
44
<PAGE> 46
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) RELATED PARTY TRANSACTIONS
In addition to the advances made to its equity affiliate, MHP (see Note
3), TPC receives natural gas storage services from MHP and in turn, provides
certain administrative, financial and other services to MHP. Storage fees paid
by TPC to MHP are at contractual rates which are comparable to those rates
reflected in MHP's third party storage contracts and amounted to $3,177,000 and
$1,888,000 in the years ended December 31, 1996 and 1995, respectively. Charges
for services provided by TPC to MHP are based substantially upon contracts
approved by TPC and MHP and are meant to approximate the market rate for such
services. Contracts covering a substantial portion of such services were
cancelled by mutual agreement between TPC and MHP effective July 1, 1996 and
the TPC employees who were previously involved in providing these services to
MHP became employees of MHP at that date. The aggregate charges for contractual
services provided by TPC to MHP in the years ended December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Services provided to MHP which were continued subsequent to July 1, 1996 ............ $1,641 $4,292
Services provided to MHP which were discontinued on July 1, 1996 .................... 774 1,158
------ ------
$2,415 $5,450
====== ======
</TABLE>
In 1991, TPC executed a Technical Cooperation Agreement with GDF
Technology US, Incorporated ("GDF Tech") a wholly owned subsidiary of Gaz de
France, holder of a combined total of 4,046,999 shares of TPC's Class A and
Class B Common Stock (see Notes 7 and 8). The agreement granted TPC access to
technology via a consulting arrangement which was renewed in 1994. Total fees
incurred during 1996, 1995 and 1994 were $478,000, $426,000 and $292,000,
respectively. Except for $345,000 of the 1995 fees which were capitalized, such
amounts were expensed in the accompanying Consolidated Statements of
Operations. The renewed technology agreement with GDF Tech expires in April
1999 and TPC anticipates that total minimum fees of approximately $1,257,000
will be expensed ratably over the remaining term of the agreement, unless the
agreement should be terminated early (TPC has the right to cancel the agreement
with six months notice to GDF Tech).
(13) SEGMENT INFORMATION AND OTHER
TPC's operations are comprised of three segments: natural gas marketing,
natural gas gathering and processing and natural gas storage. There are no
material intersegment sales. Operating profit for each segment includes total
revenues less operating expenses (including depreciation) and segment
administrative expenses, and excludes corporate administrative expense,
interest expense, interest income and income taxes.
45
<PAGE> 47
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents information relating to TPC's business
segments included in its Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Segment Revenues:
Natural gas marketing...................................... $577,249 $286,602 $272,486
Natural gas gathering and processing....................... 32,064 16,720 13,346
Natural gas storage (including equity in earnings of MHP).. 7,979 8,243 8,330
-------- -------- --------
Total............................................... $617,292 $311,565 $294,162
======== ======== ========
Segment Operating Income:
Natural gas marketing...................................... $ 5,406 $ 4,034 $ 6,101
Natural gas gathering and processing....................... 13,703 5,248 3,851
Natural gas storage........................................ 4,993 3,616 1,592
-------- -------- --------
Total............................................... 24,102 12,898 11,544
Corporate administrative expense........................... (7,416) (6,266) (5,238)
Interest expense........................................... (13,386) (6,472) (2,063)
Interest income............................................ 2,404 1,705 1,092
Net earnings of business transferred....................... (782) (1,908) (777)
Other income............................................... 2,584 84 705
-------- -------- --------
Income before income tax and extraordinary item.......... $ 7,506 $ 41 $ 5,263
======== ======== ========
</TABLE>
Included in the natural gas marketing segment's operating income for the
years ended December 31, 1996 and 1995 are reductions in the cost of gas sold
of approximately $0.9 and $2.7 million as a result of favorable settlements of
certain natural gas imbalance positions. These settlements were made with
various producers and pipelines and covered imbalance positions through
December 31, 1994 and 1993, respectively.
The identifiable assets of TPC, by segment, at December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Natural gas marketing ............................ $108,930 $ 66,874
Natural gas gathering and processing ............. 172,423 197,178
Natural gas storage .............................. 59,938(A) 107,007(B)
-------- --------
Total ......................................... 341,291 371,059
Corporate and other .............................. 7,320 4,857
-------- --------
Total ......................................... $348,611 $375,916
======== ========
</TABLE>
- --------------
(A) Consists principally of investments in and advances to MHP of $49,954, at
December 31, 1996.
46
<PAGE> 48
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(B) Consists principally of investments in and advances to MHP and assets of
business transferred of $52,817,000 and $31,690,000, respectively, at
December 31, 1995.
Depreciation and amortization expense and capital expenditure information
for each segment is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------- -------------- -------------
1996 1995 1994
------- ----- --------- ----- -------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and Amortization Expense:
Natural gas marketing...................................... $ 72 $ 230 $ 230
Natural gas gathering and processing....................... 10,171 6,717 6,215
Natural gas storage........................................ 10 12 1,345
---------- ------- -------
Total............................................... 10,253 6,959 7,790
Corporate and other........................................... 961 695 334
---------- ------- -------
Total............................................... $ 11,214 $ 7,654 $ 8,124
========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Capital Expenditures:
Natural gas marketing........................................................ $ -- $ --
Natural gas gathering and processing......................................... 1,374 156,044
Natural gas storage.......................................................... 3,045 1,939
--------- ------------
Total................................................................. 4,419 157,983
Corporate and other............................................................. 5,063 1,092
--------- ------------
Total................................................................. $ 9,482 $ 159,075
========= ============
</TABLE>
Natural gas storage capital expenditures shown above consist principally
of land acquisitions made by TPC for future storage project sites. Some such
land purchases are expected to be ultimately sold by TPC to MHP, while others
will likely be retained by TPC for possible non-natural gas storage projects.
SIGNIFICANT CUSTOMERS - Significant customers are those which
individually account for more than 10% of TPC's consolidated revenues. For the
year ended December 31, 1996, there were no such customers. For the years ended
December 31, 1995 and 1994, one natural gas marketing segment customer
accounted for 11% and 14%, respectively, of consolidated revenues.
47
<PAGE> 49
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES
TPC leases its corporate and certain other office space. Total office and
equipment lease expense was $822,000, $721,000 and $576,000 during 1996, 1995
and 1994, respectively. Future minimum rental payments required under such
office leases, as well as under two lease agreements that TPC has with MHP for
natural gas storage services (see Note 12) as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
OFFICE AND
EQUIPMENT STORAGE
LEASES LEASES TOTAL
---------- -------- --------
(IN THOUSANDS)
<C> <C> <C> <C>
1997.................................................................... $ 879 $ 3,612 $ 4,491
1998.................................................................... 685 2,913 3,598
1999.................................................................... 569 2,400 2,969
2000.................................................................... 142 2,400 2,542
2001.................................................................... -- 2,400 2,400
Thereafter.............................................................. -- 6,300 6,300
------ -------- --------
Total minimum payments required......................................... $2,275 $ 20,025 $ 22,300
====== ======== ========
</TABLE>
TPC is currently a party to several lawsuits which, in management's
opinion, will not have a significant adverse affect on TPC's financial
position, results of operations or cash flows. One such lawsuit involves a case
filed in the U.S. District Court for the Southern District of Texas by 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 company. The subject gathering system is now wholly owned by TPC which
assumed full responsibility in connection with the acquisition of the interest
previously held by the other defendant. The contract was amended in 1990 and,
as amended, provided that the respective parties would make keepwhole payments
to each other for any monthly disparities between the amounts of natural gas
and condensate delivered by the producers into the gathering system and TPC's
subsequent allocations to each producer at the redelivery points. Pursuant to
the contract, TPC billed the producers for keepwhole fees commencing in 1991
and the producers paid such amounts to TPC through early 1994. Subsequently,
the plaintiff producers filed this action claiming that the keepwhole payments
were only to be paid in the event of a shortage at the redelivery point, but
not in the event of an overdelivery unless due to misallocation among the
several producers on the system.
On July 28, 1995, the magistrate assigned by the Court issued a
memorandum and recommendation granting summary judgment in favor of TPC. The
memorandum extensively discussed the court's interpretation of the subject
contract as being in agreement with the construction given to the contract by
TPC. The magistrate found that TPC was owed the sums which it has sought in its
counterclaim against the plaintiffs under the "keepwhole" provision of the
contract. The plaintiffs sought review of the magistrate's rulings by the
District Court. On April 25, 1996, the District Court, upon review of the same
facts and circumstances, overturned the magistrate's ruling and granted partial
summary judgment that the gathering contract was to be construed as requested
by the plaintiffs, ordering a refund to them of approximately $1.8 million in
previously paid keepwhole fees, together with as yet undetermined attorneys'
fees and interest. Following the partial summary judgment, the remaining claims
of the plaintiffs were dismissed by agreement of the parties (subject to the
plaintiffs' ability to revive them), to permit entry of a final judgment. If
a final judgment is entered consistent with the partial summary judgment, TPC
intends to defend its position vigorously on appeal to the United States Court
of Appeals for the Fifth Circuit, seeking reversal and rendition on several
independent grounds. There are several substantial issues to be addressed on
appeal which provide the basis for a reversal and remand for new trial. In
management's view, based on consultation with
48
<PAGE> 50
TPC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
litigation counsel, TPC would likely prevail in such an appeal. Pending entry
of a final judgment and appeal, no accrual for a loss from this litigation
has been made.
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Results of operations by quarters for the years ended December 31, 1996
and 1995 are set forth in the following table.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Revenues .................................... $ 165,828 $ 151,037 $ 155,365 $ 145,062
Operating income ............................ 6,494 5,025 4,900 7,683
Net income .................................. 1,315 1,715 576 1,438
Per Common Share:
Net income .................................. $ .07 $ .09 $ .03 $ .08
1995
Revenues .................................... $ 108,656 $ 65,452 $ 70,127 $ 67,330
Operating income ............................ 6,795 3,101 1,024 1,978
Income (loss) before extraordinary item ..... 456 (693) 316 415
Extraordinary item, net of income tax ....... 207 -- -- --
Net income (loss) ........................... $ 663 $ (693) $ 316 $ 415
Per Common Share:
Income (loss) before extraordinary item ..... $ .03 $ (.05) $ .02 $ .03
Extraordinary item .......................... .01 -- -- --
Net income (loss) ........................... $ .04 $ (.05) $ .02 $ .03
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There was no reported disagreement on any matter of accounting principles
or procedures of financial statement disclosure in 1996 with TPC's independent
public accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers of TPC is set forth in Part I
of this Annual Report on Form 10-K under the caption "Executive Officers of the
Registrant," in reliance on General Instruction G to Form 10-K.
Information concerning the directors of TPC is presented below.
49
<PAGE> 51
TPC's Board of Directors is currently comprised of nine directors: Jean P.
Abiteboul, Larry W. Bickle, W. J. Bowen, Bernard Brelle, Robert Cosson, Roger
L. Jarvis, Thomas M. Jenkins, Michael E. McMahon, and James S. Pignatelli.
TPC's Certificate of Incorporation and by-laws provide that its directors are
to be classified into three classes, with the directors in each class serving
for three-year terms and until their successors are elected, except that the
initial terms of the directors of TPC expired, or will expire, at the 1996,
1997 and 1998 annual meeting of the stockholders of TPC, depending upon the
particular class in which each such director was placed. The terms of the
persons presently serving on the Board expire at the annual meetings of
stockholders for the years indicated: Messrs. Michael E. McMahon, Roger L.
Jarvis and Bernard Brelle: 1997; Messrs. W. J. Bowen, James S. Pignatelli and
Jean P. Abiteboul: 1998; and Messrs. Larry W. Bickle, Thomas M. Jenkins and
Robert Cosson: 1999.
JEAN P. ABITEBOUL, 45, is Vice President, Manager of the Major Projects
Department of the International Division of Gaz de France. He has served as
President of the United States subsidiary of Gaz de France since its formation
in 1991. In addition, M. Abiteboul has acted as Chairman and Chief Executive
Officer of NOVERGAZ (1994) Inc., a non-regulated gas company in Montreal,
Canada, since May 1994. M. Abiteboul is a director of Northern New England Gas
Corporation, Sceptre Resources Limited, and Gaz Metropolitain. M. Abiteboul has
served as a director of TPC since 1991.
LARRY W. BICKLE, 51, has been Chairman of the Board of Directors and
Chief Executive Officer of TPC since December 1990. Further information
regarding Mr. Bickle is provided in Item 4 "Executive Officers of the
Registrant."
W. J. BOWEN, 74, has extensive experience in the energy industry. In May
1992, Mr. Bowen retired as Chairman of the Board of Transco Energy Company
after an eighteen year career. Mr. Bowen is also a director of J.B. Poindexter
& Co., Inc. and has served as a director of TPC since 1994.
BERNARD BRELLE, 44, has been head of the Tariffs and Contracts Department
of the Commercial Division of Gaz de France since 1993. From 1990 to 1992 he
was Regional Manager of CFM, an affiliate company of Gaz de France.
Mr. Brelle has been a director of TPC since 1995.
ROBERT COSSON, 47, has been the President of Financial and Jurisdictional
Services of Gaz de France since 1990. Mr. Cosson has been a director of TPC
since 1991.
ROGER L. JARVIS, 42, has been the Chief Executive Officer of Spinnaker
Exploration, L.L.C. since December 1996. Prior thereto, Mr. Jarvis was an
independent consultant and private investor, and President, Chief Executive
Officer and a director of King Ranch, Inc., a privately-held company with
interests in agribusinesses, oil and gas exploration and production, real
estate development, and retail businesses. Mr. Jarvis has been a director of
TPC since 1991.
THOMAS M. JENKINS, 46, is Group Vice President, Treasurer and Chief
Financial Officer of DPL Inc., the parent company of Dayton Power and Light
Company ("DP&L"), which positions he has held since 1990. Mr. Jenkins is also
Group Vice President and Chief Financial Officer of DP&L, which positions he
has held since 1995. From 1990 to 1995, Mr. Jenkins was Group Vice President
and Treasurer of DP&L. Mr. Jenkins has been a director of TPC since 1996.
MICHAEL E. MCMAHON, 49, is a Managing Director of Lehman Brothers, Inc.
He was a Partner of Aeneas Group, Inc., a wholly owned subsidiary of Harvard
Management Company, Inc., from January 1993 to September 1994. From December
1989 through 1992, Mr. McMahon was Managing Director and co-head of the Energy
& Chemicals Group of Salomon Brothers Inc. Mr. McMahon also serves as a
director of Triton Energy Corporation. Mr. McMahon has been a director of TPC
since 1993.
JAMES S. PIGNATELLI, 53, has served as Senior Vice President and Chief
Operating Officer of Tucson Electric since 1994. Mr. Pignatelli retired from
Mission Energy Company in 1993, where he served as the President and
50
<PAGE> 52
Chief Executive Officer. Mr. Pignatelli is a director of BWIP International and
has served as a director of TPC since 1991.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The business and affairs of TPC are managed under the direction of the
Board. The Board has responsibility for establishing broad corporate policies
and for the overall performance of TPC, rather than day-to-day operating
details. The Board met ten times in 1996. The Board has regularly scheduled
meetings during the year and meets at other times during the year as necessary
to review significant developments affecting TPC and to act on matters
requiring Board approval. In 1996, each of the directors attended at least
seventy-five percent of the meetings of the Board and the committees on which
he served, except for Messrs. Brelle and Cosson whose attendance was below this
threshold.
BOARD COMMITTEES. The Board has five standing committees which include an
Executive Committee, an Audit Committee, a Compensation Committee, a Nominating
Committee and a Strategic Planning Committee. Actions taken by a committee of
the Board are reported to the Board of Directors at its next meeting.
The Executive Committee consists of five directors. Although this
Committee has very broad powers, it is intended that this committee only meet
to take formal action on a specific matter when it would be impracticable to
call a formal meeting of the Board. The Executive Committee, and all other
committees of the Board, are prohibited by TPC's by-laws from taking certain
major corporate actions. The members of the Executive Committee in 1996 were
Messrs. Abiteboul, Bickle, Bowen, Jarvis and Pignatelli. In 1996, there were no
Executive Committee meetings.
The Audit Committee consists of three nonemployee directors. This
committee recommends the appointment of a firm of independent certified public
accountants to audit the accounting records of TPC each year. It reviews with
representatives of the independent public accountants the auditing arrangements
and scope of the independent public accountants' examination of the accounting
records, results of those audits, their fees, and any problems identified by
the independent public accountants regarding internal accounting controls,
together with their recommendations. It also meets with TPC's Chief Financial
Officer and its Controller to review reports on the functioning of TPC's
programs for compliance with its policies and procedures regarding financial
reporting and internal controls. The members of the Audit Committee in 1996
were Messrs. Jarvis, Jenkins and Pignatelli. The Audit Committee met three
times in 1996.
The Compensation Committee consists of four nonemployee directors. This
Committee makes recommendations to the Board of Directors as to the salaries
and annual bonuses of the Chief Executive Officer and the other elected
officers, and reviews the salaries of certain other senior executives. It makes
recommendations to the Board of Directors regarding grants of stock options to
elected and other senior executive officers and other eligible employees and
consultants, and reviews guidelines for the administration of TPC's incentive
compensation programs. It also reviews and makes recommendations to the Board
of Directors with respect to proposed compensation or benefits plans or
programs, and periodically reviews the operations of such plans or programs.
The members of the Compensation Committee in 1996 were Messrs. Abiteboul,
Bowen, Jarvis and McMahon. The Compensation Committee met three times in 1996.
The Nominating Committee consists of three directors. This Committee
identifies, evaluates, and nominates potential individuals to stand for
election as directors of TPC as an opening on the Board occurs. The members of
the Nominating Committee in 1996 were Messrs. Bickle, Cosson and Jarvis. The
Nominating Committee did not meet in 1996.
The Strategic Planning Committee consists of five directors. This
Committee determines the focus of TPC's annual business plan, as well as
establishes and monitors TPC's strategic goals throughout the year. The members
of the Strategic Planning Committee in 1996 were Messrs. Abiteboul, Bickle,
Bowen, McMahon and Pignatelli. The Strategic Planning Committee met two times
in 1996.
51
<PAGE> 53
DIRECTOR NOMINATION PROCEDURES. The by-laws provide that nominations for
election of directors by the stockholders will be made by the Board or by any
stockholder entitled to vote in the election of directors generally. The
by-laws require that stockholders intending to nominate candidates for election
as directors deliver written notice thereof to the Secretary of TPC not later
than eighty days in advance of the meeting of stockholders; provided however,
that in the event that the date of the meeting is not publicly announced by TPC
by an inclusion in a filing with the Securities and Exchange Commission
pursuant to Section 13(a) or 14(a) of the Exchange Act, by mail, or by press
release more than ninety days prior to the meeting, notice by the stockholder
to be timely must be delivered to the Secretary of TPC not later than the close
of business on the tenth day following the day on which such announcement of
the date of the meeting was so communicated. The by-laws further require that
the notice by the stockholder set forth certain information concerning such
stockholder and the stockholder's nominees, including their names and
addresses, a representation that the stockholder is entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice, the class and number of shares
of TPC's stock owned or beneficially owned by such stockholder, and such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the nominees of such stockholder and the consent of
each nominee to serve as a director of TPC if so elected. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with these requirements. Similar procedures prescribed by the
by-laws are applicable to stockholders desiring to bring any other business
before an annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Employee directors are not compensated for their services as a director
of TPC. In 1996, each nonemployee director was paid $3,000 per quarter, $1,000
per Board meeting attended and $500 for each committee meeting attended.
Nonemployee directors participate in both the Non-Management Director
Stock Option Plan (the "1992 Director Plan") and the 1995 Stock Option Plan for
Non-Employee Directors (the "1995 Director Plan"), which were respectively
adopted on February 4, 1992 and February 13, 1995. The 1992 Director Plan
provides for nonqualified stock options to purchase up to 100,000 Shares, in
the aggregate, by TPC's outside directors. The 1995 Director Plan provides for
nonqualified stock options to purchase up to 48,000 Shares, in the aggregate,
by TPC's outside directors.
Under the 1992 Director Plan, each director, on the date of the Board
meeting following his initial election to the Board, is granted an option to
purchase 10,000 Shares, which option vests ratably over a five year period.
Under the 1995 Director Plan, on May 15th of each year (or the first succeeding
business day thereafter) each nonemployee director receives an annual option
grant to purchase 2,000 Shares, which options also vest ratably over five
years. The exercise price for the options granted under both the 1992 Director
Plan and the 1995 Director Plan is the fair market value of TPC's Shares on the
date of grant.
The following table sets forth information with respect to the Chief
Executive Officer and the other four most highly compensated executive officers
of TPC (the "Named Officers") for the fiscal year ended December 31, 1996.
52
<PAGE> 54
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------------------
OTHER ANNUAL SHARES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS ($)(1) ($)(3) OPTIONS (#) (4) ($) (5)
---- ----------- ------------ ----- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Larry W. Bickle........................ 1996 162,000 189,200 9,973 35,000 3,136
Chairman of the Board and 1995 157,500 62,235 (2) 10,728 10,000 9,492
Chief Executive Officer 1994 108,000 137,699 12,668 50,000 19,310
John A. Strom.......................... 1996 162,000 189,200 9,973 35,000 3,136
President 1995 157,500 62,235 (2) 10,728 10,000 9,492
1994 108,000 137,699 12,668 50,000 19,310
J. Chris Jones......................... 1996 162,000 189,200 9,973 35,000 3,566
Senior Vice President, Chief 1995 157,500 62,235 (2) 10,728 10,000 9,492
Operating Officer and Chief 1994 108,000 137,699 12,668 50,000 19,310
Financial Officer
Ronald H. Benson....................... 1996 84,000 341,000 1,192 15,000 4,224
Vice President-Corporate 1995 84,000 59,485 (2) 243 -- 1,053
Development 1994 3,500 -- -- 50,000 --
Michael E. Calderone................... 1996 106,800 147,050 685 15,000 4,199
Vice President-Gas Marketing 1995 87,508 84,571 (2) 2,322 25,000 9,492
1994 84,000 92,288 3,669 57,125 3,669
</TABLE>
- ----------------
(1) Amounts include cash compensation earned and received by the Named
Officers as well as amounts deferred under a 401(k) Savings Plan.
(2) A portion of each Named Officer's third quarter 1995 bonus was deferred
until the first quarter of 1996. The amounts deferred for each of the
Named Officers, respectively, was $105,750, $105,750, $105,750, $300,000
and $100,000.
(3) Amounts shown include car allowances paid to the Named Officers, the
value of financial planning services and the payment of insurance
premiums for long-term disability coverage.
(4) All options awarded in 1994, 1995 and 1996 were granted under the
terms of TPC's 1994 Stock Option Plan (the "1994 Plan").
(5) Amounts shown are derived from TPC contributions to the 401(k) Savings
Plan and to TPC's Employee Stock Option Plan (the "ESOP"). The respective
amounts paid under each plan are shown in the following table. TPC's ESOP
contributions to each of the Named Officers for 1996 will not be
calculated until the second quarter of 1997.
53
<PAGE> 55
<TABLE>
<CAPTION>
NAME YEAR 401(K) ($) ESOP ($)
- ---- ---- --------- -------
<S> <C> <C>
Larry W. Bickle 1996 3,136 --
1995 2,310 7,182
1994 2,310 17,000
John A. Strom 1996 3,136 --
1995 2,310 7,182
1994 2,310 17,000
J. Chris Jones 1996 3,566 --
1995 2,310 7,182
1994 2,310 17,000
Ronald H. Benson 1996 4,224 --
1995 1,053 --
1994 -- --
Michael E. Calderone 1996 4,199 --
1995 2,310 7,182
1994 1,785 1,884
</TABLE>
The following table shows, as to the Named Officers, information about
option grants in the last fiscal year. TPC does not grant any stock
appreciation rights. The fair value of each option grant is estimated as of the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: a risk-free interest rate of 6.206%, expected
volatility of 33%, a dividend yield of 0% and an expected option term of four
years. No gain to the options is possible without an increase in stock price
which will benefit all stockholders proportionately. Actual gains, if any, on
option exercises and common stockholdings are dependent on the future
performance of the shares of TPC's Class A Common Stock (the "Shares"). There
can be no assurance that the actual realized values will not be greater or less
than potential realizable values shown in this table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF
TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED (#)(1) IN 1996 ($/SH) (2) DATE PRESENT VALUE($)
---- ------------ ---------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Larry W. Bickle........... 35,000 8.5% 8.25 5/15/06 102,212
John A. Strom............. 35,000 8.5% 8.25 5/15/06 102,212
J. Chris Jones............ 35,000 8.5% 8.25 5/15/06 102,212
Ronald H. Benson.......... 15,000 3.7% 8.25 5/15/06 43,805
Michael E. Calderone...... 15,000 3.7% 8.25 5/15/06 43,805
</TABLE>
- -----------------
(1) Options granted under the 1994 Plan. Options generally are nontransferable
and vest ratably over four years.
(2) The exercise price is the closing market price per share of the Shares
on the date of grant, as reported on the New York Stock Exchange Composite
Tape.
54
<PAGE> 56
The following table shows aggregate fiscal year-end option values for the
Named Officers. No options were exercised during the last fiscal year by any of
the Named Officers. TPC does not grant any stock appreciation rights.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END ($)(1)
SHARES ACQUIRED VALUE -------------------------- ----------------------------
NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ----------- ----------- ------------- ------------ -------------
(#)
<S> <C> <C> <C> <C> <C> <C>
Larry W. Bickle......... -- -- 567,313 67,500 4,858,317 405,000
John A. Strom........... -- -- 567,313 67,500 4,858,317 405,000
J. Chris Jones.......... -- -- 567,313 67,500 4,858,317 405,000
Ronald H. Benson........ -- -- 25,000 40,000 -- 135,000
Michael E. Calderone.... -- -- 36,013 63,112 10,800 142,200
</TABLE>
- -----------------
(1) Based on the closing market price of $9.00 per Share as reported on the
New York Stock Exchange Composite Tape for December 31, 1996. These
amounts do not reflect the actual amounts, if any, which may be realized
in the future upon exercise of stock options and should not be considered
indicative of future stock performance.
SENIOR EXECUTIVE PERFORMANCE BONUS AND SEVERANCE PACKAGE
Pursuant to a resolution of the TPC Board of Directors in November 1996,
Messrs. Larry Bickle, John Strom and Chris Jones (the "Senior
Executives"), are entitled to receive a cash bonus upon the consummation of a
change in control of TPC prior to December 31, 1997, measured by their
performance in obtaining a premium to the then current market price for TPC's
Shares in such a transaction.
If the entire Company is sold for a per Share price equal to $15.50,
the Senior Executives will each receive a Performance Bonus equal to two times
his Base Amount (being the respective Senior Executive's base amount on the
date of the consummation of the change in control as determined in accordance
with Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code")). A per Share price between $10.50 and $15.50 will entitle each of
the Senior Executives to a performance bonus equal to the interpolated value;
i.e., four-tenths of their Base Amount for each dollar of per Share value
between $10.50 and $15.50. For example, a per Share sales price of $12.00
results in a Performance Bonus equal to six-tenths of the Senior Executive's
Base Amount. In addition thereto, if a per Share price in excess of $15.50 is
received, each of the Senior Executives will be entitled to an additional
one-half of the Base Amount for each dollar of Share value in excess of $15.50.
If the entire Company is sold for a per Share price less than or equal to
$10.50, the Senior Executives will not receive any performance bonus.
Each Senior Executive will also be entitled to a severance payment equal
to his respective Base Amount, plus the cost to continue his medical and dental
health benefits for up to two years following the consummation of the
transaction. The value of the benefits to be paid to any one of the Senior
Executives, as a result of a change of control in TPC, shall be limited so as
to escape application of the excise tax imposed on excessive change of control
payments.
CHANGE OF CONTROL AGREEMENTS
TPC is a party to a change in control agreement (a "Change in Control
Agreement") with certain officers, key employees, affiliate employees and
consultants (each a "Named Executive") of TPC. Under the Change in Control
Agreement, if, prior to the expiration or termination thereof, a change in
control (as defined in the Change in
55
<PAGE> 57
Control Agreement) occurs, each Named Executive would be entitled to receive
(i) a retention bonus equal to a specified multiple of their Base Amount, and
(ii) if, thereafter TPC or, in certain circumstances, the Named
Executive, terminates the Named Executive's employment and, in the case of
termination by TPC "cause" (as defined in the Change in Control Agreement) for
such termination does not exist, a cash severance benefit equal to a specified
multiple of the Named Executive's Base Amount, as provided in the respective
agreement of each Named Executive. Each Named Executive would also be entitled
to COBRA continuation for a period of twenty-four months following such
termination at no cost to the Named Executive. In the event that any Named
Executive's receipt of all payments under the Change in Control Agreement would
subject such Named Executive to the excise tax imposed by Section 4999 of the
Code, then the aggregate present value of all payments to such Named Executive
shall be reduced to an amount, expressed in present value, which maximizes the
aggregate present value of the payment, without causing any payment to be
nondeductible by TPC because of Code Section 280G, or subject the Named
Executive to such excise tax. The Change in Control Agreements with the Named
Executives will expire on November 8, 1997, provided however, that the term
shall automatically be extended without further action by the parties for
additional one year periods, unless TPC gives a Named Executive six months
written notice of its intent not to extend the current term of the respective
Change in Control Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
GENERAL
The outstanding voting securities of TPC consist of 17,424,252 shares
("Shares") of Class A Common Stock and 579,963 shares of Class B Common Stock
(the "Common Stock"), with approximately 3,508,818 Shares reserved for issuance
pursuant to outstanding stock options granted by TPC to key employees,
directors and consultants. Each Share is entitled to one vote on matters other
than the election of directors, in which case the holders of the Class A Common
Stock are entitled to elect two members to the Board class being elected each
year, and the holder of the Class B Common Stock is entitled to elect one
member to the Board class being elected each year.
BENEFICIAL OWNERS
The following table and the information under "Stockholders' Agreements"
below describe the ownership of Shares by each person known by TPC to own
beneficially more than five percent of the Shares (including any "group" as
that term is used in Section 13(d) (3) of the Exchange Act). Unless otherwise
indicated, to TPC's knowledge, such persons have sole voting and investment
power with respect to such Shares, and all such Shares are owned beneficially
and of record by the person indicated. The table reflects the ownership of such
Shares (including Shares that may be acquired within sixty days of March 7,
1997) at March 7, 1997.
Certain of the information in the following table and set forth under
"Stockholders' Agreements" was taken from materials filed with the Securities
and Exchange Commission by certain owners of TPC's capital stock. Certain of
the stockholders identified in the following table have entered into agreements
regarding the disposition and voting of their capital stock as described under
"Stockholders' Agreements" which may cause certain of the parties to such
agreements to be deemed to have beneficial ownership of stock subject to such
agreements. All of the percentages in the following table assume that the
579,963 outstanding shares of Class B Common Stock have been converted into the
same number of Shares.
56
<PAGE> 58
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT MARCH 7, 1997
----------------------
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF CLASS
- ------------------------------------ -------- --------
<S> <C> <C>
Foreign & Colonial Management Limited (1)............................................... 921,000 5.28%
Exchange House
Primrose Street
London EC2A 2NY, England
Gaz de France (2)....................................................................... 4,046,999 23.22%
No. 32 Lookerman Square
Suite L-100
Dover, Delaware 19901
Miami Valley Leasing, Inc. (3).......................................................... 1,000,000 5.74%
Courthouse Plaza Southwest
Dayton, Ohio 45402
NAR Group Limited (4)................................................................... 1,546,000 8.87%
Citco Building
P.O. Box 662
Wickhams Cay
Road Town, Tortola
British Virgin Islands
</TABLE>
- -----------------
(1) Foreign & Colonial Management Limited ("F&C") is an investment advisor
wholly owned by Hypo Foreign & Colonial Management (Holdings) Limited
("Holdings"). Both of these entities are organized under the laws of the
United Kingdom. F&C and Holdings share voting and dispositive power with
respect to the shares indicated as beneficially owned by F&C.
(2) The Shares indicated as beneficially owned by Gaz de France ("GDF") are
held of record by GDF US INCORPORATED, a Delaware corporation and an
indirect wholly owned subsidiary of GDF. M. Abiteboul, a director of TPC,
is President of GDF US INCORPORATED. These shares include 579,963 Shares
issuable upon conversion of the Class B Shares now owned by GDF.
(3) Miami Valley Leasing, Inc., an Ohio corporation ("Miami Valley"), is a
wholly owned subsidiary of DPL Inc. ("DPL"), also an Ohio corporation.
DPL is also the parent company of Dayton Power & Light Company ("DP&L"),
an Ohio corporation engaged in the business of generating, transmitting
and selling electric energy and distributing natural gas in the State of
Ohio. Mr. Thomas Jenkins is an officer of both DPL and DP&L, however, Mr.
Jenkins disclaims any beneficial ownership to the Shares owned by Miami
Valley.
(4) The Shares beneficially owned by NAR Group Limited ("NAR") are owned of
record by Intercontinental Mining & Resources Incorporated, a British
Virgin Islands company and a wholly owned subsidiary of NAR. NAR is a
private investment holding company that is a joint venture between the
family of Mr. Alan Quasha, and Compagnie Financiere Richemont A.G., a
Swiss public company engaged in the tobacco, luxury goods, and other
businesses.
STOCKHOLDERS' AGREEMENTS
Effective June 14, 1991, TPC sold an aggregate of 565,065 Class B Shares,
and preferred shares that are no longer outstanding, to GDF and certain other
entities (which certain other entities no longer own any such shares). In
connection with this transaction, Phemus Corporation, Intercontinental Mining &
Resources Incorporated, a
57
<PAGE> 59
wholly owned subsidiary of NAR Group Limited, and another company that has
since sold its Shares, entered into a stockholders' agreement with GDF
("Stockholders' Agreement"). The Stockholders' Agreement provides, among other
things, that so long as such stockholders own Shares, they will consult with
GDF regarding the nomination of two directors to be elected by holders of the
Shares. Such nominees must also be acceptable to TPC. Messrs. Jarvis and
Pignatelli serve on TPC's Board in accordance with this arrangement.
By letter agreement dated June 12, 1991, TPC agreed with the holders of
the Class B Common Stock that if TPC granted any additional options under TPC's
1991 Stock Option Plan (the "1991 Plan") or sold any of the 375,000 Shares held
in treasury on that date, TPC would issue additional shares of Class B Common
Stock to the holders of such stock equal to five percent of the options granted
or treasury stock sold. Pursuant to this agreement and in connection with the
grant of additional options under the 1991 Plan, TPC issued 9,079 additional
shares of Class B Common Stock in 1992, 5,819 additional shares of Class B
Common Stock in 1993 and no additional shares of Class B Common Stock in 1994,
1995 or 1996.
MANAGEMENT
The table below describes the ownership of Shares by (i) each director of
TPC, (ii) the Chief Executive Officer and each of the four most highly
compensated executive officers of TPC, and (iii) all officers and directors of
TPC as a group. Unless otherwise indicated, to TPC's knowledge, such persons
have sole voting and investment power with respect to such shares and all such
shares are owned beneficially and of record by the person indicated. The table
reflects the ownership of such Shares (including Shares that may be acquired
within sixty days after March 7, 1997) at March 7, 1997.
Certain of the information in the following table was taken from
materials filed with the Securities and Exchange Commission by certain owners
of TPC's capital stock. All of the percentages in the following table assume
that the 579,963 shares of Class B Common Stock have been converted into the
same number of Shares.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT MARCH 7, 1997
----------------------
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF CLASS
------------------------------------- --------- ---------
<S> <C> <C>
Larry W. Bickle (1)...................................................................... 580,293 3.2%
John A. Strom (1)......................................................................... 732,642 4.1%
J. Chris Jones (1)........................................................................ 634,140 3.5%
Ronald H. Benson (1)...................................................................... 27,700 0.2%
Michael E. Calderone (1).................................................................. 39,602 0.2%
Jean P. Abiteboul (2) (4)................................................................. 8,400 *
W. J. Bowen (3)........................................................................... 9,400 *
Bernard Brelle (2) (4).................................................................... 2,400 *
Robert Cosson (2) (4)..................................................................... 8,400 *
Roger L. Jarvis (2)....................................................................... 8,400 *
Thomas M. Jenkins (2)(5).................................................................. - -
Michael E. McMahon (2).................................................................... 400 *
James S. Pignatelli (3)................................................................... 8,900 *
All officers and directors as a group
(nineteen persons including those listed above) (6) .................................. 2,411,319 12.5%
</TABLE>
- -----------------
* Less than 0.1%.
58
<PAGE> 60
(1) Shares shown as beneficially owned by Messrs. Bickle, Strom, Jones,
Benson, and Calderone include 567,313, 567,313, 567,313, 25,000 and
36,013 Shares, respectively, which each of them has the right to acquire
within sixty days after March 7, 1997, through the exercise of stock
options.
(2) All Shares shown as beneficially owned are Shares which the named
director has the right to acquire within sixty days after March 7, 1997,
through the exercise of stock options.
(3) Shares shown as beneficially owned by Messrs. Bowen and Pignatelli
include 5,000 and 500 Shares, respectively, and the right to acquire
4,400 and 8,400 Shares, respectively, within sixty days after March 7,
1997, through the exercise of stock options.
(4) Messrs. Abiteboul, Brelle and Cosson are affiliated with GDF, which
beneficially owns 4,046,999 Shares, including 579,963 Shares issuable
upon conversion of the Class B Shares now owned by GDF.
(5) See footnote (3) to the table on page 57.
(6) Shares shown as beneficially owned by the officers and directors of TPC
as a group include 1,929,716 Shares which such officers and directors
have the right to acquire within sixty days after March 7, 1997, through
the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH 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. 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.
Miami Valley Leasing, Inc. ("Miami Valley"), is a wholly owned subsidiary
of DPL Inc. ("DPL") and the beneficial owner of 5.74% of TPC's Shares as of
March 7, 1997. Miami Valley Hub Partners, Inc., a wholly owned subsidiary of
Miami Valley, is a stockholder of MHP's corporate general partner and a limited
partner of MHP. Mr. Thomas M. Jenkins, a director of TPC, is an officer of DPL.
DPL is also the parent company of Miami Valley Resources, Inc., an Ohio
corporation ("MVR"), which entered into a storage contract with MHP in
September 1995 for storage services at MHP's Egan facility in Louisiana. The
contract provides MVR with firm monthly withdrawal and injection capacity, with
a term that expires in March 1999. The demand charges payable to MHP for the
full term of the contract are estimated to be $792,000. The commodity charges
payable to MHP under the contract are not currently estimable, as they will
depend upon MVR's actual usage of the storage facility. The demand charges and
the commodity charges under this contract are comparable with the demand and
commodity charges included in storage contracts between MHP and nonaffiliated
parties.
RELATIONSHIP WITH GDF. In 1991, TPC entered into a Technical Cooperation
Agreement with GDF Technology U.S. Incorporated ("GDF Tech"), a wholly owned
subsidiary of GDF, a holder of 3,467,036 Shares and 579,963 Class B Shares. The
Agreement granted TPC access to technology under a consulting arrangement which
was renewed in 1994. In 1996, TPC paid $366,000 in fees to GDF Tech under this
Agreement. The renewed technology agreement with GDF Tech expires in April
1999, and may be terminated by TPC at any time upon six months' notice. TPC
anticipates that total minimum fees of approximately $1,257,000 will be
expensed ratably over the remaining term of the agreement.
59
<PAGE> 61
RELATIONSHIP WITH LEHMAN BROTHERS, INC. In November 1996, the Board
retained Lehman Brothers, Inc. to assist it in exploring strategic alternatives
for increasing shareholder value, including the possible sale or merger of all
or part of TPC. Assuming the successful completion of a change in control of
TPC, Lehman Brothers will receive a fee from TPC for its services. Mr. McMahon,
a director of TPC since 1993, is a managing director of Lehman Brothers. As a
result of a change in control of TPC, the vesting of Mr. McMahon's two stock
option grants, to acquire a total of 4,000 Shares, will be accelerated.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires TPC's directors and executive
officers, and persons who own more than ten percent of a registered class of
TPC's equity securities, to file reports of ownership and changes in ownership
of shares of TPC's stock with the Securities and Exchange Commission.
Directors, officers and greater than ten percent stockholders are required by
the Securities and Exchange Commission Regulations to furnish TPC with copies
of all Section 16(a) reports they file. Based on TPC's review of the copies of
such reports received by it, and written representations from certain reporting
persons that no Form 5s were required for those persons, TPC believes that,
from January 1 through December 31, 1996, its directors, officers and greater
than ten percent stockholders complied with all applicable filing requirements
of Section 16(a), with the exceptions of Messrs. Jarvis and Jenkins.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a). The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants........................................................... 29
Consolidated Balance Sheets as of December 31, 1996 and 1995....................................... 30
Consolidated Statements of Operations for the three years ended December 31, 1996.................. 32
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1996........ 33
Consolidated Statements of Cash Flows for the three years ended December 31, 1996.................. 34
Notes to Consolidated Financial Statements......................................................... 35
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
None
3. EXHIBITS
The following exhibits are included:
60
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2.1 - Purchase and Sale Agreement by and among Seagull Energy
Corporation, Amoco Gas Company, Houston Pipeline Company, Enron
Gas Processing Company and Mantaray Pipeline Company as
Sellers, Seahawk Gathering and Liquids Company as Buyer, and
Tejas Power Corporation ("TPC") as Guarantor, dated July 28,
1995 (incorporated by reference to Exhibit 2.1 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
2.2 - First Amendment to Purchase and Sale Agreement dated September
25, 1995 (incorporated by reference to Exhibit 2.2 to Tejas
Power Corporation's Current Report on Form 8-K dated September
28, 1995 for an event occurring on September 25, 1995).
3.1 - Amended and Restated Certificate of Incorporation of Tejas
Power Corporation, together with a Certificate of Correction
thereto (incorporated by reference to Exhibit 3.3.1 to E-Z
Serve Corporation's and Tejas Power Corporation's Registration
Statement, Registration No. 33-37141).
3.2 - Certificate of Designation, Preferences and Rights of Series A,
8% Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 3.2 to Tejas Power Corporation's
Registration Statement, Registration No. 33-42302).
3.3 - Certificate of Correction to Certificate of Designation,
Preferences and Rights of Series A, 8% Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.2.1 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
3.4 - Certificate of Designation, Preferences, and Rights of Series
A, Class B Common Stock (incorporated be reference to Exhibit
3.3 to Tejas Power Corporation's Registration Statement,
Registration No. 33-42302).
3.5 - Certificate of Correction to Certificate of Designation,
Preferences, and Rights of Series A, Class B Common Stock
(incorporated by reference to Exhibit 3.3.1 to Tejas Power
Corporation's Registration Statement, Registration No.
33-42302).
3.6 - Certificate of Designation, Preferences, and Rights of the
Series B Preferred Stock of Tejas Power Corporation
(incorporated by reference to Exhibit 4.2 to E-Z Serve
Corporation's and Tejas Power Corporation's Registration
Statement, Registration No. 33-37141).
3.7 - Certificate of Correction to Certificate of Designation,
Preferences, and Rights of Series A, 8% Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.7 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-55578).
3.8 - Amended and Restated Certificate of Incorporation of Tejas
Power Corporation (incorporated by reference to Exhibit 3.3.1
of Tejas Power Corporation's Registration Statement No.
33-37141).
3.9 - Bylaws of Tejas Power Corporation, as amended (incorporated by
reference to Exhibit 3.4 to E-Z Serve Corporation's and Tejas
Power Corporation's Registration Statement, Registration No.
33-37141).
3.10 - Bylaws of Tejas Power Corporation, as amended and restated
(incorporated by reference to Exhibit 3.5.1 to Tejas Power
Corporation's Registration Statement, Registration No.
33-42302).
*3.11 - Amended and Restated Certificate of Incorporation of TPC
Corporation.
</TABLE>
61
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
4.1 - Term Facility Credit Agreement among TPC, ING Capital
individually as a Facility A Term Lender and as a Facility B
Term Lender, and as Term Agent, certain institutions as
Facility A Term Lenders and certain institutions as Facility B
Term Lenders, dated September 25, 1995 (incorporated by
reference to Exhibit 4.1 to Tejas Power Corporation's Current
Report on Form 8-K dated September 28, 1995 for an event
occurring on September 25, 1995).
4.2 - Bridge Facility Credit Agreement among TPC, ING Capital
individually as a Bridge Lender and as Bridge Agent and certain
institutions as Bridge Lenders, dated September 25, 1995
(incorporated by reference to Exhibit 4.2 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
4.3 - First Restated Credit Agreement among ING Capital as agent and
certain institutions as Lenders, dated September 25, 1995
(incorporated by reference to Exhibit 4.3 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
4.4 - Amendment to Note Agreement of March 15, 1994 among TPC and the
purchasers named therein, dated as of September 25, 1995
(incorporated by reference to Exhibit 4.4 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
4.5 - Second Amendment to First Restated Credit Agreement dated
as of December 28, 1995, by and among Tejas Power Corporation,
ING Capital and CIBC, Inc.
*4.6 - Third Amendment to First Restated Credit Agreement dated as of
October 30, 1996, by and among TPC Corporation, Internationale
Nederlanden (U.S.) Capital Corporation, as Agent, CIBC, Inc.,
as Co-Agent, and the Lenders under the Credit Agreement.
*4.7 - Fourth Amendment to Term Facility Credit Agreement dated as of
October 30, 1996, by and among TPC Corporation, Internationale
Nederlanden (U.S.) Capital Corporation, as Term Agent, and the
Term Lenders under the Original Term Agreement.
*4.8 - Amendment to Note Agreement dated as of November 15, 1996
between TPC Corporation, Massachusetts Mutual Life Insurance
Company and The Travelers Insurance Company.
9 - Stockholders Agreement dated as of June 12, 1991, among Tejas
Power Corporation, GDF US INCORPORATED, Aeneas Venture
Corporation, Traco International, N.V., and Intercontinental
Mining & Resources Incorporated (incorporated by reference to
Exhibit 9.1 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.1 - Joint Venture Agreement among Tejas Power Corporation and
Transco Offshore Gathering Company and Amerada Hess Corporation
dated February 29, 1988 (incorporated by reference to Exhibit
10.15 to Harken Energy Corporation's Annual Report on Form 10-K
for fiscal year ended December 31, 1989).
10.2 - Tax Sharing Agreement among Harken Energy Corporation and
certain subsidiaries of Harken Energy Corporation (incorporated
by reference to Exhibit 10.53 to E-Z Serve Corporation's and
Tejas Power Corporation's Registration Statement, Registration
No. 33-37141).
10.3 - Master Intercompany Agreement between Harken Energy Corporation
and Tejas Power Corporation (incorporated by reference to
Exhibit 10.55 to E-Z Serve Corporation's and Tejas Power
Corporation's Registration Statement, Registration No.
33-37141).
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.4 - Litigation, Indemnification and Contribution Agreement between
Harken Energy Corporation and Tejas Power Corporation
(incorporated by reference to Exhibit 10.57 to E-Z Serve
Corporation's and Tejas Power Corporation's Registration
Statement, Registration No. 33-37141).
10.5 - Tejas Power Corporation 1991 Stock Option Plan (incorporated by
reference to Exhibit 4.14 to Tejas Power Corporation's
Registration Statement, Registration No. 33-98924).
10.6 - Stockholders Agreement dated as of June 12, 1991, between Tejas
Power Corporation, GDF US INCORPORATED, Aeneas Venture
Corporation, Traco International, N.V., and Intercontinental
Mining & Resources Incorporated (incorporated by reference to
Exhibit 9 to Tejas Power Corporation's Registration Statement,
Registration No. 33-42302).
10.7 - Letter dated June 12, 1991, from Tejas Power Corporation to GDF
US INCORPORATED, Francarep, Inc., and Petrorep, Inc. relating
to obligation to issue additional shares of Class B Common
Stock, $0.01 par value per share (incorporated by reference to
Exhibit 10.26 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.8 - Gas Storage Contract effective as of November 1, 1991, between
Moss Bluff Gas Storage Systems and Channel Industries Gas
Company regarding intrastate service (incorporated by reference
to Exhibit 10.31 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.9 - Gas Storage Contract effective as of November 1, 1991, between
Moss Bluff Gas Storage Systems and Channel Industries Gas
Company regarding interstate service (incorporated by reference
to Exhibit 10.32 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.10 - Purchase and Sale Agreement effective as of June 1, 1991,
between Moss Bluff Gas Storage Systems and Channel Industries
Gas Company (incorporated by reference to Exhibit 10.33 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
10.11 - Assignment and Bill of Sale effective as of June 1, 1991,
between Moss Bluff Gas Storage Systems and Channel Industries
Gas Company (incorporated by reference to Exhibit 10.34 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
10.12 - Operating Agreement effective as of June 1, 1991, between Moss
Bluff Gas Storage Systems and Channel Industries Gas Company
(incorporated by reference to Exhibit 10.35 to Tejas Power
Corporation's Registration Statement, Registration No.
33-42302).
10.13 - Amendment to Gas Transport Agreement effective as of June 1,
1991, between Tejas Power Corporation and Channel Industries
Gas Company (incorporated by reference to Exhibit 10.36 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
10.14 - Tejas Power Corporation 401(k) Savings Plan (incorporated by
reference to Exhibit 10.37 to Tejas Power Corporation's
Registration Statement, Registration No. 33-42302).
10.15 - Firm Gas Storage Contract effective as of November 1, 1991,
between Moss Bluff as Storage Systems and Northern Indiana
Public Service Company regarding interstate service
(incorporated by reference to Exhibit 10.37 to Tejas Power
Corporation's Annual Report on Form 10-K for fiscal year ended
December 31, 1991).
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.16 - Firm Gas Storage Contract effective as of November 1, 1991,
between Moss Bluff Gas Storage Systems and Northern Indiana
Public Service Company regarding intrastate service
(incorporated by reference to Exhibit 10.38 to Tejas Power
Corporation's Annual Report on Form 10-K for fiscal year ended
December 31, 1991).
10.17 - Gas Purchase Contract effective as of November 1, 1991, between
Tejas Power Corporation and Northern Indiana Public Service
Company (incorporated by reference to Exhibit 10.39 to Tejas
Power Corporation's Annual Report on Form 10-K for fiscal year
ended December 31, 1991).
10.18 - Performance Guaranty Agreement dated November 14, 1991, by
Tejas Power Corporation in favor of Northern Indiana Public
Service Company (incorporated by reference to Exhibit 10.40 to
Tejas Power Corporation's Annual Report on Form 10-K for fiscal
year ended December 31, 1991).
10.19 - Letter Agreement dated November 14, 1991, between Moss Bluff
Gas Storage Systems and Northern Indiana Public Service Company
regarding financing contingencies (incorporated by reference to
Exhibit 10.41 to Tejas Power Corporation's Annual Report on
Form 10-K for fiscal year ended December 31, 1991).
10.20 - Letter Agreement dated November 14, 1991, between Tejas Power
Corporation and Northern Indiana Public Service Company
regarding operational imbalances (incorporated by reference to
Exhibit 10.42 to Tejas Power Corporation's Annual Report on
Form 10-K for fiscal year ended December 31, 1991).
10.21 - Form of Gas Gathering, Separation, Dehydration and Redelivery
Service agreement by and between TPC Services, Inc., and
Anadarko Petroleum Corporation, Seagull Energy Exploration &
Production, Inc., Union Pacific Resources Company, Wolverine
Exploration Company, and Energy Service Company (incorporated
by reference to Exhibit 10.43 to Tejas Power Corporation's
Annual Report on Form 10-K for fiscal year ended December 31,
1991).
10.22 - Credit Agreement, dated as of November 2, 1992, among Moss
Bluff Gas Storage Systems and the Banque Indosuez, New York
Branch, individually and as agent (incorporated by reference to
Exhibit 10.58 to Tejas Power Corporation's Registration
Statement, Registration No. 33-55578).
10.23 - Tejas Power Corporation Employee Stock Ownership Plan and Trust
(incorporated by reference to Exhibit 10.37 to Tejas Power
Corporation's Annual Report on Form 10-K for fiscal year ended
December 31, 1992).
10.24 - Purchase Agreement By and Between MB Acquisition Corporation,
Tejas Power Corporation, Moss Bluff Gas Storage Company, Inc.,
Phibro Gas Properties, Inc., and Phibro Energy USA, Inc. dated
July 30, 1993 (incorporated by reference to Exhibit 2 to Tejas
Power Corporation's Current Report of Form 8-K dated October
15, 1993 for an event occurring on October 1, 1993).
10.25 - Purchase Agreement between MB Acquisition Corporation and CMS
Gulf Coast Storage Company, dated March 11, 1994 (incorporated
by reference to Exhibit 2 to Tejas Power Corporation's Current
Report on Form 8-K dated March 25, 1994 for an event occurring
on March 11, 1994).
10.26 - Letter dated March 30, 1994, from GDF US Incorporated to Tejas
Power Corporation (incorporated by reference to Exhibit 7.9 to
Tejas Power Corporation's Current Report on Form 8-K dated
April 15, 1994 for an event occurring on March 31, 1994).
</TABLE>
64
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.27 - Agreement of Limited Partnership of Market Hub Partners, L.P.
dated as of December 15, 1994 (incorporated by reference to
Exhibit 1 to Tejas Power Corporation's Current Report on Form
8-K dated January 4, 1995 for an event occurring on December
21, 1994).
10.28 - Formation Agreement dated as of December 20, 1994 by and
between Tejas Power Corporation, Market Hub Partners, L.P. and
the MHP subsidiaries (incorporated by reference to Exhibit 2 to
Tejas Power Corporation's Current Report on Form 8-K dated
January 4, 1995 for an event occurring on December 21, 1994).
10.29 - Technical Cooperation Agreement dated as of April 1, 1994,
between Tejas Power Corporation and GDF Technology US
Incorporated.
10.30 - Tejas Power Corporation Non-Management Directors Stock Option
Plan (incorporated by reference to Exhibit 4.13 to Tejas Power
Corporation's Registration Statement, Registration No.
33-98924).
10.31 - Tejas Power Corporation 1994 Stock Option Plan (incorporated by
reference to Exhibit 4.15 to Exhibit 4.15 to Tejas Power
Corporation's Registration Statement, Registration No.
33-98924).
10.32 - Tejas Power Corporation 1995 Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 4.16 to Exhibit
4.15 to Tejas Power Corporation's Registration Statement,
Registration No. 33-98924).
*11 - Computation of Earnings Per Share
*21 - Subsidiaries of TPC Corporation
*23.1 - Consent of Arthur Andersen LLP
*24 - Power of Attorney
*27 - Financial Data Schedule
*99 - Financial Statements of Market Hub Partners
Report of Independent Public Accountants
Combined Balance Sheets as of December 31, 1996 and 1995
Combined Statements of Operations for the two years ended
December 31, 1996 and for the period from inception (December
21, 1994) to December 31, 1994
Combined Statements of Capital for the two years ended December
31, 1996 and for the period from inception (December 21, 1994)
to December 31, 1994
Combined Statements of Cash Flows for the two years ended
December 31, 1996 and for the period from inception (December
21, 1994) to December 31, 1994
Notes to Combined Financial Statements
</TABLE>
- ---------------
* Filed herewith
(b) Reports on Form 8-K
None
65
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TPC Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 10, 1997.
TPC CORPORATION
(Registrant)
By: /s/ LARRY W. BICKLE
---------------------------------
LARRY W. BICKLE
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of TPC
Corporation and in the capacities indicated on March 10, 1997:
SIGNATURES TITLE
---------- -----
/s/ LARRY W. BICKLE Chairman and Chief Executive Officer (Principal
- ------------------------- Executive Officer)
Larry W. Bickle
/s/ J. CHRIS JONES Senior Vice President and Chief Operating and
- ------------------------- Financial Officer (Principal Financial Officer)
J. Chris Jones
/s/ D. HUGHES WATLER, JR. Corporate Controller (Principal Accounting
- ------------------------- Officer)
D. Hughes Watler, Jr.
D. Hughes Watler, Jr., pursuant to powers of attorney which are being
filed with this annual report on Form 10-K, has signed below on March 10, 1997,
as attorney-in-fact for the following directors of the Registrant, constituting
a majority of the Registrant's Board of Directors:
Jean P. Abiteboul Roger L. Jarvis
Bernard Brelle Thomas M. Jenkins
W. Jack Bowen Michael E. McMahon
Robert Cosson James S. Pignatelli
/s/ D. HUGHES WATLER, JR.
-------------------------
D. Hughes Watler, Jr.
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2.1 - Purchase and Sale Agreement by and among Seagull Energy
Corporation, Amoco Gas Company, Houston Pipeline Company, Enron
Gas Processing Company and Mantaray Pipeline Company as
Sellers, Seahawk Gathering and Liquids Company as Buyer, and
Tejas Power Corporation ("TPC") as Guarantor, dated July 28,
1995 (incorporated by reference to Exhibit 2.1 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
2.2 - First Amendment to Purchase and Sale Agreement dated September
25, 1995 (incorporated by reference to Exhibit 2.2 to Tejas
Power Corporation's Current Report on Form 8-K dated September
28, 1995 for an event occurring on September 25, 1995).
3.1 - Amended and Restated Certificate of Incorporation of Tejas
Power Corporation, together with a Certificate of Correction
thereto (incorporated by reference to Exhibit 3.3.1 to E-Z
Serve Corporation's and Tejas Power Corporation's Registration
Statement, Registration No. 33-37141).
3.2 - Certificate of Designation, Preferences and Rights of Series A,
8% Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 3.2 to Tejas Power Corporation's
Registration Statement, Registration No. 33-42302).
3.3 - Certificate of Correction to Certificate of Designation,
Preferences and Rights of Series A, 8% Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.2.1 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
3.4 - Certificate of Designation, Preferences, and Rights of Series
A, Class B Common Stock (incorporated be reference to Exhibit
3.3 to Tejas Power Corporation's Registration Statement,
Registration No. 33-42302).
3.5 - Certificate of Correction to Certificate of Designation,
Preferences, and Rights of Series A, Class B Common Stock
(incorporated by reference to Exhibit 3.3.1 to Tejas Power
Corporation's Registration Statement, Registration No.
33-42302).
3.6 - Certificate of Designation, Preferences, and Rights of the
Series B Preferred Stock of Tejas Power Corporation
(incorporated by reference to Exhibit 4.2 to E-Z Serve
Corporation's and Tejas Power Corporation's Registration
Statement, Registration No. 33-37141).
3.7 - Certificate of Correction to Certificate of Designation,
Preferences, and Rights of Series A, 8% Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.7 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-55578).
3.8 - Amended and Restated Certificate of Incorporation of Tejas
Power Corporation (incorporated by reference to Exhibit 3.3.1
of Tejas Power Corporation's Registration Statement No.
33-37141).
3.9 - Bylaws of Tejas Power Corporation, as amended (incorporated by
reference to Exhibit 3.4 to E-Z Serve Corporation's and Tejas
Power Corporation's Registration Statement, Registration No.
33-37141).
3.10 - Bylaws of Tejas Power Corporation, as amended and restated
(incorporated by reference to Exhibit 3.5.1 to Tejas Power
Corporation's Registration Statement, Registration No.
33-42302).
*3.11 - Amended and Restated Certificate of Incorporation of TPC
Corporation.
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
4.1 - Term Facility Credit Agreement among TPC, ING Capital
individually as a Facility A Term Lender and as a Facility B
Term Lender, and as Term Agent, certain institutions as
Facility A Term Lenders and certain institutions as Facility B
Term Lenders, dated September 25, 1995 (incorporated by
reference to Exhibit 4.1 to Tejas Power Corporation's Current
Report on Form 8-K dated September 28, 1995 for an event
occurring on September 25, 1995).
4.2 - Bridge Facility Credit Agreement among TPC, ING Capital
individually as a Bridge Lender and as Bridge Agent and certain
institutions as Bridge Lenders, dated September 25, 1995
(incorporated by reference to Exhibit 4.2 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
4.3 - First Restated Credit Agreement among ING Capital as agent and
certain institutions as Lenders, dated September 25, 1995
(incorporated by reference to Exhibit 4.3 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
4.4 - Amendment to Note Agreement of March 15, 1994 among TPC and the
purchasers named therein, dated as of September 25, 1995
(incorporated by reference to Exhibit 4.4 to Tejas Power
Corporation's Current Report on Form 8-K dated September 28,
1995 for an event occurring on September 25, 1995).
4.5 - Second Amendment to First Restated Credit Agreement dated
as of December 28, 1995, by and among Tejas Power Corporation,
ING Capital and CIBC, Inc.
*4.6 - Third Amendment to First Restated Credit Agreement dated as of
October 30, 1996, by and among TPC Corporation, Internationale
Nederlanden (U.S.) Capital Corporation, as Agent, CIBC, Inc.,
as Co-Agent, and the Lenders under the Credit Agreement.
*4.7 - Fourth Amendment to Term Facility Credit Agreement dated as of
October 30, 1996, by and among TPC Corporation, Internationale
Nederlanden (U.S.) Capital Corporation, as Term Agent, and the
Term Lenders under the Original Term Agreement.
*4.8 - Amendment to Note Agreement dated as of November 15, 1996
between TPC Corporation, Massachusetts Mutual Life Insurance
Company and The Travelers Insurance Company.
9 - Stockholders Agreement dated as of June 12, 1991, among Tejas
Power Corporation, GDF US INCORPORATED, Aeneas Venture
Corporation, Traco International, N.V., and Intercontinental
Mining & Resources Incorporated (incorporated by reference to
Exhibit 9.1 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.1 - Joint Venture Agreement among Tejas Power Corporation and
Transco Offshore Gathering Company and Amerada Hess Corporation
dated February 29, 1988 (incorporated by reference to Exhibit
10.15 to Harken Energy Corporation's Annual Report on Form 10-K
for fiscal year ended December 31, 1989).
10.2 - Tax Sharing Agreement among Harken Energy Corporation and
certain subsidiaries of Harken Energy Corporation (incorporated
by reference to Exhibit 10.53 to E-Z Serve Corporation's and
Tejas Power Corporation's Registration Statement, Registration
No. 33-37141).
10.3 - Master Intercompany Agreement between Harken Energy Corporation
and Tejas Power Corporation (incorporated by reference to
Exhibit 10.55 to E-Z Serve Corporation's and Tejas Power
Corporation's Registration Statement, Registration No.
33-37141).
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.4 - Litigation, Indemnification and Contribution Agreement between
Harken Energy Corporation and Tejas Power Corporation
(incorporated by reference to Exhibit 10.57 to E-Z Serve
Corporation's and Tejas Power Corporation's Registration
Statement, Registration No. 33-37141).
10.5 - Tejas Power Corporation 1991 Stock Option Plan (incorporated by
reference to Exhibit 4.14 to Tejas Power Corporation's
Registration Statement, Registration No. 33-98924).
10.6 - Stockholders Agreement dated as of June 12, 1991, between Tejas
Power Corporation, GDF US INCORPORATED, Aeneas Venture
Corporation, Traco International, N.V., and Intercontinental
Mining & Resources Incorporated (incorporated by reference to
Exhibit 9 to Tejas Power Corporation's Registration Statement,
Registration No. 33-42302).
10.7 - Letter dated June 12, 1991, from Tejas Power Corporation to GDF
US INCORPORATED, Francarep, Inc., and Petrorep, Inc. relating
to obligation to issue additional shares of Class B Common
Stock, $0.01 par value per share (incorporated by reference to
Exhibit 10.26 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.8 - Gas Storage Contract effective as of November 1, 1991, between
Moss Bluff Gas Storage Systems and Channel Industries Gas
Company regarding intrastate service (incorporated by reference
to Exhibit 10.31 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.9 - Gas Storage Contract effective as of November 1, 1991, between
Moss Bluff Gas Storage Systems and Channel Industries Gas
Company regarding interstate service (incorporated by reference
to Exhibit 10.32 to Tejas Power Corporation's Registration
Statement, Registration No. 33-42302).
10.10 - Purchase and Sale Agreement effective as of June 1, 1991,
between Moss Bluff Gas Storage Systems and Channel Industries
Gas Company (incorporated by reference to Exhibit 10.33 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
10.11 - Assignment and Bill of Sale effective as of June 1, 1991,
between Moss Bluff Gas Storage Systems and Channel Industries
Gas Company (incorporated by reference to Exhibit 10.34 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
10.12 - Operating Agreement effective as of June 1, 1991, between Moss
Bluff Gas Storage Systems and Channel Industries Gas Company
(incorporated by reference to Exhibit 10.35 to Tejas Power
Corporation's Registration Statement, Registration No.
33-42302).
10.13 - Amendment to Gas Transport Agreement effective as of June 1,
1991, between Tejas Power Corporation and Channel Industries
Gas Company (incorporated by reference to Exhibit 10.36 to
Tejas Power Corporation's Registration Statement, Registration
No. 33-42302).
10.14 - Tejas Power Corporation 401(k) Savings Plan (incorporated by
reference to Exhibit 10.37 to Tejas Power Corporation's
Registration Statement, Registration No. 33-42302).
10.15 - Firm Gas Storage Contract effective as of November 1, 1991,
between Moss Bluff as Storage Systems and Northern Indiana
Public Service Company regarding interstate service
(incorporated by reference to Exhibit 10.37 to Tejas Power
Corporation's Annual Report on Form 10-K for fiscal year ended
December 31, 1991).
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.16 - Firm Gas Storage Contract effective as of November 1, 1991,
between Moss Bluff Gas Storage Systems and Northern Indiana
Public Service Company regarding intrastate service
(incorporated by reference to Exhibit 10.38 to Tejas Power
Corporation's Annual Report on Form 10-K for fiscal year ended
December 31, 1991).
10.17 - Gas Purchase Contract effective as of November 1, 1991, between
Tejas Power Corporation and Northern Indiana Public Service
Company (incorporated by reference to Exhibit 10.39 to Tejas
Power Corporation's Annual Report on Form 10-K for fiscal year
ended December 31, 1991).
10.18 - Performance Guaranty Agreement dated November 14, 1991, by
Tejas Power Corporation in favor of Northern Indiana Public
Service Company (incorporated by reference to Exhibit 10.40 to
Tejas Power Corporation's Annual Report on Form 10-K for fiscal
year ended December 31, 1991).
10.19 - Letter Agreement dated November 14, 1991, between Moss Bluff
Gas Storage Systems and Northern Indiana Public Service Company
regarding financing contingencies (incorporated by reference to
Exhibit 10.41 to Tejas Power Corporation's Annual Report on
Form 10-K for fiscal year ended December 31, 1991).
10.20 - Letter Agreement dated November 14, 1991, between Tejas Power
Corporation and Northern Indiana Public Service Company
regarding operational imbalances (incorporated by reference to
Exhibit 10.42 to Tejas Power Corporation's Annual Report on
Form 10-K for fiscal year ended December 31, 1991).
10.21 - Form of Gas Gathering, Separation, Dehydration and Redelivery
Service agreement by and between TPC Services, Inc., and
Anadarko Petroleum Corporation, Seagull Energy Exploration &
Production, Inc., Union Pacific Resources Company, Wolverine
Exploration Company, and Energy Service Company (incorporated
by reference to Exhibit 10.43 to Tejas Power Corporation's
Annual Report on Form 10-K for fiscal year ended December 31,
1991).
10.22 - Credit Agreement, dated as of November 2, 1992, among Moss
Bluff Gas Storage Systems and the Banque Indosuez, New York
Branch, individually and as agent (incorporated by reference to
Exhibit 10.58 to Tejas Power Corporation's Registration
Statement, Registration No. 33-55578).
10.23 - Tejas Power Corporation Employee Stock Ownership Plan and Trust
(incorporated by reference to Exhibit 10.37 to Tejas Power
Corporation's Annual Report on Form 10-K for fiscal year ended
December 31, 1992).
10.24 - Purchase Agreement By and Between MB Acquisition Corporation,
Tejas Power Corporation, Moss Bluff Gas Storage Company, Inc.,
Phibro Gas Properties, Inc., and Phibro Energy USA, Inc. dated
July 30, 1993 (incorporated by reference to Exhibit 2 to Tejas
Power Corporation's Current Report of Form 8-K dated October
15, 1993 for an event occurring on October 1, 1993).
10.25 - Purchase Agreement between MB Acquisition Corporation and CMS
Gulf Coast Storage Company, dated March 11, 1994 (incorporated
by reference to Exhibit 2 to Tejas Power Corporation's Current
Report on Form 8-K dated March 25, 1994 for an event occurring
on March 11, 1994).
10.26 - Letter dated March 30, 1994, from GDF US Incorporated to Tejas
Power Corporation (incorporated by reference to Exhibit 7.9 to
Tejas Power Corporation's Current Report on Form 8-K dated
April 15, 1994 for an event occurring on March 31, 1994).
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.27 - Agreement of Limited Partnership of Market Hub Partners, L.P.
dated as of December 15, 1994 (incorporated by reference to
Exhibit 1 to Tejas Power Corporation's Current Report on Form
8-K dated January 4, 1995 for an event occurring on December
21, 1994).
10.28 - Formation Agreement dated as of December 20, 1994 by and
between Tejas Power Corporation, Market Hub Partners, L.P. and
the MHP subsidiaries (incorporated by reference to Exhibit 2 to
Tejas Power Corporation's Current Report on Form 8-K dated
January 4, 1995 for an event occurring on December 21, 1994).
10.29 - Technical Cooperation Agreement dated as of April 1, 1994,
between Tejas Power Corporation and GDF Technology US
Incorporated.
10.30 - Tejas Power Corporation Non-Management Directors Stock Option
Plan (incorporated by reference to Exhibit 4.13 to Tejas Power
Corporation's Registration Statement, Registration No.
33-98924).
10.31 - Tejas Power Corporation 1994 Stock Option Plan (incorporated by
reference to Exhibit 4.15 to Exhibit 4.15 to Tejas Power
Corporation's Registration Statement, Registration No.
33-98924).
10.32 - Tejas Power Corporation 1995 Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 4.16 to Exhibit
4.15 to Tejas Power Corporation's Registration Statement,
Registration No. 33-98924).
*11 - Computation of Earnings Per Share
*21 - Subsidiaries of TPC Corporation
*23.1 - Consent of Arthur Andersen LLP
*24 - Power of Attorney
*27 - Financial Data Schedule
*99 - Financial Statements of Market Hub Partners
Report of Independent Public Accountants
Combined Balance Sheets as of December 31, 1996 and 1995
Combined Statements of Operations for the two years ended
December 31, 1996 and for the period from inception (December
21, 1994) to December 31, 1994
Combined Statements of Capital for the two years ended December
31, 1996 and for the period from inception (December 21, 1994)
to December 31, 1994
Combined Statements of Cash Flows for the two years ended
December 31, 1996 and for the period from inception (December
21, 1994) to December 31, 1994
Notes to Combined Financial Statements
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
EXHIBIT 3.11
CERTIFICATE OF AMENDMENT
TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TEJAS POWER CORPORATION
Tejas Power Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of Tejas Power
Corporation resolutions were duly adopted setting forth a proposed amendment to
the Amended and Restated Certificate of Incorporation of said corporation,
declaring said amendment to be advisable and calling a meeting of the
stockholders of said corporation for consideration thereof. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, That the Amended and Restated Certificate
of Incorporation of this corporation be amended as follows:
The name of the corporation is changed to "TPC Corporation."
SECOND: That thereafter, pursuant to the resolution of its Board of
Directors, the annual meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Tejas Power Corporation has caused this
certificate to be signed by Marilyn I. Eckersley, its Assistant Secretary, this
6th day of May, 1996.
/s/ Marilyn I. Eckersely
--------------------------------
Name: Marilyn I. Eckersley
Title: Assistant Secretary
<PAGE> 1
EXHIBIT 4.6
THIRD AMENDMENT TO FIRST RESTATED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO FIRST RESTATED CREDIT AGREEMENT (this
"Amendment") made as of the 30th day of October, 1996, by and among TPC
Corporation, a Delaware corporation ("Borrower"), Internationale Nederlanden
(U.S.) Capital Corporation ("ING Capital"), as Agent ("Agent"), CIBC Inc., as
Co-Agent ("Co-Agent") and the Lenders under the Credit Agreement ("Lenders"),
W I T N E S S E T H:
WHEREAS, Borrower, Agent, Co-Agent and Lenders entered into that
certain First Restated Credit Agreement dated as of September 25, 1995, as
amended by that certain First Amendment to First Restated Credit Agreement,
effective as of September 25, 1995, and that certain Second Amendment to First
Restated Credit Agreement dated as of December 28, 1995 (as amended, the
"Original Agreement") for the purpose and consideration therein expressed,
whereby ING Capital and CIBC Inc. became obligated to make Loans and have made
Loans to Borrower as therein provided; and
WHEREAS, Borrower, Agent, Co-Agent and Lenders desire to amend the
Original Agreement (i) to increase the Commitment, and (ii) for the other
purposes set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Agreement and in
consideration of the Loans which may hereafter be made by Lenders to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I. -- Definitions and References
Section 1.1. Terms Defined in the Original Agreement. Unless the
context otherwise requires or unless otherwise expressly defined herein, the
terms defined in the Original Agreement shall have the same meanings whenever
used in this Amendment.
Section 1.2. Other Defined Terms. Unless the context otherwise
requires, the following terms when used in this Amendment shall have the
meanings assigned to them in this Section 1.2.
"Amendment" shall mean this Third Amendment to First Restated
Credit Agreement.
"Amendment Documents" means this Amendment and the Renewal
Notes.
"Credit Agreement" means the Original Agreement as amended
hereby.
"Effective Date" has the meaning given it in Section 3.1.
"Original Notes" means the "Notes" referred to and defined as
such in the Original Agreement.
"Renewal Notes" has the meaning given it in Section 3.1(ii).
1
<PAGE> 2
ARTICLE II. -- Amendments to Original Agreement
Section 2.1. Defined Terms. The definitions of "Borrowing Base",
"Borrowing Base Report", "Eligible Inventory" and "Eligible Receivables" in
Section 1.1 of the Original Agreement are hereby deleted.
The definitions of "Borrower", "Commitment", "Commitment Termination
Date" and "Required Hedges" in Section 1.1 of the Original Agreement are hereby
amended in their entirety to read as follows:
"Borrower" means TPC Corporation (f/k/a Tejas Power
Corporation), a Delaware corporation.
"Commitment" means the amount of $40,000,000.
"Commitment Termination Date" means January 1, 1999,
provided, Borrower may, by written request to Agent, Co-Agent and each
Lender at any time not less than thirty days prior to the Commitment
Termination Date (whether the initial Commitment Termination Date or
such date as previously extended by Lenders in their sole discretion
pursuant to this proviso), request Lenders to extend the Commitment
Termination Date upon the same terms and conditions as set forth
herein, and Lenders may, in their individual sole discretion and upon
their unanimous agreement, extend the Commitment Termination Date for
a period of up to one year.
"Required Hedges" means for each Fiscal Quarter listed below,
forward, future, swap or hedging contracts, with a Hedging Rate capped
at eight percent (8%) per annum, entered into by Borrower pursuant to
Section 5.2(p)(ii), in an aggregate notional amount not less than the
amount listed below for each such Fiscal Quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Hedged Amount of Indebtedness
-------------- -----------------------------
<S> <C>
July 1, 1996 to September 30, 1996 $38,500,000
(commencing August 19, 1996)
October 1, 1996 to December 31, 1996 $36,500,000
January 1, 1997 to March 31, 1997 $34,500,000
April 1, 1997 to June 30, 1997 $32,500,000
July 1, 1997 to September 30, 1997 $30,500,000
October 1, 1997 to December 31, 1997 $29,500,000
January 1, 1998 to March 31, 1998 $28,500,000
April 1, 1998 to June 30, 1998 $27,500,000
July 1, 1998 to September 30, 1998 $26,500,000
October 1, 1998 to December 31, 1998 $25,500,000
</TABLE>
For purposes of this definition, "Hedging Rate" means the rate per
annum reported on each day on Telerate Access Service Page 3750
(British Bankers Association Settlement Rate) as the London Interbank
Offered Rate for dollar deposits having a three-month term and in an
amount of $1,000,000 or more (or, if such Page shall cease to be
publicly available or if the information contained on such Page, in
Agent's sole judgment, shall cease to accurately reflect such London
Interbank
2
<PAGE> 3
Offered Rate, such rate as reported by any publicly available source
of similar market data selected by Agent that, in Agent's sole
judgment, accurately reflects such London Interbank Offered Rate).
Section 2.2. Deletion of Borrowing Base Provisions. The following
references to "Borrowing Base" are hereby amended to refer instead to
"Commitment":
Clause (b) of the first sentence of Section 2.1 of the Original
Agreement; Second sentence of Section 2.1 of the Original Agreement;
First sentence of Section 2.2(b) of the Original Agreement; Last
sentence of Section 2.2(b) of the Original Agreement; First sentence
of Section 2.7(a) of the Original Agreement; Clause (i) of the first
sentence of Section 2.9 of the Original Agreement; and Section 2.9(e).
Sections 2.28, 2.29 and 5.1(b)(vii) of the Original Agreement are
hereby deleted.
Section 2.3. Requests for Advances. The first sentence of Section
2.2(a) of the Original Agreement is hereby amended in its entirety to read as
follows:
Borrower must give to Agent written notice, or telephonic notice
promptly confirmed in writing, of any requested Advances, which notice
must be received by Agent not later than 11:00 a.m., New York, New
York time, on the date of the requested Advances (or three Business
Days prior to the date of the requested Advances if Borrower is
desires for all or any part of such Advances to make up a Tranche of
LIBOR Rate Portions on such date).
Section 2.4. Mandatory Prepayments. Section 2.7(b) of the Original
Agreement is hereby deleted.
Section 2.5. Letters of Credit. The first sentence of Section 2.11 of
the Original Agreement is hereby amended in its entirety to read as follows:
Letters of Credit shall be issued solely for Borrower's general
corporate purposes, including without limitation for margin call
purposes relating to forward, future, swap or hedging contracts as
permitted by Section 5.2(p).
3
<PAGE> 4
Section 2.6. Limitation on Credit Extensions. Section 5.2(h) of the
Original Agreement is hereby amended by adding a new clause (v) at the end
thereof, to read as follows:
(v) other extensions of credit, advances or loans, so long as the
aggregate amount of such extensions of credit, advances and loans made by
Borrower and all Restricted Subsidiaries does not exceed $1,000,000.
Section 2.7. EBITAD. Section 5.2(o)(ii) of the Original Agreement is
hereby amended in its entirety to read as follows:
(ii) The ratio of (A) Borrower's and Restricted Subsidiaries' EBITAD
to (B) the sum of Debt Service plus scheduled payments of principal
(including the principal component of rentals or capitalized leases) on
Restricted Debt plus $1,000,000 maintenance capital expenditures for each
four-Fiscal Quarter period will not be less than (1) 1.10 to 1 for the
four-Fiscal Quarter period ending December 31, 1996; (2) 1.15 to 1 for the
four-Fiscal Quarter periods ending on each of March 31, 1997, June 30,
1997, September 30, 1997 and December 31, 1997; and (3) 1.20 to 1 for the
four-Fiscal Quarter period ending March 31, 1998 and each four-Fiscal
Quarter period thereafter.
Section 2.8. Name Change of Borrower. As of May 6, 1996, Borrower
changed its name from Tejas Power Corporation to TPC Corporation. All
references to "Borrower" in any Loan Document shall as of such date and
thereafter refer to "TPC Corporation, a Delaware corporation".
Section 2.9. Consent and Waiver re: Prism; Limited Waiver of EBITAD.
Agent, Co-Agent and Lenders hereby (i) consent to the extension of credit by
Borrower to PRISM Information I, LLC in the amount of $380,000, as evidenced by
a promissory note dated September 13, 1996, secured by certain collateral and
maturing on September 13, 1998, and (ii) waive Borrower's breach of Section
5.2(h) of the Credit Agreement thereby and any related Default or Event of
Default under Section 7.1(c) of the Credit Agreement. Agent, Co-Agent and
Lenders hereby waive (i) Borrower's breach of Section 5.2(o) of the Credit
Agreement for the Fiscal Quarter ending September 30, 1996 and (ii) any related
Default or Event of Default under Section 7.1(c) of the Credit AgreemeAgent,
Co-Agent and Lenders hereby waive (a) Borrower's failure to maintain the
Required Hedges, as set forth in Section 5.1(l) of the Credit Agreement, prior
to the date hereof and (b) any related Default or Event of Default under
Section 7.1(c) of the Credit Agreement.
Section 2.10. Exhibits. Exhibits A and B to the Original Agreement are
hereby amended in their entirety to read as set forth in Exhibits A and B
attached hereto. Exhibit H to the Original Agreement is hereby deleted.
ARTICLE III. -- Conditions of Effectiveness
Section 3.1. Effective Date. This Amendment shall become effective as
of the date first above written (the "Effective Date") when, and only when, (i)
Agent shall have
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<PAGE> 5
received, at Agent's office, a counterpart of this Amendment executed and
delivered by Borrower and each Lender, (ii) Borrower shall have issued and
delivered to Agent, for subsequent delivery to each Lender, a Note with
appropriate insertions in the form attached hereto as Exhibit A payable to the
order of such Lender on or before January 1, 1999 (the "Renewal Notes"), duly
executed on behalf of Borrower, dated the date hereof, and in a principal
amount equal to such Lender's Percentage Share, set forth opposite such
Lender's name on the signature pages hereto, of the Commitment, and (iii) Agent
shall have additionally received all of the following documents, each document
(unless otherwise indicated) being dated the date of receipt thereof by Agent,
duly authorized, executed and delivered, and in form and substance satisfactory
to Agent:
(a) Opinion of Counsel for Borrower. Agent shall have
received (i) the written opinion of M. Scott Jones, Esq., general
counsel of Borrower, dated as of the date of this Amendment, addressed
to Agent, Co-Agent and Lenders, substantially in the form of that
certain opinion dated September 25, 1995 by M. Scott Jones, Esq. to
Agent and Lenders, to the effect that, among other things, this
Amendment and each Renewal Note have been duly authorized, executed
and delivered by Borrower, and (ii) the written opinion of Baker &
Botts, L.L.P., special New York counsel to Borrower, dated as of the
date of this Amendment, addressed to Agent, Co-Agent and Lenders,
substantially in the form of that certain opinion dated September 25,
1995 by Baker & Botts, L.L.P. to Agent and Lenders, to the effect
that, among other things, the Credit Agreement and each Renewal Note
constitute the legal, valid and binding obligations of Borrower,
enforceable in accordance with their terms (subject, as to enforcement
of remedies, to applicable bankruptcy, reorganization, insolvency and
similar laws and to moratorium laws and other laws affecting
creditors' rights generally from time to time in effect).
(b) Officer's Certificate. Agent shall have received a
certificate of a duly authorized officer of Borrower to the effect
that all of the representations and warranties set forth in Article IV
hereof are true and correct at and as of the time of such
effectiveness.
(c) Supporting Documents. Agent shall have received (i) a
certificate of the Secretary of Borrower dated the date of this
Amendment certifying that attached thereto is a true and complete copy
of resolutions adopted by the Board of Directors of Borrower
authorizing the execution, delivery and performance of this Amendment
and each Renewal Note and certifying the names and true signatures of
the officers of Borrower authorized to sign this Amendment and each
Renewal Note, and (ii) such supporting documents as Agent may
reasonably request.
ARTICLE IV. -- Representations and Warranties
Section 4.1. Representations and Warranties of Borrower. In order to
induce each Lender to enter into this Amendment, Borrower represents and
warrants to Agent, Co-Agent and each Lender that:
(a) The representations and warranties contained in Section 4.1
of the Original Agreement are true and correct at and as of the
Effective Date.
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<PAGE> 6
(b) Borrower is duly authorized to execute and deliver this
Amendment and each Renewal Note and is and will continue to be duly
authorized to borrow monies and to perform its obligations under the
Credit Agreement. Borrower has duly taken all corporate action
necessary to authorize the execution and delivery of this Amendment
and each Renewal Note and to authorize the performance of the
obligations of Borrower hereunder and thereunder.
(c) The execution and delivery by Borrower of this Amendment
and each Renewal Note, the performance by Borrower of its obligations
hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby do not and will not conflict with any
provision of law, statute, rule or regulation or of the certificate of
incorporation and bylaws of Borrower, or of any material agreement,
judgment, license, order or permit applicable to or binding upon
Borrower, or result in the creation of any lien, charge or encumbrance
upon any assets or properties of Borrower. Except for those which have
been obtained, no consent, approval, authorization or order of any
court or governmental authority or third party is required in
connection with the execution and delivery by Borrower of this
Amendment and each Renewal Note or to consummate the transactions
contemplated hereby and thereby.
(d) When duly executed and delivered, each of this Amendment,
the Credit Agreement and the Renewal Notes will be a legal and binding
obligation of Borrower, enforceable in accordance with its terms,
except as limited by bankruptcy, insolvency or similar laws of general
application relating to the enforcement of creditors' rights and by
equitable principles of general application.
(e) The audited annual Consolidated financial statements of
Borrower dated as of December 31, 1995 and the unaudited quarterly
Consolidated financial statements of Borrower dated as of June 30,
1996 fairly present the Consolidated financial position at such dates
and the Consolidated statement of operations and the changes in
Consolidated financial position for the periods ending on such dates
for Borrower. Copies of such financial statements have heretofore been
delivered to Agent, Co-Agent and each Lender. Since December 31, 1995,
no material adverse change has occurred in the financial condition or
businesses or in the Consolidated financial condition or businesses of
Borrower.
ARTICLE V. -- Miscellaneous
Section 5.1. Ratification of Agreements. The Original Agreement as
hereby amended is hereby ratified and confirmed in all respects. Any reference
to the Credit Agreement in any Loan Document shall be deemed to be a reference
to the Original Agreement as hereby amended. Any reference to the Notes in any
other Loan Document shall be deemed to be a reference to the Renewal Notes
issued and delivered pursuant to this Amendment. The execution, delivery and
effectiveness of this Amendment and the Renewal Notes shall not, except as
expressly provided herein or therein, operate as a waiver of any right, power
or remedy of Lenders under the Credit Agreement, the Notes, or any other Loan
Document nor constitute a waiver of any provision of the Credit Agreement, the
Notes or any other Loan Document.
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<PAGE> 7
Section 5.2. Survival of Agreements. All representations, warranties,
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Loans and the issuance and delivery of
the Renewal Notes, and shall further survive until all of the Obligations are
paid in full. All statements and agreements contained in any certificate or
instrument delivered by any Related Person hereunder or under the Credit
Agreement to any Lender shall be deemed to constitute representations and
warranties by, and/or agreements and covenants of, Borrower under this
Amendment and under the Credit Agreement.
Section 5.3. Delivery of Original Notes. Each Lender shall promptly
deliver to Agent, for subsequent delivery to Borrower, the Original Note
heretofore delivered to it under the Original Agreement.
Section 5.4. Loan Documents. This Amendment and each Renewal Note are
each a Loan Document, and all provisions in the Credit Agreement pertaining to
Loan Documents apply hereto and thereto.
Section 5.5. Governing Law. This Amendment shall be governed by and
construed in accordance the laws of the State of New York and any applicable
laws of the United States of America in all respects, including construction,
validity and performance.
Section 5.6. Counterparts. This Amendment may be separately executed
in counterparts and by the different parties hereto in separate counterparts,
each of which when so executed shall be deemed to constitute one and the same
Amendment.
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<PAGE> 8
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
<TABLE>
<S> <C>
TPC CORPORATION
By: /s/ Robert D. Kincaid
-------------------------------------------
Robert D. Kincaid, Treasurer
Percentage Share INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION, as Agent and a
50% Lender
By: /s/ Trond O. Rokholt
-------------------------------------------
Trond O. Rokholt, Senior Vice President
Percentage Share CIBC INC., as Co-Agent, Issuing Bank and a Lender
50%
By: /s/ Robert E. Long
-------------------------------------------
Name: Robert E. Long
Title: Managing Director
Address:
2 Houston Center, Suite 1200
900 Fannin Street
Houston, Texas 77010
Attention: Mr. Robert Long
Phone: (713) 658-8400
Fax: (713) 658-9922
with a copy to:
Canadian Imperial Bank of Commerce
Two Paces West
2727 Paces Ferry Road, Suite 1200
Atlanta, Georgia 30339
Attention: Ms. Joan Moseley
Phone: (770) 319-4828
Fax: (770) 319-4950
</TABLE>
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<PAGE> 9
EXHIBIT A
PROMISSORY NOTE
20,000,000 New York, New York October 30, 1996
FOR VALUE RECEIVED, the undersigned, TPC Corporation, a Delaware
corporation (herein called "Borrower"), hereby promises to pay to the order of
____________________________________________ (herein called "Lender"), the
principal sum of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000), or, if
greater or less, the aggregate unpaid principal amount of the Loan made under
this Note by Lender to Borrower pursuant to the terms of the Credit Agreement
(as hereinafter defined), together with interest on the unpaid principal
balance thereof as hereinafter set forth, both principal and interest payable
as herein provided in lawful money of the United States of America at the
offices of Lender, 135 East 57th Street, New York, New York or at such other
place within New York County, New York, as from time to time may be designated
by the holder of this Note.
This Note (a) is issued and delivered under that certain First
Restated Credit Agreement dated September 25, 1995 among Borrower,
Internationale Nederlanden (U.S.) Capital Corporation, as Agent, and the
lenders named therein (herein, as from time to time supplemented, amended or
restated, called the "Credit Agreement"), and is a Note as defined therein, and
(b) is subject to the terms and provisions of the Credit Agreement, which
contains provisions for payments and prepayments hereunder and acceleration of
the maturity hereof upon the happening of certain stated events. Payments on
this Note shall be made and applied as provided herein and in the Credit
Agreement. Reference is hereby made to the Credit Agreement for a description
of certain rights, limitations of rights, obligations and duties of the parties
hereto and for the meanings assigned to terms used and not defined herein.
For the purposes of this Note, the following terms have the meanings
assigned to them below:
"Maximum Rate" means at the particular time in question the
maximum rate of interest which, under applicable law, may then be
charged on this Note. If such maximum rate of interest changes after
the date hereof, the Maximum Rate shall be automatically increased or
decreased, as the case may be, without notice to Borrower from time to
time as of the effective time of each change in such maximum rate. If
applicable law ceases to provide for such a maximum rate of interest,
the Maximum Rate shall be a per annum rate of interest equal to
twenty-five percent (25.0%) plus the Base Rate from time to time in
effect.
"Base Rate Payment Date" means (i) the last day of each
March, June, September and December of each year, beginning December
31, 1996, and (ii) any day on which past due interest or principal is
owed hereunder and is unpaid. If the terms hereof or of the Credit
Agreement provide that payments of interest or
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<PAGE> 10
principal hereon shall be deferred from one Base Rate Payment Date to
another day, such other day shall also be a Base Rate Payment Date.
"LIBOR Rate Payment Date" means, with respect to any LIBOR
Rate Portion: (i) the day on which the related Interest Period ends
(and, if such Interest Period is longer than three months, the
three-month anniversary of the first day of such Interest Period), and
(ii) any day on which past due interest or past due principal is owed
hereunder with respect to such LIBOR Rate Portion and is unpaid. If
the terms hereof or of the Credit Agreement provide that payments of
interest or principal with respect to such LIBOR Rate Portion shall be
deferred from one LIBOR Rate Payment Date to another day, such other
day shall also be a LIBOR Rate Payment Date.
The principal amount of this Note, together with all unpaid accrued
interest hereon, shall be due and payable in full on January 1, 1999.
The Base Rate Portion of the Loan (exclusive of any past due principal
or interest) from time to time outstanding shall bear interest on each day
outstanding at the Base Rate in effect on such day. On each Base Rate Payment
Date Borrower shall pay to the holder hereof all unpaid interest which has
accrued on the Base Rate Portion to but not including such Base Rate Payment
Date. Each LIBOR Rate Portion of the Loan (exclusive of any past due principal
or interest) shall bear interest on each day during the related Interest Period
at the related LIBOR Rate in effect on such day. On each LIBOR Rate Payment
Date relating to such LIBOR Rate Portion Borrower shall pay to the holder
hereof all unpaid interest which has accrued on such LIBOR Rate Portion to but
not including such LIBOR Rate Payment Date. All past due principal and past due
interest owed under this Note shall bear interest on each day outstanding at
the Late Payment Rate in effect on such day, and such interest shall be due and
payable daily as it accrues. Notwithstanding the foregoing provisions of this
paragraph, if at any time the rate at which interest is payable on this Note
(considering together all portions of the Loan and the interest payable
thereon) exceeds the Maximum Rate, this Note shall bear interest at the Maximum
Rate only but shall continue to bear interest at the Maximum Rate until such
time as the total amount of interest accrued hereon equals (but does not
exceed) the total amount of interest which would have accrued hereon had there
been no Maximum Rate applicable hereto.
Notwithstanding the foregoing paragraph and all other provisions of
this Note, in no event shall the interest payable hereon, whether before or
after maturity, exceed the maximum interest which, under applicable law, may be
charged on this Note, and this Note is expressly made subject to the provisions
of the Credit Agreement which more fully set out the limitations on how
interest accrues hereon.
If this Note is placed in the hands of an attorney for collection
after default, or if all or any part of the indebtedness represented hereby is
proved, established or collected in any court or in any bankruptcy,
receivership, debtor relief, probate or other court proceedings, Borrower and
all endorsers, sureties and guarantors of this Note jointly and severally agree
to pay reasonable attorneys' fees and collection costs to the holder hereof in
addition to the principal and interest payable hereunder.
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<PAGE> 11
Borrower and all endorsers, sureties and guarantors of this Note
hereby severally waive demand, presentment, notice of demand and of dishonor
and nonpayment of this Note, protest, notice of protest, notice of intention to
accelerate the maturity of this Note, declaration or notice of acceleration of
the maturity of this Note, diligence in collecting, the bringing of any suit
against any party and any notice of or defense on account of any extensions,
renewals, partial payments or changes in any manner of or in this Note or in
any of its terms, provisions and covenants, or any releases or substitutions of
any security, or any delay, indulgence or other act of any trustee or any
holder hereof, whether before or after maturity.
THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW), EXCEPT TO THE EXTENT THE SAME ARE GOVERNED BY APPLICABLE
FEDERAL LAW.
This Note is given in renewal, extension and increase,
but not in novation or extinguishment, of that certain Promissory Note dated
December 28, 1995 by Borrower in the aggregate original principal amount of
$15,000,000, payable to the order of Lender.
TPC CORPORATION
By:
----------------------------
Robert D. Kincaid, Treasurer
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<PAGE> 12
EXHIBIT B
REQUEST FOR ADVANCES
Reference is made to that certain First Restated Credit Agreement
dated as of September 25, 1995 (as from time to time amended, the "Agreement"),
by and among TPC Corporation ("Borrower"), Internationale Nederlanden (U.S.)
Capital Corporation, as Agent, and the Lenders named therein. Terms which are
defined in the Agreement are used herein with the meanings given them in the
Agreement. Pursuant to the terms of the Agreement Borrower hereby requests
Lenders to make Advances to Borrower in the aggregate principal amount of
$__________ and specifies ____________, 199__, as the date Borrower desires for
Lenders to make such Advances and to deliver to Borrower the proceeds thereof.
To induce Lenders to make Advances, Borrower hereby represents,
warrants, acknowledges, and agrees that:
(a) The officer of Borrower signing this instrument is the
duly elected, qualified and acting officer of Borrower as indicated
below such officer's signature hereto having all necessary authority
to act for Borrower in making the request herein contained.
(b) The representations and warranties of Borrower set forth
in the Agreement and the other Loan Documents are true and correct on
and as of the date hereof (except to the extent that the facts on
which such representations and warranties are based have been changed
by the transactions contemplated by the Agreement), with the same
effect as though such representations and warranties had been made on
and as of the date hereof.
(c) There does not exist on the date hereof any condition or
event which constitutes a Default or Event of Default which has not
been waived in writing as provided in Section 9.1(a) of the Agreement;
nor will any such Default or Event of Default exist upon Borrower's
receipt and application of the Advances requested hereby. Borrower
will use the Advances hereby requested in compliance with Section 2.3
of the Agreement.
(d) Except to the extent waived in writing as provided in
Section 9.1(a) of the Agreement, Borrower has performed and complied
with all agreements and conditions in the Agreement required to be
performed or complied with by Borrower on or prior to the date hereof,
and each of the conditions precedent to an Advance contained in the
Agreement remains satisfied.
(e) The Loan Documents have not been modified, amended or
supplemented by any unwritten representations or promises, by any
course of dealing, or by any other means not provided for in Section
9.1(a) of the Agreement. The Agreement and the other Loan Documents
are hereby ratified, approved, and confirmed in all respects.
(f) The outstanding Utilized Credit, after the making of the
Advances requested hereby, will not be in excess of the Commitment on
the date requested for the making of such Advances.
The officer of Borrower signing this instrument hereby certifies that,
to the best of his knowledge after due inquiry, the above representations,
warranties, acknowledgements, and agreements of Borrower are true, correct and
complete.
IN WITNESS WHEREOF, this instrument is executed as of ____________,
199__.
TPC CORPORATION
By:
--------------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 4.7
FOURTH AMENDMENT TO TERM FACILITY CREDIT AGREEMENT
This FOURTH AMENDMENT TO TERM FACILITY CREDIT AGREEMENT (this
"Amendment") made as of the 30th day of October, 1996, by and among TPC
CORPORATION, a Delaware corporation ("Borrower"), INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION, a Delaware corporation, as Term Agent ("Term
Agent"), and the Term Lenders under the Original Term Agreement ("Term
Lenders").
W I T N E S S E T H:
WHEREAS, Borrower, Term Agent and Term Lenders have entered into that
certain Term Facility Credit Agreement dated as of September 25, 1995, as
amended by that certain First Amendment to Term Facility Credit Agreement,
effective as of September 25, 1995 that certain Second Amendment to Term
Facility Credit Agreement dated December 6, 1995, and that certain Third
Amendment to Term Facility Credit Agreement dated August 19, 1996 (as so
amended, the "Original Term Agreement"), for the purpose and consideration
therein expressed, whereby Term Lenders made loans to Borrower as therein
provided; and
WHEREAS, Borrower, Term Agent and Term Lenders desire to amend the
Original Term Agreement for the purposes described herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Term Agreement
and in consideration of the loans which may hereafter be maintained by Term
Lenders to Borrower, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto do hereby
agree as follows:
ARTICLE I. Definitions and References
Section 1.1. Terms Defined in the Original Term Agreement. Unless the
context otherwise requires or unless otherwise expressly defined herein, the
terms defined in the Original Term Agreement shall have the same meanings
whenever used in this Amendment.
Section 1.2. Other Defined Terms. Unless the context otherwise
requires, the following terms when used in this Amendment shall have the
meanings assigned to them in this Section 1.2.
"Amendment" shall mean this Fourth Amendment to Term Facility Credit
Agreement.
"Term Agreement" shall mean the Original Term Agreement as amended
hereby.
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<PAGE> 2
ARTICLE II. Amendments to Original Term Agreement
Section 2.1. Repayment of Term Loans. Section 2.7(a) of the Original
Term Agreement is hereby amended in its entirety to read as follows:
(a) Repayment of Facility A Term Loans. Borrower shall repay
the principal of the Facility A Term Loans in installments on the last
day of each March, June, September and December, commencing December
31, 1996, with the final installment being due and payable on or before
June 30, 2000. Each such installment shall be the lesser of (i) the
remaining outstanding principal of the Facility A Term Loans on such
date or (ii) the following amounts:
<TABLE>
<S> <C>
December 31, 1996 $2,500,000
March 31, 1997 $2,500,000
June 30, 1997 $2,500,000
September 30, 1997 $2,500,000
December 31, 1997 $2,500,000
March 31, 1998 $2,500,000
June 30, 1998 $2,500,000
September 30, 1998 $2,500,000
December 31, 1998 $2,500,000
March 31, 1999 $2,500,000
June 30, 1999 $2,500,000
September 30, 1999 $2,500,000
December 31, 1999 $2,500,000
March 31, 2000 $2,500,000
June 30, 2000 $9,017,648
</TABLE>
In any event all unpaid principal and interest on the Facility A Term
Notes shall be due and payable in full on the final maturity of June
30, 2000.
Section 2.2. Restricted Debt. Section 5.2(a)(v) of the Original Term
Agreement is hereby amended in its entirety to read as follows:
(v) Debt under the Revolving Credit Agreement, and renewals,
refinancings or extensions thereof; provided, the principal amount of
such Debt shall not at any time exceed $40,000,000 and such Debt shall
at all times be on an unsecured basis.
Section 2.3. Limitation on Credit Extensions. Section 5.2(h) of the
Original Term Agreement is hereby amended by adding a new clause (v) at the end
thereof, to read as follows:
(v) other extensions of credit, advances or loans, so long as
the aggregate amount of such extensions of credit, advances and loans
made by Borrower and all Restricted Subsidiaries does not exceed
$1,000,000.
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<PAGE> 3
Section 2.4. EBITAD. Section 5.2(o)(ii) of the Original Term
Agreement is hereby amended in its entirety to read as follows:
(ii) The ratio of (A) Borrower's and Restricted Subsidiaries'
EBITAD to (B) the sum of Debt Service plus scheduled payments of
principal (including the principal component of rentals or capitalized
leases) on Restricted Debt plus $1,000,000 maintenance capital
expenditures for each four-Fiscal Quarter period will not be less than
(1) 1.10 to 1 for the four-Fiscal Quarter period ending December 31,
1996; (2) 1.15 to 1 for the four-Fiscal Quarter periods ending on each
of March 31, 1997, June 30, 1997, September 30, 1997 and December 31,
1997; and (3) 1.20 to 1 for the four-Fiscal Quarter period ending
March 31, 1998 and each four-Fiscal Quarter period thereafter.
Section 2.5. Consent and Waiver re: Prism; Limited Waiver of EBITAD.
Term Agent and Term Lenders hereby (i) consent to the extension of credit by
Borrower to PRISM Information I, LLC in the amount of $380,000, as evidenced by
a promissory note dated September 13, 1996, secured by certain collateral and
maturing on September 13, 1998, and (ii) waive Borrower's breach of Section
5.2(h) of the Term Agreement thereby and any related Default or Event of
Default under Section 7.1(c) of the Term Agreement. Term Agent and Term
Lenders hereby waive (i) Borrower's breach of Section 5.2(o) of the Term
Agreement for the Fiscal Quarter ending September 30, 1996 and (ii) any related
Default or Event of Default under Section 7.1(c) of the Term Agreement.
ARTICLE III. Conditions of Effectiveness
Section 3.1. Effective Date. This Amendment shall become effective
as of the date first above written when, and only when, (i) Term Agent shall
have received, at Term Agent's office, a counterpart of this Amendment executed
and delivered by Borrower and each Term Lender and (ii) Term Agent shall have
additionally received all of the following documents, each document (unless
otherwise indicated) being dated the date of receipt thereof by Term Agent,
duly authorized, executed and delivered, and in form and substance satisfactory
to Term Agent:
(a) Officer's Certificate. Term Agent shall have received a
certificate of a duly authorized officer of Borrower to the effect
that all of the representations and warranties set forth in Article IV
hereof are true and correct at and as of the time of such
effectiveness.
(b) Supporting Documents. Term Agent shall have received (i)
a certificate of the Secretary of Borrower dated the date of this
Amendment certifying that attached thereto is a true and complete copy
of resolutions adopted by the Board of Directors of Borrower
authorizing the execution, delivery and performance of this Amendment
and certifying the names and true signatures of the officers of
Borrower authorized to sign this Amendment and (ii) such supporting
documents as Term Agent may reasonably request.
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<PAGE> 4
ARTICLE IV. Representations and Warranties
Section 4.1. Representations and Warranties of Borrower. In order to
induce each Term Lender to enter into this Amendment, Borrower represents and
warrants to each Term Lender that:
(a) The representations and warranties contained in Section
4.1 of the Term Agreement are true and correct at and as of the time of
the effectiveness hereof.
(b) Each Related Person is duly authorized to execute and
deliver this Amendment and Borrower is and will continue to be duly
authorized to borrow monies and to perform its obligations under the
Term Agreement. Each Related Person has duly taken all corporate
action necessary to authorize the execution and delivery of this
Amendment and to authorize the performance of the obligations of such
Related Person hereunder.
(c) The execution and delivery by each Related Person of this
Amendment, the performance by each Related Person of its obligations
hereunder and the consummation of the transactions contemplated hereby
do not and will not conflict with any provision of law, statute, rule
or regulation or of the articles or certificate of incorporation and
bylaws or partnership agreement of any Related Person, or of any
material agreement, judgment, license, order or permit applicable to
or binding upon any Related Person, or result in the creation of any
lien, charge or encumbrance upon any assets or properties of Related
Persons. Except for those which have been obtained, no consent,
approval, authorization or order of any court or governmental
authority or third party is required in connection with the execution
and delivery by each Related Person of this Amendment or to consummate
the transactions contemplated hereby.
(d) When duly executed and delivered, each of this Amendment
and the Term Agreement will be a legal and binding obligation of each
Related Person, enforceable in accordance with its terms, except as
limited by bankruptcy, insolvency or similar laws of general
application relating to the enforcement of creditors' rights and by
equitable principles of general application.
(e) The audited annual Consolidated financial statements of
Borrower dated as of December 31, 1995 and the unaudited quarterly
Consolidated financial statements of Borrower dated as of June 30,
1996 fairly present the Consolidated financial position at such dates
and the Consolidated statement of operations and the changes in
Consolidated financial position for the periods ending on such dates
for Borrower. Copies of such financial statements have heretofore
been delivered to each Term Lender. Since December 31, 1995, no
material adverse change has occurred in the financial condition or
businesses or in the Consolidated financial condition or businesses of
Borrower.
4
<PAGE> 5
ARTICLE V. Miscellaneous
Section 5.1. Ratification of Agreements. The Original Term Agreement
as hereby amended is hereby ratified and confirmed in all respects. Any
reference to the Term Agreement in any Term Loan Document shall be deemed to be
a reference to the Original Term Agreement as hereby amended. The execution,
delivery and effectiveness of this Amendment shall not, except as expressly
provided herein, operate as a waiver of any right, power or remedy of Term
Lenders under the Term Agreement, the Term Notes, or any other Term Loan
Document nor constitute a waiver of any provision of the Term Agreement, the
Term Notes or any other Term Loan Document.
Section 5.2. Survival of Agreements. All representations,
warranties, covenants and agreements of Borrower herein shall survive the
execution and delivery of this Amendment and the performance hereof, including
without limitation the making or granting of the Term Loans, and shall further
survive until all of the Obligations are paid in full. All statements and
agreements contained in any certificate or instrument delivered by any Related
Person hereunder or under the Term Agreement to any Term Lender shall be deemed
to constitute representations and warranties by, and/or agreements and
covenants of, Borrower under this Amendment and under the Term Agreement.
Section 5.3. Term Loan Documents. This Amendment is a Term Loan
Document, and all provisions in the Term Agreement pertaining to Term Loan
Documents apply hereto.
Section 5.4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York and any
applicable laws of the United States of America in all respects, including
construction, validity and performance.
Section 5.5. Counterparts. This Amendment may be separately executed
in counterparts and by the different parties hereto in separate counterparts,
each of which when so executed shall be deemed to constitute one and the same
Amendment.
5
<PAGE> 6
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
TPC CORPORATION
By: /s/ Robert D. Kincaid
-----------------------------------
Robert D. Kincaid, Treasurer
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION,
as Term Agent and a Term Lender
By: /s/ Trond O. Rokholt
-----------------------------------
Trond O. Rokholt, Vice President
CIBC, INC.
By: /s/ Gary C. Gaskill
-----------------------------------
Name: Gary C. Gaskill
Title: Authorized Signatory
BANK OF SCOTLAND
By: /s/ Catherine M. Oniffrey
-----------------------------------
Name: Catherine M. Oniffrey
Title: Vice President
6
<PAGE> 7
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By: /s/ Pascal Poupelle
-----------------------------------
Name: Pascal Poupelle
Title: Authorized Signature
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Virginia Ryan
-----------------------------------
Name: Virginia Ryan
Title: Vice President
DEN NORSKE BANK AS
By: /s/ Byron L. Cooley
-----------------------------------
Name: Byron L. Cooley
Title: First Vice President
By: /s/ Charles E. Hall
-----------------------------------
Name: Charles E. Hall
Title: First Vice President
WELLS FARGO BANK (TEXAS)
NATIONAL ASSOCIATION
(f/k/a First Interstate
Bank of Texas, N.A.)
By: /s/ Ann M. Rhoads
-----------------------------------
Ann M. Rhoads, Vice President
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By: /s/ Satoru Otsubo
-----------------------------------
Name: Satoru Otsubo
Title: Joint General Manager
BANK OF SCOTLAND
By: /s/ Catherine M. Oniffrey
-----------------------------------
Name: Catherine M. Oniffrey
Title: Vice President
7
<PAGE> 8
CONSENT AND AGREEMENT
Each of the undersigned Guarantors hereby consents to the following:
1. The provisions of this Fourth Amendment to Term Facility
Credit Agreement, and the transactions contemplated herein and
therein.
Each of the undersigned Guarantors hereby ratifies and confirms the
Guaranty (Term Facility) dated as of September 25, 1995 made by it in favor of
ING Capital, individually and as Term Agent, and in favor of Term Lenders, and
any and all Security Documents and other Term Loan Documents executed by the
undersigned Guarantors in connection therewith, and agrees that its obligations
and covenants thereunder are unimpaired hereby and shall remain in full force
and effect.
SEAHAWK GATHERING & LIQUIDS COMPANY,
a Delaware corporation
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President
SEAHAWK TRANSMISSION COMPANY,
f/k/a Seagull Transmission Company,
a Texas corporation
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President
SEAHAWK PIPELINE & MARKETING COMPANY,
f/k/a Seagull Pipeline & Marketing Company,
a Delaware corporation
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President
SEAHAWK PROCESSING COMPANY,
f/k/a Seagull Processing Company,
a Delaware corporation
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President
8
<PAGE> 9
SEAHAWK NATURAL GAS COMPANY,
f/k/a Seagull Natural Gas Company,
a Delaware corporation
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President
SEAHAWK INDUSTRIAL PIPELINE COMPANY,
f/k/a Seagull Industrial Pipeline Company,
a Texas corporation
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President
SEAHAWK CAVALLO INVESTMENT COMPANY,
f/k/a Amoco Cavallo Investment Company,
a Delaware corporation
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President
CAVALLO PIPELINE COMPANY,
a Texas general partnership
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President of Seahawk
Cavallo Investment Company (f/k/a Amoco
Cavallo Investment Company), general
partner, as representative of Seahawk
Cavallo Investment Company to Management
Committee of Cavallo Pipeline Company
By: /s/ J. Chris Jones
---------------------------------------
J. Chris Jones, Vice President of Seahawk
Industrial Pipeline Company (f/k/a Seagull
Industrial Pipeline Company), general
partner, as representative of Seahawk
Industrial Pipeline Company to Management
Committee of Cavallo Pipeline Company
SEAHAWK SHORELINE SYSTEM,
f/k/a Seagull Shoreline System,
a Texas general partnership
By: /s/ Ronald H. Benson
---------------------------------------
Ronald H. Benson, President of Seahawk
Transmission Company (f/k/a Seagull
Transmission Company), general partner, as
representative of Seahawk Transmission
Company to Management Committee of Seahawk
Shoreline System
By: /s/ J. Chris Jones
---------------------------------------
J. Chris Jones,Vice President of Seahawk
Pipeline & Marketing Company (f/k/a
Seagull Pipeline & Marketing Company),
general partner, as representative of
Seahawk Pipeline & Marketing Company to
Management Committee of Seahawk Shoreline
System
9
<PAGE> 1
EXHIBIT 4.8
================================================================================
TPC CORPORATION
(FORMERLY TEJAS POWER CORPORATION)
AMENDMENT TO NOTE AGREEMENT
Dated as of November 15, 1996
Re: Note Agreement Dated as of March 15, 1994
and
$35,000,000 Aggregate Principal Amount of
Senior Notes Due March 15, 2004
================================================================================
<PAGE> 2
TPC CORPORATION
(FORMERLY TEJAS POWER CORPORATION)
AMENDMENT TO NOTE AGREEMENT
Re: Note Agreement Dated as of March 15, 1994
and
$35,000,000 Aggregate Principal Amount of
Senior Notes Due March 15, 2004
Dated as of
November 15, l996
To the Purchasers Named on
Schedule I hereto
Ladies and Gentlemen:
Reference is made to the Note Agreement dated as of March 15, l994, as
heretofore amended, (the "Note Agreement") between TPC Corporation, a Delaware
corporation (formerly Tejas Power Corporation) (the "Company"), and you, under
and pursuant to which $35,000,000 aggregate principal amount of Senior Notes
Due March 15, 2004 (the "Notes") were originally issued.
The Company desires to have the Holders of the Notes (the "Holders")
waive certain Defaults under the Note Agreement and consent to the amendment of
certain provisions of the Note Agreement as set forth below in the manner
herein provided.
SECTION 1. WAIVER.
Section 1.1. Waiver The Holders hereby waive (a) any Default or
Event of Default which may exist under Section 5.7(a) of the Note Agreement (i)
for the fiscal quarter ended September 30, 1996; provided that the ratio of
Income Available for Debt Service to Debt Service for such period shall have
been not less than 1.12 to 1; and (ii) for the fiscal quarter ending December
31, 1996; provided that the ratio of Income Available for Debt Service to Debt
Service for such period shall be not less than 1.15 to 1; and (b) any Default
or Event of Default which may exist but for the amendments to the Note
Agreement hereinafter set forth.
<PAGE> 3
SECTION 2. AMENDMENT TO EXHIBIT B OF THE NOTE AGREEMENT.
Section 2.1. Amendment to Exhibit B of the Note Agreement.
Paragraph 14 of Exhibit B to the Note Agreement shall be amended by inserting
the phrase "to the extent the same would result in a violation of Regulation
G." at the end of the second sentence.
SECTION 3. AMENDMENTS TO SECTION 5 OF THE NOTE AGREEMENT.
Section 3.1. Amendment to Section 5.9. Section 5.9 of the Note
Agreement shall be amended by the addition thereto of a new clause "(i)" which
shall read as follows:
(i) Liens on the Seagull Collateral pursuant to
the Seagull Loan Agreements.
Section 3.2. Amendment to Section 5.12. Section 5.12 of the Note
Agreement shall be amended by the addition thereto of a new clause "(i)" which
shall read as follows:
(i) Investments by TPC Gathering & Transmission
Company in Seahawk Gathering & Liquids Company represented by
the Seahawk Notes.
Section 3.3. Amendment to Section 5.13. Clause "(b)" of Section
5.13 of the Note Agreement shall be amended in its entirety to read as follows:
(b) Guaranties by the Seahawk Subsidiaries of the
obligations incurred by the Company, the Seahawk Subsidiaries
and TPC Gathering and Transmission Company in connection with
the Seagull Acquisition under the Seagull Loan Agreements.
Section 3.4. Amendment to Section 5.15. Section 5.15 of the Note
Agreement shall be amended by addition thereto of the phrase hereinafter set
forth immediately following the word "Affiliate" in the last line thereof:
or if no such comparable transaction exists, then on terms
which are fair and equitable to the Company.
SECTION 4. AMENDMENTS TO SECTION 8.1 OF THE NOTE AGREEMENT.
Section 4.1. Amendment to Definition of "Subsidiary". The second
sentence of the definition of "Subsidiary" shall be amended in its entirety to
read as follows:
"Subsidiary" shall mean a subsidiary of the Company whose
financial statements are consolidated with the financial statements of
the Company in accordance with GAAP.
-2-
<PAGE> 4
Section 4.2. Amendment to Definition of "Unrestricted Subsidiary".
The definition of "Unrestricted Subsidiary" shall be amended by the addition
thereto of a new sentence which shall read as follows:
For purposes of determinations pursuant to Section 5.12,
Market Hub Partners, L.P. shall be deemed to be an Unrestricted
Subsidiary.
Section 4.3. Amendment to Definition of "Debt Service". The
definition of "Debt Service" shall be amended by adding the following sentence
after the last sentence of the definition:
For purposes of determinations pursuant to clause (ii) above,
Debt Service shall not include (i) any principal payments on Debt
which by the terms of the agreement pursuant to which such Debt has
been issued may be reborrowed; or (ii) any scheduled payments or
prepayments on Debt made with the sale of equity or the issuances of
new Debt (including any renewal or extension of outstanding Debt).
Section 4.4. Additional Definitions. Section 8.1 of the Note
Agreement shall be amended by inserting the following definitions in Section
8.1 in the correct alphabetical order:
"Seagull Collateral" shall mean property of any kind (whether
now existing or hereafter acquired) and which was generally or
specifically described in the Seagull Loan Agreement and the related
Security Documents as in effect on September 25, 1995. Capitalized
terms used in this definition shall have the meaning set forth in the
Seagull Loan Agreements.
"Seahawk Notes" shall mean collectively, (i) that certain
Intercompany Note (Term A Facility) dated as of September 25, 1995,
made by Seahawk Gathering & Liquids Company payable to the order of
TPC Gathering & Transmission Company in the original principal amount
of $60 million; and (ii) that certain Intercompany Note (Term B
Facility) dated as of September 25, 1995, made by Seahawk Gathering &
Liquids Company payable to the order of TPC Gathering & Transmission
Company in the original principal amount of $60 million.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants that all representations and
warranties set forth in Exhibit A to this Amendment to Note Agreement are true
and correct as of the date hereof and are incorporated herein by reference with
the same force and effect as though herein set forth in full.
SECTION 6. CONDITIONS PRECEDENT.
The effectiveness and validity of this Amendment is subject to the
satisfaction of the following conditions precedent:
(a) Each Holder shall have received the following, all of
which must be satisfactory in form and substance to such Holder:
-3-
<PAGE> 5
(i) this Amendment to Note Agreement, duly
executed by the Company; and
(ii) an opinion of Baker & Botts, L.L.P., counsel
to the Company, to the effect that this Amendment to Note
Agreement has been duly authorized by all necessary corporate
action on the part of the Company, has been duly executed and
delivered by the Company and constitutes the legal, valid and
binding contract of the Company enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent
conveyance or similar laws affecting creditors' rights
generally, and general principles of equity (regardless of
whether the application of such principles is considered in a
proceeding in equity or at law).
(b) This Amendment to Note Agreement shall have been
executed and delivered by the Holders of 51% in the aggregate
principal amount of outstanding Notes.
SECTION 7. MISCELLANEOUS.
Section 7.1. Effective Date; Ratification. The amendments
contemplated by this Amendment to Note Agreement shall be effective as of the
date (the "Effective Date") upon which (a) all conditions set forth in Section
6 hereof have been satisfied, (b) the Company consummates the proposed
amendment of its credit facilities with certain lenders, (c) each Purchaser
shall have received a copy of such amendment entered into by the Company and
those certain lenders, and (d) the fees and expenses of Chapman and Cutler
shall have been paid by the Company. Except as amended herein, the terms and
provisions of the Note Agreement are hereby ratified, confirmed and approved in
all respects.
Section 7.2. Successors and Assigns. This Amendment to Note
Agreement shall be binding upon the Company and its successors and assigns and
shall inure to the benefit of the Holders and to the benefit of their
successors and assigns, including each successive holder or holders of any
Notes.
Section 7.3. Counterparts. This Amendment to Note Agreement may
be executed in any number of counterparts, each executed counterpart
constituting an original but all together one and the same instrument.
Section 7.4. Fees and Expenses. Whether or not the Effective Date
occurs, the Company agrees to pay all reasonable fees and expenses of the
Holders and special counsel to the Holders in connection with the preparation
of this Amendment to Note Agreement.
Section 7.5. No Legend Required. Any and all notices, requests,
certificates and other instruments including, without limitation, the Notes,
may refer to the Note Agreement or the Note Agreement dated as of March 15,
l994 without making specific reference to this Amendment to Note Agreement, but
nevertheless all such references shall be deemed to include this Amendment to
Note Agreement unless the context shall otherwise require.
-4-
<PAGE> 6
Section 7.6. Governing Law. THIS AMENDMENT TO NOTE AGREEMENT AND
THE NOTES SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE
STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES
OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
Section 7.7. Waivers by the Company. THE COMPANY WAIVES (A) THE
RIGHT TO TRIAL BY JURY (WHICH EACH HOLDER OF NOTES HEREBY ALSO WAIVES) IN ANY
ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED
TO THIS AMENDMENT TO NOTE AGREEMENT, THE NOTE AGREEMENT OR THE NOTES; (B)
PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT,
NON-PAYMENT, INTENT TO ACCELERATE, ACCELERATION, MATURITY, RELEASE, COMPROMISE,
SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL DOCUMENTS, INSTRUMENTS, AND
GUARANTIES AT ANY TIME HELD BY THE HOLDERS OF NOTES (OR ANY AGENT THEREFOR) ON
WHICH THE COMPANY MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS
WHATEVER THE HOLDERS OF NOTES MAY DO IN THIS REGARD; AND (C) NOTICE OF
ACCEPTANCE HEREOF. THE COMPANY ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A
MATERIAL INDUCEMENT TO THE HOLDERS' ENTERING INTO THIS AMENDMENT TO NOTE
AGREEMENT AND THAT THE HOLDERS ARE RELYING UPON THE FOREGOING WAIVERS IN THEIR
FUTURE DEALINGS WITH THE COMPANY. THE COMPANY WARRANTS AND REPRESENTS THAT IT
HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND
VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, THIS AMENDMENT TO NOTE AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
-5-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Note Agreement as of the day and year first above written.
TPC CORPORATION
By /s/ Robert D. Kincaid
-----------------------------------
Robert D. Kincaid
Its Treasurer
Accepted as of November 15, l996
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By /s/ Richard C. Morrison
-----------------------------------
Richard C. Morrison
Its Managing Director
THE TRAVELERS INSURANCE COMPANY
By /s/ Robert M. Mills
-----------------------------------
Robert M. Mills
Its Investment Officer
-6-
<PAGE> 8
SCHEDULE I
<TABLE>
<CAPTION>
NAME OF NOTEHOLDER PRINCIPAL AMOUNT OF NOTES OUTSTANDING
<S> <C>
Massachusetts Mutual Life Insurance Company $20,000,000
The Travelers Insurance Company $15,000,000
</TABLE>
SCHEDULE 1
(to Amendment to Note Agreement)
<PAGE> 9
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Purchaser as follows:
1. Corporate Organization and Authority. The Company, and each
Restricted Subsidiary, is a corporation or partnership, as the case may be,
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization.
2. Transaction is Legal and Authorized. The execution, delivery
and performance of the Amendment to Note Agreement and compliance by the
Company with all of the provisions of the Amendment to Note Agreement:
(a) are within the corporate powers of the Company;
(b) will not violate any provisions of any law or any
order of any court or governmental authority or agency and will not
conflict with or result in any breach of any of the terms, conditions
or provisions of, or constitute a default under the Certificate of
Incorporation or By-laws of the Company or any indenture or other
agreement or instrument to which the Company is a party or by which it
may be bound or result in the imposition of any Liens or encumbrances
on any property of the Company; and
(c) have been duly authorized by proper corporate action
on the part of the Company (no action by the stockholders of the
Company being required by law, by the Certificate of Incorporation or
By-laws of the Company or otherwise), executed and delivered by the
Company and the Amendment to Note Agreement constituted the legal,
valid and binding obligation, contract and agreement of the Company
enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance or similar laws affecting creditors'
rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a
proceeding in equity or at law).
3. No Defaults. On the Effective Date of the Amendment to the
Note Agreement (after giving effect thereto) no Default or Event of Default (as
defined in the Note Agreement) has occurred and is continuing. Neither the
Company nor any Restricted Subsidiary is in default in the payment of principal
or interest on any Debt or is in default under any instrument or instruments or
agreements under and subject to which any Debt has been issued, and no event
has occurred and is continuing under the provisions of any such instrument or
agreement which with the lapse of time or the giving of notice, or both, would
constitute an event of default thereunder.
4. Governmental Consent. No approval, consent or withholding of
objection on the part of any regulatory body, state, Federal or local, is
necessary in connection with the execution and delivery by the Company of the
Amendment to Note Agreement or compliance by the Company with any of the
provisions of the Amendment to Note Agreement.
EXHIBIT A
(to Amendment to Note Agreement)
<PAGE> 1
TPC CORPORATION AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Average common shares outstanding ............................................ 18,072,851 14,424,257
Net effect of dilutive stock options - based on the treasury stock
method using average market price .......................................... 621,753 1,184,653
----------- -----------
Weighted average shares outstanding .......................................... 18,694,604 15,608,910
=========== ===========
Income Before Extraordinary Item ............................................. $ 5,044,000 $ 494,000
Extraordinary Item, net of income tax provision of $107,000 in 1995 .......... -- 207,000
----------- -----------
Net income ................................................................... $ 5,044,000 $ 701,000
=========== ===========
Income per Common Share Before Extraordinary Item ............................ $ .27 $ .04
Extraordinary Item ........................................................... -- .01
----------- -----------
Net income per common share .................................................. $ .27 $ .05
=========== ===========
</TABLE>
<PAGE> 1
TPC CORPORATION AND SUBSIDIARIES
EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME JURISDICTION
- ---- ------------
<S> <C>
TPC Electric Corporation ................................... Delaware
Evangeline Development Company ........................... Delaware
Allison Development Company .............................. Delaware
TPC Facilities, Inc. ....................................... Delaware
TPC Pipeline, Inc. ......................................... Texas
TPC Information, Inc. ...................................... Delaware
Matagorda Island Area Gathering System ..................... Texas
TPC Services, Inc. ......................................... Delaware
TPC Gathering & Transmission Company ....................... Delaware
Seahawk Gathering & Liquids Company ...................... Delaware
Seahawk Cavallo Investment Company ..................... Delaware
Seahawk Pipeline & Marketing Company ................... Delaware
Seahawk Natural Gas Company .......................... Delaware
Seahawk Industrial Pipeline Company .................. Texas
Seahawk Cavallo Pipeline Company ................... Texas
Seahawk Transmission Company ......................... Texas
Seahawk Shoreline System ........................... Texas
Seahawk Processing Company ........................... Delaware
TPC Gas Storage Services, Inc. ............................. Delaware
Moss Bluff Development Corporation ....................... Delaware
MB Acquisition Corporation ............................... Delaware
Farmington Properties, Inc. .............................. Pennsylvania
Wolverine Land & Development Corporation ................. Michigan
Tioga Gas Storage Company ................................ Delaware
Market Hub Partners, Inc. .............................. Delaware
Moss Bluff Hub Partners, Inc. ....................... Delaware
Egan Hub Partners, Inc. ............................. Delaware
Mistex Hub Partners, Inc. ........................... Delaware
Grands Lacs Hub Partners, Inc. ...................... Delaware
NE Hub Partners, Inc. ............................... Delaware
TPC Gas Storage Services, L.P. ........................... Delaware
Market Hub Partners, L.P. .............................. Delaware
Moss Bluff Hub Partners, L.P. ....................... Delaware
Egan Hub Partners, L.P. ............................. Delaware
Mistex Hub Partners, L.P. ........................... Delaware
Copiah County Storage Company ................... Texas
MS-1 Distribution & Storage Corporation ......... Mississippi
Grands Lacs Hub Partners, L.P. ...................... Delaware
NE Hub Partners, L.P. ............................... Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into TPC Corporation's previously filed
Registration Statement on Form S-8 File No. 33-98924. It should be noted that
we have not audited any financial statements of the Company subsequent to
December 31, 1996 or performed any audit procedures subsequent to the date of
our report.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
March 10, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned directors of TPC Corporation, a Delaware
corporation (the "Corporation"), hereby constitutes and appoints D. Hughes
Watler, Jr. and J. Chris Jones, and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution in the premises, for him and on his behalf in his name,
place, and stead, in his capacity as a director of the Corporation, to sign,
execute, and file an Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, under the Securities Exchange Act of 1934, as amended, with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any state or other
regulatory authority, and granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing required and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might
or could do if personally present, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the 10th day of March, 1997.
Name and Signature
<TABLE>
<S> <C>
/s/ Jean P. Abiteboul /s/ Roger L. Jarvis
- ---------------------------------- ------------------------------------------
Jean P. Abiteboul Roger L. Jarvis
/s/ Larry W. Bickle /s/ Thomas M. Jenkins
- ---------------------------------- ------------------------------------------
Larry W. Bickle Thomas M. Jenkins
/s/ Bernard Brelle /s/ Michael E. McMahon
- ---------------------------------- ------------------------------------------
Bernard Brelle Michael E. McMahon
/s/ W. Jack Bowen /s/ James S. Pignatelli
- ---------------------------------- ------------------------------------------
W. Jack Bowen James S. Pignatelli
/s/ Robert Cosson
- ----------------------------------
Robert Cosson
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,536
<SECURITIES> 0
<RECEIVABLES> 107,028
<ALLOWANCES> 0
<INVENTORY> 13,451
<CURRENT-ASSETS> 124,527
<PP&E> 220,292
<DEPRECIATION> 49,464
<TOTAL-ASSETS> 348,611
<CURRENT-LIABILITIES> 104,455
<BONDS> 138,532
0
0
<COMMON> 185
<OTHER-SE> 102,695
<TOTAL-LIABILITY-AND-EQUITY> 348,611
<SALES> 617,292
<TOTAL-REVENUES> 617,292
<CGS> 593,190
<TOTAL-COSTS> 593,190
<OTHER-EXPENSES> (3,210)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,386
<INCOME-PRETAX> 7,506
<INCOME-TAX> 2,462
<INCOME-CONTINUING> 5,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,044
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
<PAGE> 1
EXHIBIT 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Partners of
Market Hub Partners:
We have audited the accompanying combined balance sheets of Market Hub
Partners (see Note 1) as of December 31, 1996 and 1995, and the related
combined statements of operations, capital and cash flows for the two years
ended December 31, 1996 and for the period from inception (December 21, 1994)
to December 31, 1994. These financial statements are the responsibility of the
management of Market Hub Partners. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Market Hub Partners as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the two years ended December 31, 1996 and for
the period from inception (December 21, 1994) to December 31, 1994, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1997
<PAGE> 2
MARKET HUB PARTNERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 638 $ 872
Restricted cash 721 1,172
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 3,121 1,549
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,031 1,774
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . 270 188
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . 6,781 5,555
-------- --------
Property and Equipment:
Natural gas storage facilities . . . . . . . . . . . . . . . . . 124,968 83,107
Construction in progress . . . . . . . . . . . . . . . . . . . . 26,493 16,087
Less accumulated depreciation . . . . . . . . . . . . . . . . (5,525) (1,634)
-------- --------
145,936 97,560
-------- --------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,018 2,970
-------- --------
$156,735 $106,085
======== ========
LIABILITIES AND CAPITAL
Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . $ 4,200 $ 1,350
Accounts payable:
Trade and other . . . . . . . . . . . . . . . . . . . . . . . 15 2,371
Partners and affiliates (including accrued interest on note
payable to TPC) 1,818 8,989
Note payable to TPC . . . . . . . . . . . . . . . . . . . . . . . 8,800 25,021
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . -- 94
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,239 2,681
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . 17,072 40,506
Note payable to TPC . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 --
Long-Term Debt, net of current portion . . . . . . . . . . . . . . . 53,492 8,464
Capital 74,171 57,115
-------- --------
$156,735 $106,085
======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these statements.
2
<PAGE> 3
MARKET HUB PARTNERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION
----------------------- (DECEMBER 21, 1994)
1996 1995 TO DECEMBER 31, 1994
---------- --------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Salt cavern storage ......................................... $ 15,670 $ 7,528 $ --
Pipeline storage and transportation ......................... 1,804 2,700 115
Other revenue ............................................... 3,043 436 --
-------- -------- --------
Total revenue ............................................... 20,517 10,664 115
-------- -------- --------
Operating Expense:
Operations and maintenance .................................. 3,970 3,586 49
Plant administrative expense ................................ 2,082 1,802 --
Depreciation and amortization ............................... 4,138 1,875 21
-------- -------- --------
Total costs and expenses .................................... 10,190 7,263 70
-------- -------- --------
Operating Income .............................................. 10,327 3,401 45
Other Income (Expense):
General and administrative expense .......................... (2,094) (1,717) (703)
Interest expense (including an extraordinary loss of
$452,000 on early extinguishment of debt in 1996) .......... (3,589) (1,267) (18)
Interest income ............................................. 172 512 14
-------- -------- --------
Net Income (Loss) ............................................. $ 4,816 $ 929 $ (662)
======== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these statements.
3
<PAGE> 4
MARKET HUB PARTNERS
COMBINED STATEMENTS OF CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION
--------------------------------- (DECEMBER 21, 1994)
1996 1995 TO DECEMBER 31, 1994
--------------- --------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Contributions of assets by TPC ........... $ -- $ (139) $ 24,227
Cash contributions by other partners ..... 12,240 19,760 13,000
Net Income (Loss) ........................ 4,816 929 (662)
--------------- --------------- ---------------
Net Increase in Capital .................. 17,056 20,550 36,565
Balance, Beginning of Period ............. 57,115 36,565 --
--------------- --------------- ---------------
Balance, End of Period ................... $ 74,171 $ 57,115 $ 36,565
=============== =============== ===============
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these statements.
4
<PAGE> 5
MARKET HUB PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION
---------------------------------------- (DECEMBER 21, 1994)
1996 1995 TO DECEMBER 31, 1994
------------------ ------------------ ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) .................................... $ 4,816 $ 929 $ (662)
Depreciation and amortization ..................... 4,138 1,875 21
Adjustments to reconcile net income to net cash
flows from operating activities:
Decrease (increase) in Restricted Cash ............ 451 (146) --
Decrease (increase) in Accounts Receivable ........ (1,572) (981) --
(Increase) decrease in Inventory and Prepaid ...... (339) (1,799) --
Expenses
Increase (decrease) in Trade Payables and Other ... (2,798) (2,425) --
Liabilities
Increase (decrease) in payable to partners and .... (7,171) 8,326 655
affiliates
Other ............................................. 40 (135) --
------------------ ------------------ ------------------
Net Cash Provided by (Used in) Operating ..... (2,435) 5,644 14
------------------ ------------------ ------------------
Activities
Cash Flows from Investing Activities:
Capital and Other Asset additions .................... (43,770) (39,186) --
------------------ ------------------ ------------------
Cash Flows from Financing Activities:
Capital contributions ................................ 12,240 19,760 13,000
Net increase (decrease) in Note Payable to TPC ....... (4,221) 2,799 227
Issuance of long-term debt (net of expenses of ....... 58,407 -- --
Repayments of long-term debt ......................... (20,455) (1,386) --
------------------ ------------------ ------------------
Net Cash Provided by Financing Activities .... 45,971 21,173 13,227
------------------ ------------------ ------------------
Net Increase (Decrease) in Cash and Cash ............. (234) (12,369) 13,241
Equivalents
Cash and Cash Equivalents at Beginning of Period ..... 872 13,241 --
------------------ ------------------ ------------------
Cash and Cash Equivalents at End of Period ........... $ 638 $ 872 $ 13,241
================== ================== ==================
Supplemental Disclosure:
Cash paid during the period for interest, net of ..... $ 4,549 $ 1,068 $ --
amounts capitalized
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these statements.
5
<PAGE> 6
MARKET HUB PARTNERS
NOTES TO 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 5 - 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, all
of which was contributed by July 1996. 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 natural gas market centers located in Texas and
Louisiana and it is anticipated that MHP will construct, own and operate up to
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.
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, MHP
established another office in Houston, Texas, and 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 for accounting, financial,
field operating and technology access services 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.
6
<PAGE> 7
MARKET HUB PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION AND PRINCIPLES OF COMBINATION - The accompanying financial
statements include the combined accounts of MHI and MHL and their respective
subsidiaries. MHP's interests in various gas storage joint ventures have been
proportionately consolidated. Material intercompany balances and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of demand
deposits and highly liquid investments purchased with an original maturity of
three months or less.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject MHP to concentration of credit risk consist primarily of temporary cash
investments and trade receivables derived principally from uncollateralized
sales to customers in the pipeline and natural gas utility industries. The
concentration of credit risk in these industries affects MHP's overall exposure
to credit risk because customers may be similarly affected by changes in
economic and other conditions.
INVENTORIES - Inventories of natural gas are carried at the lower of
weighted average cost or market value.
PROPERTY AND EQUIPMENT - Property and equipment contributed to MHP was
contributed at the historical cost basis net of related accumulated
depreciation at the date of contribution. Depreciation of storage facilities
and equipment (whether contributed or subsequently acquired) is provided using
the straight-line method over estimated useful lives of the assets ranging from
fifteen to thirty years. Other property is depreciated on the straight-line
method over applicable estimated useful lives. Additions, renewals, and
betterments that materially add to productive capacity or extend the life of an
asset are capitalized. Expenditures for routine maintenance, repairs, and
renewal costs are expensed as incurred. Interest is capitalized during the
construction period of major facilities and amounted to $1,868,100 and
$1,966,300 in the years ended December 31, 1996 and 1995, respectively. In
1996, MHP adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." Since adoption, SFAS No. 121 has had no
impact on MHP's financial statements.
INCOME TAXES - MHI has various wholly-owned incorporated subsidiaries and
interests in related limited partnerships. Because no stockholder owns more
than 80% of MHI, the corporation files a separate federal income tax return and
as such is responsible for its own income tax liabilities. The tax liabilities
of MHI are immaterial. MHL is a limited partnership, and the applicable tax
liability or benefit is the responsibility of the individual general or limited
partners.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements relate
primarily to the depreciable lives of property and equipment.
(3) DESCRIPTION OF MARKET CENTER PROJECTS
MOSS BLUFF FACILITY. This facility, which is located near Houston, Texas,
began operations in 1990, prior to TPC's formation of MHP. Through July 3,
1996, Moss Bluff Gas Storage Systems ("MBGSS"), was the partnership that owned
the facility, with MHP having a 50% partnership interest in MBGSS. On July 3,
1996, MHP acquired the 50% partnership interest in MBGSS 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 5). MBGSS was effectively dissolved upon MHP's acquisition
of CMS's partnership interest.
7
<PAGE> 8
MARKET HUB PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Moss Bluff Facility has three storage caverns that provide
approximately 7.8 Bcf of working storage capacity and a maximum 200 million
cubic feet per day ("MMcf/d") and 900 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 with a working storage capacity of 2.25 Bcf was
placed in service on September 18, 1995. Total construction expenditures
related to this cavern were approximately $13.5 million.
EGAN FACILITY. The Egan 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 (current capacity
is 4.7 Bcf) with 185 MMcf/d of injection capacity and 750 MMcf/d of withdrawal
capacity began September 1, 1995, while construction continued on a new
pipeline interconnection. Total construction expenditures for the initial
cavern, the pipeline interconnection and the facility infrastructure were $60.7
million. In 1996, MHP began construction of a second cavern at Egan with an
initial planned working storage capacity of 2.0 Bcf. Cumulative construction
expenditures of $3.9 million were incurred on this cavern through December 31,
1996.
COPIAH COUNTY PROJECT. This project includes the planned development of
salt caverns at a storage site located in Copiah County, Mississippi. The
project was originally owned 75% by MHP and 25% by a third party, however, in
the first quarter of 1996, TPC purchased the third party'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 possibly related) projects in the
respective areas of natural gas storage and compressed air energy storage. A
total of $2.7 million (net to MHP) had been incurred in development related
expenditures through December 31, 1996.
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 initially have 2.5 Bcf of storage capacity. The first phase of
the facility is targeted to begin operations in 1999. A total of $19.7 million
has been incurred in development expenditures through December 31, 1996.
MIDWEST AREA. In the Midwest area, TPC and CMS originally proposed to
develop the Grands Lacs Project in southeastern Michigan, with each company
owning a 50% interest in the project. Service in a third party facility began
under an interim contract in the second quarter of 1995. On July 3, 1996, MHP
conveyed the interest in the Grands Lacs 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.
(4) OTHER ASSETS
Other assets consist primarily of formation costs of MHP and deferred
financing fees related to a private placement financing transaction completed
in July 1996 (see Note 5). The formation costs include legal, accounting and
other services and are being amortized over a period of five years. The
deferred financing fees related to the private placement transaction include
legal, placement agency and other services and are being amortized over the
life of the underlying loan.
(5) 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 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 the time of payoff on July 3, 1996, including assumption of the 50%
attributable to CMS' former interest, was $16,695,000 (a $452,000 loss was
incurred on the early extinguishment of the
8
<PAGE> 9
MARKET HUB PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
debt). 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 to
the gas storage projects after the effective date of the formation 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.
Interest on the outstanding balance was accrued through December 1996 at the
prime rate stated by Wells Fargo Bank, which was a weighted average of 8.25%
and 8.83% for the years ended December 31, 1996 and 1995; a total of $2,037,700
and $2,261,300 of interest was accrued on the advances during the years ended
December 31, 1996 and 1995, and the unpaid portions of such amounts are
included as a current payable to TPC in the accompanying combined balance
sheet.
SENIOR SECURED NOTES. 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 $14,100,000. The
remaining $16,900,000 balance of the promissory note payable by MHP to TPC,
which was originally due in December 1996, was extended through March 31, 1997
at an annual interest rate of 12%; an additional $3,900,000 was also loaned by
TPC to MHP on the same terms in December 1996. Repayment of approximately
$8,800,000 of the promissory note is expected to be made from the proceeds of a
new MHP private placement debt financing that is anticipated to close on or
around March 31, 1997 (commitments from the lenders have been obtained for this
financing). Accordingly, such portion of the promissory note has been
classified as a current payable and the balance, which is expected to be
refinanced on a long-term basis, has been classified as a non-current payable
at December 31, 1996.
The MHP subsidiaries which issued the senior secured notes are required to
maintain a specified balance in a cash reserve account at a trustee bank and to
meet certain debt service coverage ratios on a combined basis. At December 31,
1996, the subsidiaries were in compliance with such coverage ratios.
Maturities of the senior secured notes for the five fiscal years following
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN THOUSANDS)
<S> <C>
1997............................................... $ 4,200
1998............................................... 4,449
1999............................................... 4,667
2000............................................... 3,437
2001............................................... 3,331
Thereafter......................................... 37,608
--------
Total minimum payments required.................... $ 57,692
========
</TABLE>
9
<PAGE> 10
MARKET HUB PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
The following table presents the carrying amount and estimated fair value
of MHP's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ......... $ 638 $ 638 $ 872 $ 872
Interest rate cap agreements ...... -- -- 111 36
Liabilities:
Long-term debt .................... 57,692 57,692 9,814 9,814
Note payable to TPC ............... 20,800 20,800 25,021 25,021
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the financial instruments summarized in the above table. The carrying value
of restricted cash, trade receivables and trade payables included in the
accompanying balance sheet approximated fair value at December 31, 1996 and
1995.
CASH AND CASH EQUIVALENTS - The carrying amounts of cash and cash
equivalents approximated fair value due to their short-term nature.
INTEREST RATE CAP AGREEMENT - The fair value of interest rate caps at
December 31, 1995 represented the amount at which they could be settled, based
on quotes from dealers. The risk of nonperformance by the counterparties to
the interest rate cap agreements was not considered significant. In
conjunction with the private placement financing transaction and repayment of
the MBGSS project finance loan (see Note 5), MHP sold the interest rate caps to
TPC at fair value in September 1996. A loss of $112,000 was recorded on this
transaction and was included in the $452,000 loss on the early extinguishment
of the MBGSS project finance loan.
DEBT AND NOTE PAYABLE TO TPC - The fair value of long-term debt is
estimated using discounted cash flow analysis, based on the borrowing rate
currently available to MHP for loans with similar terms and maturities.
(7) RELATED PARTY TRANSACTIONS
For the period from the Effective Date of the formation of MHP (March 31,
1994) to December 21, 1994, TPC incurred certain internal costs related to the
development and construction of the individual market center projects. These
costs totaled $641,000 and were charged to MHP as general and administrative
expenses in the accompanying combined statements of operations.
Subsequent to the formation of MHP, TPC has received natural gas storage
services from MHP, and in turn, provides certain administrative, financial and
other services to MHP. Storage fees paid by TPC to MHP are at contractual
rates which are comparable to those rates reflected in MHP's third party
storage contracts and amounted to $3,177,000 and $1,888,000 in the years ended
December 31, 1996 and 1995, respectively. Charges for services provided by TPC
to MHP are based substantially upon contracts approved by TPC and MHP and are
meant to approximate the market rate for such services. Contracts covering a
substantial portion of such services were canceled by mutual agreement between
TPC and MHP effective July 1, 1996 and the TPC employees who were previously
10
<PAGE> 11
MARKET HUB PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
involved in providing these services to MHP became employees of MHP at that
date. The aggregate charges for contractual services provided by TPC to MHP in
the years ended December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Services provided by TPC which were continued subsequent to July 1, 1996..... $1,641 $4,292
Services provided by TPC which were discontinued on July 1, 1996............. 774 1,158
------ ------
$2,415 $5,450
====== ======
</TABLE>
(8) COMMITMENTS
MHP leases its main office space in Leesburg, Virginia, from a third
party. In addition, since July 1, 1996, MHP has occupied office space in
Houston, Texas, leased by a TPC subsidiary from a third party; MHP has
reimbursed the TPC subsidiary for this space at the subsidiary's cost, however,
the subsidiary remains primarily liable on the lease with the third party.
MHP's total office lease expense for the years ended December 31, 1996 and 1995
were $62,000 and $38,000, respectively. Future minimum rental payments
required to be made by MHP under the Leesburg, Virginia, office lease are as
follows:
<TABLE>
<CAPTION>
AMOUNT
------------
(IN THOUSANDS)
<S> <C>
1997.................................................. $ 40
1998.................................................. 42
1999.................................................. 44
2000.................................................. 4
2001.................................................. -0-
Thereafter............................................ -0-
-----
Total minimum payments required....................... $ 130
=====
</TABLE>
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