<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________ to ____________
Commission file number: 1-11156
NGC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3248415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 LOUISIANA, SUITE 5800
HOUSTON, TEXAS 77002
(Address of principal executive offices)
(Zip Code)
(713) 507-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date: Common stock, $.01 par value per share,
151,663,100 shares outstanding as of November 12, 1997.
PAGE 1 OF 38
<PAGE>
NGC CORPORATION
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations:
For the three months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Operations:
For the nine months ended September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows:
For the nine months ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Not Applicable -
Item 3. Not Applicable -
Item 4. Not Applicable -
Item 5. Not Applicable -
Item 6. Exhibits and Reports on Form 8-K 36
PAGE 2 OF 38
<PAGE>
NGC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 97,161 $ 50,209
Accounts receivable, net 1,385,923 1,373,560
Accounts receivable, affiliates 127,227 144,825
Inventories 192,854 257,005
Assets held for sale 87,000 ---
Assets from risk management activities 149,965 98,433
Prepayments and other assets 84,894 12,689
---------- ----------
2,125,024 1,936,721
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 1,882,622 1,819,811
Less: accumulated depreciation (186,734) (128,432)
---------- ----------
1,695,888 1,691,379
---------- ----------
OTHER ASSETS:
Investments in unconsolidated affiliates 394,241 181,688
Assets from risk management activities 180,741 171,528
Other assets 385,892 205,494
---------- ----------
$4,781,786 $4,186,810
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,287,213 $1,305,726
Accounts payable, affiliates 82,857 39,070
Accrued liabilities 259,885 117,777
Liabilities from risk management activities 127,908 86,414
---------- ----------
1,757,863 1,548,987
LONG-TERM DEBT 1,003,912 988,597
OTHER LIABILITIES:
Liabilities from risk management activities 143,169 127,725
Deferred income taxes 337,438 328,280
Other long-term liabilities 157,482 76,488
---------- ----------
3,399,864 3,070,077
---------- ----------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 ---
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares authorized: 8,000,000
shares designated as Series A Participating Preferred Stock,
7,815,363 shares issued and outstanding at September 30, 1997 and
December 31, 1996 75,418 75,418
Common stock, $0.01 par value, 400,000,000 shares authorized:
151,454,436 shares issued and outstanding at September 30, 1997 and
149,846,503 shares issued and outstanding at December 31, 1996 1,514 1,498
Additional paid-in capital 916,278 896,432
Retained earnings 199,218 143,385
Less: treasury stock, at cost: 654,900 shares at September 30, 1997 (10,506) ---
---------- ----------
1,181,922 1,116,733
---------- ----------
$4,781,786 $4,186,810
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
PAGE 3 OF 38
<PAGE>
NGC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues $3,657,456 $1,495,482
Cost of sales 3,546,608 1,413,171
---------- ----------
Operating margin 110,848 82,311
Depreciation and amortization 25,981 17,496
General and administrative expenses 40,598 22,901
---------- ----------
Operating income 44,269 41,914
Equity in earnings of unconsolidated affiliates 14,233 4,298
Other income 1,593 1,021
Relocation costs --- (4,000)
Interest expense (16,415) (10,539)
Other expenses (2,197) (840)
Minority interest in income of a subsidiary (4,157) ---
---------- ----------
Income before income taxes 37,326 31,854
Income tax provision 12,298 10,402
---------- ----------
Net Income $ 25,028 $ 21,452
========== ==========
Net Income Per Share:
Net income $ 25,028 $ 21,452
Less: preferred stock dividends 98 33
---------- ----------
Net income applicable to common stockholders $ 24,930 $ 21,419
========== ==========
Net income per common and common equivalent share $0.15 $0.16
========== ==========
Weighted average number of common and common
equivalent shares outstanding 167,019 135,637
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
PAGE 4 OF 38
<PAGE>
NGC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues $9,613,875 $4,305,756
Cost of sales 9,337,913 4,081,368
---------- ----------
Operating margin 275,962 224,388
Depreciation and amortization 74,750 46,601
General and administrative expenses 106,389 63,514
---------- ----------
Operating income 94,823 114,273
Equity in earnings of unconsolidated affiliates 41,036 16,956
Other income 18,660 3,615
Relocation costs --- (4,000)
Interest expense (44,275) (30,317)
Other expenses (19,232) (4,828)
Minority interest in income of a subsidiary (5,682) ---
---------- ----------
Income before income taxes 85,330 95,699
Income tax provision 23,560 30,081
---------- ----------
Net Income $ 61,770 $ 65,618
========== ==========
Net Income Per Share:
Net income $ 61,770 $ 65,618
Less: preferred stock dividends 292 33
---------- ----------
Net income applicable to common stockholders $ 61,478 $ 65,585
========== ==========
Net income per common and common equivalent share $0.37 $0.53
========== ==========
Weighted average number of common and common
equivalent shares outstanding 166,785 123,624
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
PAGE 5 OF 38
<PAGE>
NGC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1997 1996
----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 61,770 $ 65,618
Items not affecting cash flows from operating activities:
Depreciation and amortization 76,219 48,101
Equity in earnings of affiliates, net of cash distributions (2,328) (11,104)
Risk management activities (3,808) (18,721)
Deferred income taxes 2,817 30,848
Amortization of bond premium (5,050) (3,270)
Other 1,103 5,038
Changes in assets and liabilities resulting from operating activities:
Accounts receivable 129,129 (144,151)
Inventories 52,870 (61,270)
Prepayments and other assets (42,209) 4,549
Accounts payable (84,939) 152,856
Accrued liabilities 100,309 24,580
Other, net (3,346) (580)
----------- ---------
Net cash provided by operating activities 282,537 92,494
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (146,892) (63,995)
Investment in unconsolidated affiliates, net (28,734) 4,373
Business acquisitions, net of cash acquired (715,589) ---
Proceeds from asset sales 449,345 ---
Other, net --- 14,500
----------- ---------
Net cash used in investing activities (441,870) (45,122)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 1,344,000 893,000
Repayments of long-term borrowings (1,323,635) (930,687)
Proceeds from sale of capital stock, options and warrants 4,320 858
Issuance of company obligated preferred securities of subsidiary trust, net 198,044 ---
Treasury stock acquisitions (10,506) ---
Dividends and other distributions (5,938) (4,769)
----------- ---------
Net cash provided by (used in) financing activities 206,285 (41,598)
----------- ---------
Net change in cash and cash equivalents 46,952 5,774
Cash and cash equivalents, beginning of period 50,209 16,266
----------- ---------
Cash and cash equivalents, end of period $ 97,161 $ 22,040
=========== =========
</TABLE>
See notes to condensed consolidated financial statements.
PAGE 6 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE 1 -- ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to interim financial reporting as
prescribed by the Securities and Exchange Commission ("SEC"). These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the 1996 Annual Report to
Shareholders incorporated by reference into the Company's Annual Report on Form
10-K for the year ended December 31, 1996, filed with the SEC.
The financial statements include all material adjustments consisting only of
normal recurring adjustments which, in the opinion of management, were necessary
for a fair presentation of the results for the interim periods. Interim period
results are not necessarily indicative of the results for the full year. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to develop
estimates and make assumptions that affect reported financial position and
results of operations and that impact the nature and extent of disclosure, if
any, of contingent assets and liabilities. Actual results could differ from
those estimates.
NOTE 2 -- ACQUISITIONS AND DISPOSITIONS
On June 30, 1997, NGC acquired Destec Energy, Inc. ("Destec"), an independent
power producer, in a $1.26 billion deal, or $21.65 per share of Destec common
stock. Concurrent with this acquisition, NGC sold Destec's international
facilities and operations to The AES Corporation for $439 million. NGC financed
the transaction through cash on hand and advances on its credit facilities
provided by its existing commercial banks. The acquisition related debt is
expected to be retired from a combination of cash flows from operations, sales
of non-strategic domestic Destec assets, proceeds from issuance of new corporate
debt and proceeds from the recently completed issuance of preferred securities
of a subsidiary trust. In July and August 1997, the Company consummated a sale
of Destec's interest in Tiger Bay, a power generating facility, and a sale of
certain oil, gas and lignite reserves, respectively, for aggregate proceeds of
$296 million. The Company is continuing to explore other opportunities to
monetize its investment in certain assets acquired from Destec if, and when, it
is determined that such divestitures are economically and strategically
appropriate. These non-strategic assets are classified in the accompanying
balance sheet as assets held for sale.
The Destec acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $718 million,
inclusive of transaction costs and net of cash acquired, was allocated to the
Destec assets acquired and liabilities assumed based on their estimated fair
values as of June 30, 1997, the effective date of the acquisition for accounting
purposes. The purchase price allocation as presented herein is considered
preliminary and is dependent upon subsequent asset sales, if any, and the
ultimate resolution of certain pending legal and other contingencies existing at
the time of the acquisition. The results of operations of the acquired Destec
assets are consolidated with NGC's existing operations beginning July 1, 1997.
The following table reflects certain unaudited pro forma information for the
periods presented as if the Destec acquisition had occurred on January 1, 1996
(in thousands, except per share data):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
--------- ----------
Pro forma revenues $9,733,702 $4,514,951
Pro forma net income $ 61,243 $ 71,001
Pro forma net income per share $ 0.37 $ 0.57
In June 1997, the Company and NOVA Corporation ("NOVA") completed the
restructuring of the companies' Canadian natural gas operations formerly
executed through Novagas Clearinghouse Ltd., Novagas Clearinghouse Limited
PAGE 7 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Partnership and Novagas Clearinghouse Pipelines Limited Partnership
(collectively "NCL"), a joint venture between NGC and NOVA. Pursuant to the
agreements, NGC Canada Inc. ("NGCCI"), a wholly owned indirect subsidiary of
NGC, acquired NCL's natural gas marketing business, excluding the natural gas
aggregation business of Pan-Alberta Gas Ltd. ("Pan-Alberta"), from NCL and sold
its aggregate 49.9 percent interest in NCL to NOVA Gas International, a
subsidiary of NOVA. NOVA assumed full ownership of NCL's gathering and
processing business and the operations of Pan-Alberta. The restructuring
included amendments to or termination of various agreements between NCL, NGC,
NOVA and certain affiliates of both NGC and NOVA. NGC realized a pretax gain on
the sale of its interest in NCL of $7.8 million, which is classified as other
income in the accompanying condensed consolidated statements of operations for
the nine-month period ended September 30, 1997. The acquisition by NGC of NCL's
marketing business was accounted for under the purchase method of accounting.
Accordingly, the purchase price of $4.0 million, inclusive of transaction costs,
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values as of April 1, 1997, the effective date of the acquisition
for accounting purposes. NGC and NOVA will pursue separate midstream asset
businesses in Canada with NGC operating its Canadian marketing and midstream
asset businesses through NGCCI.
On August 31, 1996, NGC completed a strategic combination (the "Chevron
Combination") with Chevron U.S.A. Inc. and certain Chevron affiliates
("Chevron") pursuant to which Chevron contributed substantially all of its
midstream assets (the "Contribution"), including substantially all of the assets
comprising Warren Petroleum Company and Chevron's Natural Gas Business Unit and
an undivided interest in those assets that constitute the West Texas LPG
Pipeline, into Midstream Combination Corp. ("Midstream"), a Delaware corporation
formed for purposes of the transaction. NGC was merged with and into Midstream
immediately following the Contribution and Midstream was renamed NGC
Corporation. In exchange for the Contribution, Chevron received approximately
38.6 million shares of NGC common stock and approximately 7.8 million shares of
NGC Series A Participating Preferred Stock and NGC assumed approximately $283
million of indebtedness. Immediately following closing of the Chevron
Combination, NGC paid approximately $128 million to Chevron and funded such
payment under its Credit Agreement. The Chevron Combination was accounted for as
an acquisition of assets under the purchase method of accounting. The purchase
price of approximately $740 million, inclusive of assumed indebtedness and
transaction costs, was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as of an effective date of September 1,
1996.
In connection with the Chevron Combination, NGC agreed with the Federal Trade
Commission to divest its ownership in a natural gas liquids fractionation
facility and to relinquish operatorship at a second fractionation facility.
Effective December 1, 1996, the Company relinquished its role as operator of the
Gulf Coast Fractionator ("GCF") facility and on January 1, 1997, the Company
sold its interest in the Mont Belvieu I fractionator.
NOTE 3 -- EARNINGS PER SHARE
Net income per share is based on the weighted average number of common stock
shares outstanding plus the common stock equivalents that would arise from
conversion of the Series A Participating Preferred Shares outstanding and the
exercise of outstanding options or warrants, when dilutive. Primary and fully
diluted earnings per share are the same for all periods presented.
On March 3, 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". The new statement is effective for interim and
annual periods ending after December 15, 1997, and early adoption is not
permitted. On a pro forma basis, using the computational guidelines provided in
the statement, basic and diluted earnings per share for the three- and nine-
month periods ended September 30, 1997 and 1996, would have been as follows:
PAGE 8 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Basic earnings per share $0.17 $0.17 $0.39 $0.58
Diluted earnings per share $0.15 $0.16 $0.37 $0.53
NOTE 4 -- INVENTORY
At March 31, 1997, the Company recognized a lower-of-cost-or-market writedown of
its NGL and crude oil inventories totaling $15.0 million on a pretax basis. In
addition, the Company recognized a pretax charge of $8.3 million resulting from
a hedge-related loss. The aggregate charge of $23.3 million is included in cost
of sales in the accompanying condensed consolidated statement of operations for
the nine-month period ended September 30, 1997.
NOTE 5 -- UNCONSOLIDATED AFFILIATES
At September 30, 1997, NGC's investments in unconsolidated affiliates accounted
for by the equity method included: a 25 percent participating preferred stock
interest in Accord Energy Limited ("Accord"), a United Kingdom limited company;
an approximate 32 percent interest in Venice Energy Services Company, L.L.C.
("VESCO"); a 38.75 percent partnership interest in GCF; an approximate 28
percent interest in Avoca Natural Gas Storage ("Avoca"); a 25 percent interest
in Midstream Barge Company, L.L.C. ("BargeCo"); a 33.33 percent interest in
Waskom Gas Processing Company; a 49 percent partnership interest in West Texas
LPG Pipeline, Limited Partnership ("West Texas Partnership") and various
partnership investments acquired in the Destec acquisition. NGC's investments
in BargeCo and the West Texas Pipeline are a result of the Chevron Combination
and NGC acquired its interest in VESCO effective November 1, 1996.
As part of the Destec acquisition, NGC acquired interests in fourteen
partnerships, each formed to build, own and operate cogeneration facilities.
The Company's interests in these partnerships range from eight to 50 percent.
Each partnership interest is accounted for under the equity method. Construction
of the cogeneration facilities owned by each of the partnerships was project
financed and the obligations of the partnerships are non-recourse to the
Company.
In September 1997, the VESCO partners announced they had agreed to expand
ownership in VESCO to include an affiliate of Shell Midstream Enterprises, a
subsidiary of Shell Oil Company ("Shell"), effective September 1, 1997, in
exchange for Shell's commitment of certain offshore reserves to VESCO. The
transaction reduced NGC's interest in VESCO from 37 percent to approximately 32
percent.
The Company has two cost-basis investments: Indeck North American Power Fund,
L.P. and Indeck North American Power Partners, L.P. Dividends from these
investments during each of the nine-month periods ended September 30, 1997 and
1996 totaled $53,000 and $112,000, respectively.
At September 30, 1997, the aggregate unamortized excess of the Company's
investment over the aggregate equity in the underlying net assets of the
affiliated entities approximated $189.6 million. This amount is being amortized
on the straight-line method over the estimated economic service lives of the
assets operated by the unconsolidated affiliates. Summarized unaudited combined
income statement information for the unconsolidated affiliates accounted for by
the equity method is presented in the table below:
PAGE 9 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1997 1996
--------------------------- -------------------------
EQUITY EQUITY
TOTAL SHARE TOTAL SHARE
-------- ------- ------- -------
<S> <C> <C> <C> <C>
($US IN THOUSANDS)
Revenues (1) (2) (3) $252,505 $99,252 $30,270 $11,968
======== ======= ======= =======
Operating margin (1) (2) (3) $ 96,354 $36,854 $16,114 $ 6,328
======== ======= ======= =======
Net income (1) (2) (3) $ 57,864 $23,927 $ 8,882 $ 3,030
======== ======= ======= =======
</TABLE>
_______________________
1. The financial data for both periods presented is exclusive of amounts
attributable to the Company's investment in Accord as some of the disclosure
data was unavailable for the current period. NGC's share of Accord earnings
for the nine-months ended September 30, 1997, totaled $18.0 million. Total
amounts for the nine-months ended September 30, 1996, attributable to
Accord's revenues, operating margin and net income approximated $441.2
million, $38.5 million and $23.8 million, respectively. NGC's interest in
Accord during 1996 was 49 percent.
2. The financial data for both periods presented is exclusive of amounts
attributable to the Company's investment in NCL as such information was not
comparable period-to-period as a result of the NCL reorganization. NGC sold
its interest in NCL effective April 1, 1997. NGC's share of NCL's loss for
the three months ended March 31, 1997, totaled $892,000. Total amounts for
the nine-months ended September 30, 1996, attributable to NCL's revenues,
operating margin and net income approximated $17.2 million, $23.9 million
and $4.5 million, respectively. NGC's interest in NCL through March 31,
1997, was 49.9 percent.
3. Equity earnings derived from investments acquired in the Destec acquisition
accrue to NGC commencing July 1, 1997.
In early 1997, British Gas completed a restructuring whereby Centrica plc
("Centrica") was demerged from British Gas and British Gas was renamed BG plc
("BG"). Centrica became the Company's joint venture partner in Accord. BG
holds the approximate 26 percent stake in NGC's common stock formerly held by
British Gas. On May 2, 1997, Centrica and the Company completed a restructuring
of Accord by converting certain common stock interests in Accord to
participating preferred stock interests as of an effective date of January 1,
1997. Centrica and the Company own 75 percent and 25 percent, respectively, of
the outstanding participating preferred stock shares of Accord. The
participating preferred stock has (a) the right to receive cumulative dividends
on a priority basis to other corporate distributions by Accord, and (b) limited
voting rights. In addition, Centrica has an option to purchase the Company's
participating preferred stock interest at any time after July 1, 2000, at a
formula based price, as defined in the agreement. As part of the reorganization,
Centrica will operate Accord while NGC obtained the right to market natural gas,
gas liquids and crude oil in the United Kingdom, which will occur through its
wholly owned subsidiary NGC UK Limited ("NGC UK"). In addition, as part of the
reorganization, NGC UK acquired Accord's existing crude oil marketing business
effective July 1, 1997. No gain or loss was recognized as a result of this
reorganization and NGC's investment in Accord continues to be accounted for
under the equity method.
On August 14, 1996, Avoca announced that construction on its gas storage
facility had been temporarily suspended pending resolution of certain technical
issues associated with the project's brine disposal capability. In April 1997,
the partners concluded that the economic returns from the project were likely
unacceptable to the Company based on the still-to-be-determined technical
feasibility. As a result, NGC established a $15 million pre-tax reserve during
the first quarter of 1997 representing the Company's estimated 28 percent share
of potential Avoca partner obligations, inclusive of the Company's net
investment in the partnership. Such reserve is reflected in other expenses in
the accompanying condensed consolidated statement of operations for the nine-
month period ended September 30, 1997. On July 29, 1997, Avoca and its
partners, JMC Avoca, Inc., ET Avoca Company and NGC Storage, Inc. ("Storage"), a
subsidiary of NGC, each filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Delaware. The filing follows the decision by the Avoca partners to discontinue
development of the natural gas storage project. Storage's only asset is its
investment in Avoca and management believes that the bankruptcy petition will
have no direct or indirect impact on any other NGC business activity. While no
assurances can be given with respect to the adequacy of the Avoca reserve,
management believes that additional obligations of the Company, if any, will not
have a material adverse effect on the Company's financial position or results of
operations.
PAGE 10 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 6 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST
During May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a private
transaction, $200 million aggregate liquidation amount of 8.316 percent
Subordinated Capital Income Securities ("Securities") representing preferred
undivided beneficial interests in the assets of the Trust. The Trust invested
the proceeds from the issuance of the Securities in an equivalent amount of
8.316 percent Subordinated Debentures ("Subordinated Debentures") of the
Company. The sole assets of the Trust are the Subordinated Debentures. The
Securities are subject to mandatory redemption in whole but not in part on June
1, 2027, upon payment of the Subordinated Debentures at maturity, or in whole
but not in part at any time, contemporaneously with the optional prepayment of
the Subordinated Debentures, as allowed by the associated indenture. The
Subordinated Debentures are redeemable, at the option of the Company, in whole
at any time or in part from time to time, at formula-based redemption prices, as
defined in the indenture. The Subordinated Debentures represent unsecured
obligations of the Company and rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
associated indenture. The Company has irrevocably and unconditionally
guaranteed, on a subordinated basis, payment for the benefit of the holders of
the Securities the obligations of the Trust to the extent the Trust has funds
legally available for distribution to the holders of the Securities, as
described in the indenture ("Guarantee"). Distributions on the Securities are
payable each June 1 and December 1, coinciding with the interest payment due
dates on the Subordinated Debentures, commencing December 1, 1997. The periodic
distributions accruing at an annual rate of 8.316 percent of the aggregate
liquidation amount are recorded as minority interest in income of a subsidiary
in the Company's consolidated statement of operations. So long as no Debenture
Event of Default, as defined, has occurred and continues, the Company has the
right to defer the payment of interest on the Subordinated Debentures for any
Extension Period elected by the Company, which period cannot extend beyond 10
consecutive semi-annual periods, end on a date other than an Interest Payment
Date or extend beyond the Stated Maturity Date. During October 1997, the Trust
completed an exchange offer through which all of the outstanding Securities were
exchanged by the holders thereof for registered securities having substantially
the same rights and obligations.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in
the Superior Court of the State of California, City and County of San Francisco,
against Destec, Destec Holdings, Inc. ("Holdings"), Destec Operating Company and
San Joaquin CoGen, Inc., wholly owned direct and indirect subsidiaries of the
Company as well as against San Joaquin CoGen Limited ("San Joaquin" or the
"Partnership"), a limited partnership in which the Company has an indirect
twenty-five percent general partner ownership interest. In the lawsuit, PG&E
asserts claims and alleges unspecified damages for fraud, negligent
misrepresentation, unfair business practices, breach of contract and breach of
the implied covenant of good faith and fair dealing. PG&E alleges that due to
the insufficient use of steam by San Joaquin's steam host, the Partnership did
not qualify as a cogenerator pursuant to the California Public Utilities Code
("CPUC") Section 218.5, and thus was not entitled under CPUC Section 454.4 to
the discount the Partnership received under gas transportation agreements
entered into between PG&E and San Joaquin in 1989, 1991, 1993 and 1995. All of
PG&E's claims in this suit arise out of the Partnership's alleged failure to
comply with CPUC Section 218.5. The defendants filed a response to the lawsuit
on May 15, 1997. The parties are actively engaged in discovery, and a trial has
been set by the Court for September 28, 1998. On October 20, 1997, PG&E named
Libbey-Owens-Ford, the Partnership's steam host, as an additional defendant in
the action. The Company's subsidiaries intend to vigorously defend this action.
In the opinion of management, the ultimate resolution of this lawsuit will not
have a material adverse effect on the Company's financial position or results of
operations.
On March 24, 1995, Southern California Gas Company, ("SoCal") filed a lawsuit in
the Superior Court of the State of California for the County of Los Angeles,
against Destec, Holdings and Destec Gas Services, Inc., wholly owned direct and
indirect subsidiaries of the Company (collectively the "Destec Defendants"), as
well as against Chalk Cliff Limited ("Chalk Cliff") and McKittrick Limited
(collectively the "Partnerships"), limited partnerships in which the Company has
an indirect twenty-five percent general partner interest and an indirect fifty
percent limited partner interest, respectively. The general partners of the
Partnerships are also named defendants. The lawsuit alleges breach of contract
against the Partnerships and their respective general partners, and interference
and conspiracy to interfere with contracts against the Destec Defendants.
PAGE 11 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
The breach of contract claims arise out of the "transport-or-pay" provisions of
the gas transportation service agreements between the Partnerships and SoCal.
SoCal has sought damages from the Partnerships for past damages and anticipatory
breach damages. On October 24, 1997, the Court granted SoCal's motion for
summary judgment relating to the breach of contract causes of action against the
Partnerships and their respective general partners, and requested that SoCal
submit a proposed order consistent with that ruling for the Court's signature.
On November 6, 1997, SoCal submitted such an order to the Court. The
Partnerships' objections to the order were filed on November 11, 1997, with oral
argument requested. No hearing date has been set. The October 24, 1997 ruling by
the Court did not include any quantification of the damages assessed against the
Partnerships, pending the outcome of the December 1, 1997 trial of SoCal's
interference claims against the Destec Defendants. SoCal's proposed order
quantifies damages associated with the claims granted in the summary judgment at
approximately $30 million. Absent a settlement with SoCal, the Partnerships'
alternatives are limited, with bankruptcy remaining as the most viable option
available. The Company's subsidiaries intend to vigorously defend the
interference causes of action at trial. In the opinion of management, the
ultimate resolution of this lawsuit will not have a material adverse effect on
the Company's financial position or results of operations.
The PG&E and SoCal litigations represent pre-acquisition contingencies acquired
by NGC in the Destec acquisition. Resolution of these lawsuits could impact the
purchase price allocation contained in the accompanying balance sheet as
described in Note 2. In a related matter, Chalk Cliff and San Joaquin have each
guaranteed the obligations of the other partnership, represented by the project
financing loan used to construct the power generation facilities owned by the
respective partnerships. Chalk Cliff and San Joaquin believe there is little
incentive for their lenders to call on this cross-guarantee at this time. In the
opinion of management, the Company's financial position and results of
operations would not be materially adversely affected if the lenders chose to
exercise their option under the terms of such arrangements.
On February 12, 1996, Apache Corporation ("Apache") requested arbitration to
resolve issues arising under a gas marketing contract ("Contract") with Natural
Gas Clearinghouse ("Clearinghouse"), a wholly owned subsidiary of the Company,
pursuant to the arbitration provisions of such Contract. On February 26, 1996,
Clearinghouse responded by denying Apache's claims and by alleging several
counterclaims of its own with respect to Apache's performance under the
Contract. In connection with the arbitration proceedings, on April 9, 1996,
Apache filed a lawsuit against Clearinghouse in the 55th Judicial District Court
of Harris County, Texas ("Court"). In that lawsuit, Apache alleged that
Clearinghouse was intentionally delaying the progress of the arbitration, and it
requested relief, pursuant to the Texas General Arbitration Act, in the form of
an order appointing a third arbitrator, compelling discovery and requiring
Clearinghouse to assign certain contracts allegedly belonging to Apache.
Clearinghouse filed a response to the lawsuit on May 6, 1996, asking that the
Court dismiss Apache's application for relief or abate the suit pending
resolution of all matters by the arbitration panel according to the terms of the
Contract. Clearinghouse also requested payment of all attorneys' fees and other
litigation expenses incurred in responding to and defending the lawsuit. The
hearing date has been postponed several times to allow the parties time to
complete discovery, most recently on August 29, 1997, when the hearing was
delayed until March 9, 1998. That hearing may be delayed further due to several
pending procedural disputes. In the arbitration and again in the lawsuit,
Apache claims that it is entitled to actual damages in an undetermined amount in
excess of $8 million and punitive damages. Clearinghouse intends to vigorously
defend the Apache suit and arbitration. Based on review of the facts and
through consultation with outside counsel, NGC management believes the ultimate
resolution of the Apache suit will not have a material adverse effect on the
Company's financial position or results of operations.
The Company assumed liability for various claims and litigation in connection
with the Chevron Combination, the Trident Combination, the Destec acquisition
and in connection with the acquisition of certain gas processing and gathering
facilities from Mesa Operating Limited Partnership. NGC believes, based on its
review of these matters and consultation with outside legal counsel, that the
ultimate resolution of such items will not have a material adverse effect on the
Company's financial position or results of operations. Further, the Company is
subject to various legal proceedings and claims which arise in the normal course
of business. In the opinion of management, the amount of ultimate liability
with respect to these actions will not have a material adverse effect the
financial position or results of operations of the Company.
PAGE 12 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 8 -- CAPITAL STOCK
Approximately 2.5 million employee stock options exercisable at a price of $2.03
remain unexercised at September 30, 1997. Employee stock option grants made
during 1993 and 1994 will become exercisable during 1998 and 1999, respectively,
resulting in the potential exercise of an aggregate 6.5 million options during
that two-year period at exercise prices ranging from $2.03 to $5.66. Other
options currently granted under the Company's option plans will fully vest
periodically and become exercisable through the year 2002 at prices ranging from
$2.03 to $21.63. Grants made under the Company's option plans may be canceled
under certain circumstances as provided in the plans. While the Company cannot
predict the timing or the number of shares which may be issued upon the exercise
of option grants by individual employees, the Company is pursuing a variety of
alternatives to help assure an orderly distribution of shares which may become
available to the market.
In May 1997, the Board of Directors approved a stock repurchase program that
allows the Company to repurchase, from time to time, up to 1.6 million shares of
common stock in open market transactions. The timing and number of shares
ultimately repurchased will depend upon market conditions and consideration of
alternative investments. Pursuant to this program, the Company has acquired
654,900 shares at a total cost of $10.5 million, or $16.04 per share on a
weighted average cost basis, through September 30, 1997.
NOTE 9 -- SUPPLEMENTAL GUARANTOR INFORMATION
The 7.625 percent Senior Notes, due 2026 ("Senior Debentures"), and the 6.75
percent Senior Notes, due 2005 ("Senior Notes"), represent general unsecured
obligations of the Company and are fully and unconditionally guaranteed on a
joint and several basis by certain of the Company's wholly owned subsidiaries
(collectively the "Guarantors"), as defined in the associated indentures. The
wholly owned subsidiaries that have fully and unconditionally guaranteed, on a
joint and several basis, the Senior Debentures, are the same wholly owned
subsidiaries that have fully and unconditionally guaranteed, on a joint and
several basis, the Senior Notes. Such Guarantors are also guarantors under the
Credit Agreement and certain of the Guarantors guarantees pursuant to the Senior
Debentures, Senior Notes and Credit Agreement are subject to release under
certain circumstances. The Company also has direct and indirect subsidiaries
that are not guarantors of the Senior Debentures or the Senior Notes
(collectively "Non-guarantor Subsidiaries"). Set forth below are condensed
consolidating financial statements of NGC Corporation, the Guarantors and the
Non-guarantor Subsidiaries representing supplemental guarantor information.
PAGE 13 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 2,112 $ 65,035 $ 30,014 $ --- $ 97,161
Accounts receivable 174,809 4,190,227 937,851 (3,789,737) 1,513,150
Inventories --- 122,211 70,643 --- 192,854
Assets held for sale --- --- 87,000 --- 87,000
Risk management activities --- 114,343 35,622 --- 149,965
Prepayments and other assets 11,733 21,920 51,241 --- 84,894
---------- ---------- ---------- ----------- ----------
188,654 4,513,736 1,212,371 (3,789,737) 2,125,024
---------- ---------- ---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 12,130 1,565,543 118,215 --- 1,695,888
---------- ---------- ---------- ----------- ----------
OTHER ASSETS:
Investments in unconsolidated affiliates 1,729,061 271,541 216,684 (1,823,045) 394,241
Risk management activities --- 170,217 10,524 --- 180,741
Other assets 183,127 210,886 192,024 (200,145) 385,892
---------- ---------- ---------- ----------- ----------
$2,112,972 $6,731,923 $1,749,818 $(5,812,927) $4,781,786
========== ========== ========== =========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,325 $4,178,702 $ 967,780 $(3,789,737) $1,370,070
Accrued liabilities 32,499 163,962 63,424 --- 259,885
Risk management activities --- 93,358 34,550 --- 127,908
---------- ---------- ---------- ----------- ----------
45,824 4,436,022 1,065,754 (3,789,737) 1,757,863
Long-Term Debt 664,365 504,937 237,905 (403,295) 1,003,912
OTHER LIABILITIES:
Risk management activities --- 133,485 9,684 --- 143,169
Deferred income taxes 20,364 304,055 13,019 --- 337,438
Other long-term liabilities 497 39,987 116,998 --- 157,482
---------- ---------- ---------- ----------- ----------
731,050 5,418,486 1,443,360 (4,193,032) 3,399,864
---------- ---------- ---------- ----------- ----------
PREFERRED STOCK OF SUBSIDIARY TRUST 200,000 --- --- --- 200,000
EQUITY 1,181,922 1,313,437 306,458 (1,619,895) 1,181,922
---------- ---------- ---------- ----------- ----------
$2,112,972 $6,731,923 $1,749,818 $(5,812,927) $4,781,786
========== ========== ========== =========== ==========
</TABLE>
PAGE 14 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ --- $ 48,685 $ 1,524 $ --- $ 50,209
Accounts receivable 337,984 3,205,987 316,191 (2,341,777) 1,518,385
Inventories --- 241,270 15,735 --- 257,005
Assets held for sale --- --- --- --- ---
Risk management activities --- 98,433 --- --- 98,433
Prepayments and other assets 2,793 6,511 3,385 --- 12,689
---------- ---------- -------- ----------- ----------
340,777 3,600,886 336,835 (2,341,777) 1,936,721
---------- ---------- -------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 6,023 1,624,207 61,149 --- 1,691,379
---------- ---------- -------- ----------- ----------
OTHER ASSETS:
Investments in unconsolidated affiliates 1,219,027 271,077 4,572 (1,312,988) 181,688
Risk management activities --- 171,528 --- --- 171,528
Other assets 250,262 180,434 51,943 (277,145) 205,494
---------- ---------- -------- ----------- ----------
$1,816,089 $5,848,132 $454,499 $(3,931,910) $4,186,810
========== ========== ======== =========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,295 $3,398,025 $272,253 $(2,341,777) $1,344,796
Accrued liabilities 18,914 100,382 (1,519) --- 117,777
Risk management activities --- 86,414 --- --- 86,414
---------- ---------- -------- ----------- ----------
35,209 3,584,821 270,734 (2,341,777) 1,548,987
LONG-TERM DEBT 644,000 586,962 34,780 (277,145) 988,597
OTHER LIABILITIES:
Risk management activities --- 127,725 --- --- 127,725
Deferred income taxes 20,147 305,856 2,277 --- 328,280
Other long-term liabilities --- 52,792 23,696 --- 76,488
---------- ---------- -------- ----------- ----------
699,356 4,658,156 331,487 (2,618,922) 3,070,077
---------- ---------- -------- ----------- ----------
PREFERRED STOCK OF SUBSIDIARY TRUST --- --- --- --- ---
EQUITY 1,116,733 1,189,976 123,012 (1,312,988) 1,116,733
---------- ---------- -------- ----------- ----------
$1,816,089 $5,848,132 $454,499 $(3,931,910) $4,186,810
========== ========== ======== =========== ==========
</TABLE>
PAGE 15 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For Each of the Three-Month Periods Ended September 30, 1997 and 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
THREE-MONTHS ENDED SEPTEMBER 30, 1997:
<S> <C> <C> <C> <C> <C>
Revenues $ --- $2,210,455 $1,791,900 $(344,899) $3,657,456
Cost of sales --- 2,122,565 1,768,942 (344,899) 3,546,608
------- ---------- ---------- --------- ----------
OPERATING MARGIN --- 87,890 22,958 --- 110,848
Depreciation and amortization 212 21,581 4,188 --- 25,981
General and administrative expenses --- 27,655 12,943 --- 40,598
------- ---------- ---------- --------- ----------
OPERATING INCOME (212) 38,654 5,827 --- 44,269
Equity earnings 49,590 6,728 10,626 (52,711) 14,233
Interest expense (7,933) (7,731) (751) (16,415)
Other income and (deductions), net (4,119) (995) 353 (4,761)
------- ---------- ---------- ---------- ----------
Income before income taxes 37,326 36,656 16,055 (52,711) 37,326
Income tax provision 12,298 13,563 5,940 (19,503) 12,298
------- ---------- ---------- --------- ----------
NET INCOME (LOSS) $25,028 $ 23,093 $ 10,115 $ (33,208) $ 25,028
======= ========== ========== ========= ==========
THREE-MONTHS ENDED SEPTEMBER 30, 1996:
Revenues $ --- $1,447,148 $ 251,616 $(203,282) $1,495,482
Cost of sales --- 1,373,128 243,325 (203,282) 1,413,171
------- ---------- ---------- --------- ----------
OPERATING MARGIN --- 74,020 8,291 --- 82,311
Depreciation and amortization 122 16,488 886 --- 17,496
General and administrative expenses --- 20,503 2,398 --- 22,901
------- ---------- ---------- --------- ----------
OPERATING INCOME (122) 37,029 5,007 --- 41,914
Equity earnings 34,920 1,489 3,173 (35,284) 4,298
Interest expense (1,620) (7,876) (1,043) --- (10,539)
Other income and (deductions), net (1,324) (2,577) 82 --- (3,819)
------- ---------- ---------- --------- ----------
Income before income taxes 31,854 28,065 7,219 (35,284) 31,854
Income tax provision 10,402 10,384 2,671 (13,055) 10,402
------- ---------- ---------- --------- ----------
NET INCOME (LOSS) $21,452 $ 17,681 $ 4,548 $ (22,229) $ 21,452
======= ========== ========== ========= ==========
</TABLE>
PAGE 16 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR EACH OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
NINE-MONTHS ENDED SEPTEMBER 30, 1997:
<S> <C> <C> <C> <C> <C>
Revenues $ --- $7,144,825 $3,389,158 $(920,108) $9,613,875
Cost of sales --- 6,905,901 3,352,120 (920,108) 9,337,913
--------- ---------- ---------- --------- ----------
OPERATING MARGIN --- 238,924 37,038 --- 275,962
Depreciation and amortization 843 67,560 6,347 --- 74,750
General and administrative expenses --- 84,358 22,031 --- 106,389
--------- ---------- ---------- --------- ----------
OPERATING INCOME (843) 87,006 8,660 --- 94,823
Equity earnings 108,172 31,931 24,053 (123,120) 41,036
Interest expense (16,232) (25,299) (2,744) --- (44,275)
Other income and (deductions), net (5,767) 5,751 (6,238) --- (6,254)
--------- ---------- ---------- --------- ----------
Income before income taxes 85,330 99,389 23,731 (123,120) 85,330
Income tax provision 23,560 36,774 8,780 (45,554) 23,560
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS) $ 61,770 $ 62,615 $ 14,951 $ (77,566) $ 61,770
========= ========== ========== ========= ==========
NINE-MONTHS ENDED SPETEMBER 30, 1996:
Revenues $ --- $4,168,145 $ 634,433 $(496,822) $4,305,756
Cost of sales --- 3,963,729 614,461 (496,822) 4,081,368
--------- ---------- ---------- --------- ----------
OPERATING MARGIN --- 204,416 19,972 --- 224,388
Depreciation and amortization 328 43,617 2,656 --- 46,601
General and administrative expenses --- 56,343 7,171 --- 63,514
--------- ---------- ---------- --------- ----------
OPERATING INCOME (328) 104,456 10,145 --- 114,273
Equity earnings $ 102,896 3,362 14,392 (103,694) 16,956
Interest expense (5,288) (21,846) (3,183) --- (30,317)
Other income and (deductions), net (1,581) (3,891) 259 --- (5,213)
--------- ---------- ---------- --------- ----------
Income before income taxes 95,699 82,081 21,613 (103,694) 95,699
Income tax provision 30,081 30,370 7,997 (38,367) 30,081
--------- ---------- ---------- --------- ----------
NET INCOME (LOSS) $ 65,618 $ 51,711 $ 13,616 $ (65,327) $ 65,618
========= ========== ========== ========= ==========
</TABLE>
PAGE 17 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR EACH OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 61,770 $ 62,615 $ 14,951 $(77,566) $ 61,770
Items not affecting cash flow from
operating activities:
Depreciation and amortization 2,312 67,560 6,347 --- 76,219
Equity earnings, net of distributions (108,172) (4,099) 1,771 108,172 (2,328)
Risk-management activities --- (1,896) (1,912) --- (3,808)
Deferred taxes 2,976 (159) --- --- 2,817
Other 8,836 (8,547) (4,236) --- (3,947)
Changes in working capital, net 623,374 (104,067) (333,471) (30,676) 155,160
Other, net (6,157) 1,054 1,687 70 (3,346)
----------- --------- --------- -------- -----------
Operating activities cash flow 584,939 12,461 (314,863) --- 282,537
----------- --------- --------- -------- -----------
Capital expenditures (73,523) (54,290) (19,079) --- (146,892)
Business acquisitions, net of cash
acquired (715,589) --- (715,589)
Investment in affiliates --- (40,239) 11,505 --- (28,734)
Proceeds from asset sales --- 113,000 336,345 --- 449,345
Other, net --- --- --- --- ---
----------- --------- --------- -------- -----------
Investing activities cash flow (789,112) 18,471 328,771 --- (441,870)
----------- --------- --------- -------- -----------
Proceeds from long-term borrowings 1,344,000 --- --- --- 1,344,000
Repayments of long-term borrowings (1,323,635) --- --- --- (1,323,635)
Proceeds from sales of securities 202,364 --- --- --- 202,364
Treasury stock acquisitions (10,506) --- --- --- (10,506)
Dividends and other distributions, net (5,938) --- --- --- (5,938)
----------- --------- --------- -------- -----------
Financing activities cash flow 206,285 --- --- --- 206,285
----------- --------- --------- -------- -----------
Net change in cash and equivalents 2,112 30,932 13,908 --- 46,952
Cash and equivalents, beginning of
period --- 34,103 16,106 --- 50,209
----------- --------- --------- -------- -----------
Cash and equivalents, end of period $ 2,112 $ 65,035 $ 30,014 $ --- $ 97,161
=========== ========= ========= ======== ===========
</TABLE>
PAGE 18 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR EACH OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 65,618 $ 51,711 $ 13,616 $(65,327) $ 65,618
Items not affecting cash flow from
operating activities:
Depreciation and amortization 1,828 44,265 2,008 --- 48,101
Equity earnings, net of distributions (102,896) (3,362) (7,742) 102,896 (11,104)
Risk-management activities --- (18,721) --- --- (18,721)
Deferred taxes 28,089 (1,077) 3,836 --- 30,848
Other 5,038 (770) (2,500) --- 1,768
Changes in working capital, net (80,762) 80,786 13,854 (37,314) (23,436)
Other, net (2,802) 7,808 (5,331) (255) (580)
--------- --------- -------- -------- ---------
Operating activities cash flow (85,887) 160,640 17,741 --- 92,494
--------- --------- -------- -------- ---------
Capital expenditures (764) (47,489) (15,742) --- (63,995)
Business acquisitions, net of cash
acquired --- --- --- --- ---
Investment in affiliates --- --- 4,373 --- 4,373
Proceeds from asset sales --- --- --- --- ---
Other, net --- 14,500 --- 14,500
--------- --------- -------- ---------
Investing activities cash flow (764) (32,989) (11,369) --- (45,122)
--------- --------- -------- -------- ---------
Proceeds from long-term borrowings 893,000 --- --- --- 893,000
Repayments of long-term borrowings (802,000) (128,687) --- --- (930,687)
Proceeds from sales of securities 858 --- --- --- 858
Dividends and other distributions, net (5,213) 444 --- --- (4,769)
--------- --------- -------- -------- ---------
Financing activities cash flow 86,645 (128,243) --- --- (41,598)
--------- --------- -------- --------
Net change in case and equivalents (6) (592) 6,372 --- 5,774
Cash and equivalents, beginning of
period 6 14,876 1,384 --- 16,266
--------- --------- -------- -------- ---------
Cash and equivalents, end of period $ $ 14,284 $ 7,756 $ 22,040
========= ========= ======== ======== =========
</TABLE>
NOTE 10 -- SUBSEQUENT EVENT
In October 1997, NGC received $103.5 million from a gas purchaser as an advance
payment for future natural gas deliveries of 16,650 MMBtu per day over a ten-
year period commencing November 1, 1997 ("Advance Agreement"). As a condition
of the Advance Agreement, NGC entered into a natural gas swap with a third party
under which NGC became a fixed price payor on identical volumes to those to be
delivered under the Advance Agreement at prices based on then current market
rates. The payment will be classified as an advance on the balance sheet and
will be reduced ratably as gas is delivered to the purchaser under the terms of
the Advance Agreement. In addition, the purchaser will pay a monthly fee to NGC
associated with delivered volumes. The Advance Agreement contains certain non-
performance penalties that impact both parties and as a condition precedent, NGC
purchased a surety bond in support of its obligations under the Advance
Agreement.
In November 1997, NGC announced that El Paso Natural Gas Company, a business
unit of El Paso Energy Corporation, had accepted its offer to contract 1.3
billion cubic feet per day of firm capacity from west Texas to California on the
El
PAGE 19 OF 38
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Paso Natural Gas Pipeline system. The arrangements will take effect on January
1, 1998, and call for a minimum of $70 million of reservation charges to be paid
by NGC over a two-year term.
NOTE 11 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("Statement No. 130") and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement No. 131").
Statement No. 130 established standards for reporting and display of
comprehensive income and its components in a full-set of general purpose
financial statements. Statement 130 requires that all items that are recognized
under accounting standards as components of comprehensive income, as defined, be
reported in a financial statement with the same prominence as other financial
statements and that disclosure be made of an amount representing total
comprehensive income for the period. The objective of Statement No. 130 is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. The new statement is effective for annual periods ending after
December 15, 1997, and comparative information for earlier years is to be
restated.
Statement No. 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. Statement No. 131 supersedes or amends
existing authoritative literature governing segment reporting, reporting of
significant customers, reporting of geographic operations and reporting of
previously unconsolidated subsidiaries. The new statement is effective for
annual periods ending after December 15, 1997, and comparative information for
earlier years is to be restated. The Statement need not be applied to interim
financial statements in the initial year of its application. Early adoption of
the Statement is encouraged.
The Company is assessing the impact Statements No. 130 and No. 131 will have on
its financial disclosures, if any, and intends to adopt the provisions of such
statements within the timeframe and in accordance with the requirements provided
by each statement.
PAGE 20 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of NGC Corporation
included elsewhere herein and with the Company's Annual Report to Shareholders
and Form 10-K for the year ended December 31, 1996.
GENERAL
Company Profile
NGC is a leading North American marketer of natural gas, natural gas liquids,
crude oil and power and is engaged in electric power generation and natural gas
gathering, processing and transportation through direct and indirect ownership
of cogeneration and other electric power producing facilities and ownership and
operation of natural gas processing plants, fractionators, storage facilities
and pipelines. Acting in the role of a large-scale aggregator, processor,
marketer and reliable supplier of multiple energy products and services, NGC has
evolved into a reliable energy commodity and service provider.
From inception of operations in 1984 until 1990, Natural Gas Clearinghouse
("Clearinghouse") limited its activities primarily to natural gas marketing.
Starting in 1990, Clearinghouse began expanding its core business operations
through acquisitions and strategic alliances with certain of its shareholders
resulting in the formation of a midstream energy asset business and establishing
energy marketing operations in both Canada and the United Kingdom. Effective
March 1, 1995, Clearinghouse and Trident NGL Holding, Inc., a fully integrated
natural gas liquids company, merged and the combined entity was renamed NGC
Corporation. On August 31, 1996, NGC completed a strategic combination with
Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron")
whereby substantially all of Chevron's midstream assets were merged with NGC
("Chevron Combination"). In June 1997, NGC acquired all of the outstanding
shares of Destec Energy, Inc. ("Destec"), a leading independent power producer.
By virtue of the growth of NGC's core businesses combined with the synergies
derived from the aforementioned transactions, NGC has established itself as an
industry leader providing quality, competitively priced energy products and
services to customers throughout North America and in the United Kingdom.
NGC is a holding company that conducts principally all of its business through
its subsidiaries. Currently, the Company has three primary business segments:
the natural gas and power marketing segment ("Marketing"), the power generation
segment ("Power Generation") and the natural gas liquids, crude oil and gas
transmission segment ("Liquids").
Recent Developments
On June 30, 1997, NGC acquired Destec Energy, Inc. ("Destec"), an independent
power producer, in a $1.26 billion deal, or $21.65 per share of Destec common
stock. Concurrent with this acquisition, NGC sold Destec's international
facilities and operations to The AES Corporation for $439 million. NGC financed
the transaction through cash on hand and advances on its credit facilities
provided by its existing commercial banks. The acquisition related debt is
expected to be retired from a combination of cash flows from operations, sales
of non-strategic domestic Destec assets, proceeds from issuance of new corporate
debt and proceeds from the recently completed issuance of preferred securities
of a subsidiary trust. In July and August 1997, the Company consummated a sale
of Destec's interest in Tiger Bay, a power generating facility, and a sale of
certain oil, gas and lignite reserves, respectively, for aggregate proceeds of
$296 million. The Company is continuing to explore other opportunities to
monetize its investment in certain assets acquired from Destec if, and when, it
is determined that such divestitures are economically and strategically
appropriate. These non-strategic assets are classified in the accompanying
balance sheet as assets held for sale.
Destec is in the business of developing, operating and managing projects which
produce electricity, thermal energy and syngas. Its business strategy is based
on being the low-cost producer of electric power and Destec will actively pursue
expansion of its position as a developer, manager and operator of power
generation facilities. Following the aforementioned asset dispositions, Destec
will have interests in fourteen partnerships, each formed to build, own and
operate
PAGE 21 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIOD ENDED SEPTEMBER 30, 1997 AND 1996
electric power generating facilities, and will own and operate one cogeneration
plant, one heat recovery plant and one coal gasification facility. The majority
of the power generating facilities owned directly or indirectly by Destec are
cogeneration plants. The combined gross capacity of these facilities is
approximately 2,114 megawatts of electricity and over 2.3 million pounds per
hour of steam. Natural synergies related to the acquisition include the
integration of Destec's electricity and thermal energy marketing activities with
NGC's existing power marketing business, conducted through Electric
Clearinghouse, Inc. ("ECI"), and the introduction of Destec's customers to the
variety of dependable energy products and services provided by other NGC
businesses. NGC expects the expertise of Destec's personnel, displayed through
proven knowledge of power technology and engineering and experience in
development, construction, management and operation of power facilities, to
provide a platform for expansion of its power generating business worldwide.
In September 1997, NGC, Chevron and Koch Industries, Inc. ("Koch") announced
they had agreed to expand their jointly owned Venice Energy Services Company,
L.L.C. ("VESCO") to include an affiliate of Shell Midstream Enterprises, a
subsidiary of Shell Oil Company ("Shell") effective September 1, 1997. In
exchange for its interest in VESCO, Shell dedicated natural gas production from
its Mars, Mensa and Ursa fields and natural gas production from certain future
developments in the offshore Mississippi Canyon area for processing at the
Venice complex owned by VESCO along with other consideration. The agreement
also establishes VESCO as the entity that will develop future natural gas
processing opportunities in southeastern Plaquemines Parish, La., on behalf of
NGC, Chevron, Shell and Koch.
Also in September 1997, Warren Petroleum Company, Limited Partnership
("Warren"), a subsidiary of NGC, announced plans to construct a natural gas
liquids fractionation facility near Lake Charles, Louisiana. The facility,
having fractionation capacity of 55,000 barrels per day of natural gas liquids,
is expected to be operational in the third quarter of 1998 at a cost of
approximately $57 million. The facility will fractionate natural gas received
primarily from offshore Gulf of Mexico production areas and will be
interconnected with existing infrastructure in southwest Louisiana and southeast
Texas, linking offshore gas production to the processing, transportation and
distribution capabilities of Warren.
In October 1997, NGC Canada Inc. ("NGCCI"), a subsidiary of NGC, entered into a
midstream asset business arrangement with Chevron Canada Resources ("CCR")
involving CCR's gathering, processing and fractionation assets located in the
Western Canadian Sedimentary Basin ("WCSB"). Pursuant to the arrangement, NGCCI
will invest capital to attract business opportunities associated with CCR's
existing midstream assets, which consist of sixteen processing and fractionation
facilities in the WCSB having a combined net capacity of 900 Mmcf/d of
processing capacity and 15,000 barrels per day of fractionation capacity.
Also in October 1997, NGC received $103.5 million from a purchaser as an advance
payment for future natural gas deliveries of 16,650 MMBtu per day over a ten-
year period commencing November 1, 1997 ("Advance Agreement"). As a condition
of the Advance Agreement, NGC entered into a natural gas swap with a third party
under which NGC became a fixed price payor on identical volumes to those to be
delivered under the Advance Agreement at prices based on then current market
rates. The payment will be classified as an advance on the balance sheet and
will be reduced ratably as gas is delivered to the purchaser under the terms of
the Advance Agreement. In addition, the purchaser will pay a monthly fee to NGC
associated with delivered volumes. The Advance Agreement contains certain non-
performance penalties that impact both parties and as a condition precedent, NGC
purchased a surety bond in support of it's obligations under the Advance
Agreement.
On October 30, 1997, it was announced that Destec, a subsidiary of NGC, and
Australian-based utility joint venture partner Stanwell Corporation Limited were
selected by Chevron Asiatic Limited to develop a 766 megawatt independent power
station near Townsville in Queensland, Australia. The project will consist of
two 383 megawatt combined cycle gas-fired units, the first of which is scheduled
to be operational by July 2001, with the second unit expected to be completed
prior to July 2003. Chevron Asiatic Limited and its joint venture partners will
be supplying natural gas for the Townsville power project from a proposed
pipeline linking its Papua New Guinea production to markets in northeastern
Australia. The Townsville power station will be the first natural gas-fueled
base-load facility built in the state of Queensland. Destec and Stanwell will
each own fifty percent of the project.
PAGE 22 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTEREIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
On November 6, 1997, NGC announced that El Paso Natural Gas Company, a business
unit of El Paso Energy Corporation, had accepted its offer to contract 1.3
billion cubic feet per day of firm capacity to California on the El Paso Natural
Gas Pipeline system. The arrangements will take effect on January 1, 1998, and
call for a minimum of $70 million of reservation charges to be paid by NGC over
a two-year term.
Uncertainty of Forward-Looking Statements and Information
This quarterly report contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. When used in this
document, words such as "anticipate", "estimate", "project", "believes" and
"expect" are intended to identify forward-looking statements. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. Such statements are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key factors that may have a direct bearing on NGC's results of operations and
financial condition are: (i) competitive practices in the industries which NGC
competes, (ii) fluctuations in energy commodity prices which have not been
hedged or which are inconsistent with NGC's open position, if any, in its energy
marketing activities, (iii) environmental liabilities to which NGC may become
subject in the future which are not covered by indemnity or insurance, and (iv)
the impact of current and future laws and governmental regulations (particularly
environmental regulations) affecting the energy industry in general and NGC's
operations in particular.
Impact of Price Fluctuations
Marketing's operating margin, exclusive of risk management activities, is
relatively insensitive to commodity price fluctuations since most of this
segment's purchase and sales contracts do not contain fixed-price provisions.
Generally, the prices contained in these contracts are tied to a current or
index price and, therefore, adjust directionally with changes in overall market
conditions. Commodity price fluctuations can, however, have a significant impact
on the operating margin derived from the segment's risk management activities.
NGC generally attempts to balance its fixed-price physical and financial
purchase and sales contracts in terms of contract volumes, and the timing of
performance and delivery obligations. However, to the extent a net open
position exists, NGC is exposed to the risk that fluctuating market prices may
adversely impact its financial position or results of operations. The net open
position is actively managed, and the impact of a change in price on the
Company's financial condition at a point in time is not necessarily indicative
of the impact of price movements throughout the year.
Operating margins associated with Liquids' natural gas gathering, processing and
fractionation activities are sensitive to changes in NGL prices principally as a
result of contractual terms under which products are sold by these businesses.
However, the operating margin in these businesses is relatively insensitive to
fluctuations in natural gas prices as a result of the mitigating impact of fuel
costs and residue gas sales. Commodity price fluctuations can have a
significant impact on the operating margins derived from Liquids' NGL and crude
oil marketing businesses. In order to manage its exposure to price risks in
these businesses, the Company, from time to time, will enter into financial
instrument contracts to hedge purchase and sale commitments and/or inventories.
PAGE 23 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Fuel costs, principally natural gas, represent the primary variable cost
impacting margins of the Company's power generating facilities. Historically,
operating margins at Destec's facilities have been relatively insensitive to
commodity price fluctuations since most of this business's purchase and sales
contracts contain variable power sales contract features tied to a current or
index natural gas price and, therefore, revenues adjust directionally with
changes in natural gas prices.
Seasonality
NGC's revenue and operating margin are subject to fluctuations during the year
primarily due to the impact certain seasonal factors have on sales volumes and
the prices of natural gas, NGLs and crude oil. Marketing's sales volumes and
operating margin are typically higher in the winter months than in the summer
months, reflecting increased demand due to greater heating requirements and,
typically, higher natural gas prices. Liquids is also subject to seasonal
factors; however, such factors typically have a greater impact on sales prices
than on sales volumes. NGL prices typically increase during the winter season
due to greater heating requirements. The Company's wholesale propane business
typically experiences higher volumes and prices in the fall and winter months
due to greater demand for crop-drying and space-heating requirements. The
Company's electricity generating facilities generally experience peak demand
during the summer cooling season.
PAGE 24 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS
Provided below is a tabular presentation of certain domestic and international
financial and operating statistics for the Company's segments and subsegments
for the three- and nine-month periods ended September 30, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
THREE-MONTHS (1) NINE-MONTHS (1)
--------------------------- --------------------------
1997 1996 1997 1996
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
($US IN THOUSANDS)
OPERATING MARGIN:
NATURAL GAS AND POWER MARKETING SEGMENT:
Natural Gas Marketing $ 20,980 $17,992 $ 79,334 $ 72,859
Electric Power Marketing 4,025 1,378 8,701 933
-------- ------- -------- --------
25,005 19,370 88,035 73,792
-------- ------- -------- --------
POWER GENERATION 10,367 --- 10,367 ---
-------- ------- -------- --------
NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION SEGMENT:
Natural Gas Processing - Field Plants 35,544 26,114 119,202 61,363
Natural Gas Processing - Straddle Plants 9,793 10,923 22,534 27,078
Fractionation (2) 7,112 6,392 18,638 12,251
Natural Gas Liquids Marketing 17,483 12,509 1,153 25,448
Crude Oil Marketing (430) 3,239 (959) 10,537
Natural Gas Gathering and Transmission 3,623 3,105 12,517 12,713
Other 335 273 (95) 820
-------- ------- -------- --------
73,460 62,555 172,990 150,210
-------- ------- -------- --------
Global:
LPG Sales 1,440 386 3,328 386
Other 576 --- 1,242 ---
-------- ------- -------- --------
2,016 386 4,570 386
-------- ------- -------- --------
$110,848 $82,311 $275,962 $224,388
======== ======= ======== ========
OPERATING STATISTICS:
Natural Gas Marketing (Bcf/d):
U.S. Sales Volume (3) 5.8 4.1 6.1 3.7
Canadian Sales Volumes (4) 2.0 --- 1.8 ---
United Kingdom Sales Volume (5) 0.2 --- 0.1 ---
Electric Power Marketing - Million Megawatt Hours Sold 39.3 4.0 73.3 8.5
Power Generation (Million Megawatt Hours Generated):
Gross 3.7 --- 3.7 ---
Net 2.2 --- 2.2 ---
Natural Gas Liquids Processed:
Field Plants (MBbls/d - Gross) 91.4 58.9 85.2 48.8
Straddle Plants (MBbls/d - Gross) 46.3 36.1 47.2 29.9
Fractionation - Barrels Received for Fractionation (MBbls/d) (2) 175.8 182.2 165.9 134.6
NGL Marketing - Sales Volumes (MBbls/d) 412.6 240.3 406.5 182.3
Natural Gas Gathering and Transmission (MMcf/d) 431.7 322.7 394.8 338.4
Crude Oil Marketing - Sales Volumes (MBbls/d) 173.5 94.9 167.4 100.2
Global LPG Sales Volumes (MMBbls) (6) 9.5 0.5 22.0 0.5
</TABLE>
_____________________________________
(1) The Chevron Combination was accounted for as an acquisition of assets under
the purchase method of accounting and the results of operations attributed
to the acquired assets are included in the Company's financial statements
and operating statistics effective September 1, 1996. The Destec
acquisition was accounted for as an acquisition of a business in accordance
with the purchase method of accounting and the results of operations
attributed to the acquired business are included in the Company's financial
statements and operating statistics effective July 1, 1997.
(2) Information excludes the Company's proportionate share of GCF's margin and
fractionation volumes.
(3) Includes 0.1 Bcf/d in inter-company gas sales for the three- and nine-month
periods ended September 30, 1996, respectively.
(4) Represents volumes sold by NGC Canada, Inc. for the three- and nine-month
periods ended September 30, 1997. Volumes sold by NCL prior to the
reorganization are not comparable.
PAGE 25 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(5) Represents volumes sold by NGC UK Ltd. for the three- and nine-month
periods ended September 30, 1997. Volumes sold by Accord prior to the
reorganization are not comparable.
(6) Includes 1.4 MMBbls and 3.6 MMBbls in inter-company sales for the three-
and nine-month periods ended September 30, 1997. All volumes sold in 1996
are inter-company sales volumes.
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
For the quarter ended September 30, 1997, NGC realized net income of $25.0
million, or $0.15 per share, on revenues of $3.7 billion. This compares with
net income of $21.5 million, or $0.16 per share, on total revenue of $1.5
billion reported in the third quarter of 1996. The 1997 quarterly results
include the operations of the assets acquired in the Chevron and Destec business
combinations, respectively, for the entire quarter; whereas, the 1996 quarterly
results include only one month of operations related to the assets acquired in
the Chevron Combination.
Consolidated operating margin for the second quarter of 1997 totaled $110.8
million as compared to $82.3 million in the corresponding 1996 period, an
increase of $28.5 million. Marketing contributed $25.0 million to the 1997
quarterly consolidated operating margin, compared to $19.4 million reported a
year ago; whereas, Liquids contributed an aggregate $75.5 million to the
consolidated quarterly operating margin, or $12.6 million more than the $62.9
million reported in 1996. The 1997 quarterly consolidated operating margin
benefited $10.4 million period to period from the inclusion of the recently
acquired Destec operations. Operating income totaled $44.3 million in the third
quarter of 1997 compared with $41.9 million in the comparable 1996 period,
reflecting the aforementioned increase in consolidated operating margin offset
by increases in both depreciation and amortization and general and
administrative expenses. The increase in depreciation and amortization expense
results principally from depreciable assets acquired in the Chevron Combination,
which was effective September 1, 1996, and the Destec acquisition, which was
effective July 1, 1997, as well as the continued expansion of the Company's
depreciable asset base resulting from other acquisitions and capital projects
completed during the four quarters in the period ended September 30, 1997. The
increase in general and administrative expenses period to period principally
results from the Chevron and Destec acquisitions, the restructuring of the
Company's businesses in Canada and the United Kingdom, the expansion of ECI's
operations, the growth of Global Energy's operations and non-capitalizable
consulting and other costs related to several information system and process
improvement initiatives arising as a result of the Company's recent growth.
Incremental to NGC's quarterly results was the Company's equity share in the
earnings of its unconsolidated affiliates which contributed an aggregate $14.2
million to third quarter 1997 pre-tax income compared to $4.3 million during the
comparable 1996 period. The increase in equity earnings of $9.9 million period
to period principally results from an aggregate $2.3 million attributed to the
Company's investments in the West Texas LPG Pipeline Partnership, acquired in
the Chevron Combination, and VESCO, a limited partnership formed effective
November 1, 1996, and approximately $6.0 million contributed by Destec's
interests in fourteen partnerships which own and operate power generation
facilities. The following table provides a summary of equity earnings by
investment for the comparable periods ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accord Energy Limited $ 4,500 $2,128
Novagas Clearinghouse Ltd. --- 1,123
Gulf Coast Fractionators 927 799
West Texas LPG Pipeline Limited Partnership 2,029 675
Venice Energy Services Company, L.L.C. 975 ---
Waskom Gas Processing Company 397 ---
Destec equity investments (aggregate) 5,988 ---
Other, net (583) (427)
------- ------
$14,233 $4,298
======= ======
</TABLE>
PAGE 26 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Interest expense totaled $16.4 million for the quarter ended September 30, 1997,
compared with $10.5 million for the comparable 1996 period. The increase of
$5.9 million is attributed to higher average outstanding principal amounts in
1997 resulting primarily from debt assumed in and resulting from the Chevron
Combination and Destec acquisition. Additionally, principally as a result of
the effective rate of certain debt assumed in the Chevron Combination and the
impact of changes in market interest rates on the Company's variable rate
indebtedness period to period, the average effective interest rate accruing on
the outstanding indebtedness was higher during the 1997 period as compared to
the 1996 quarter.
Other income and expenses, net was immaterial in both periods. During the
second quarter, the Company sold $200 million of 8.316 percent Company Obligated
Preferred Securities of a Subsidiary Trust ("Securities") and the accumulated
distributions attributable to these Securities are reported as minority interest
in income of a subsidiary in the condensed consolidated statements of
operations. Accumulated distributions associated with these Securities totaled
$4.2 million in the quarter ended September 30, 1997.
The Company reported an income tax provision of $12.3 million for the three-
month period ended September 30, 1997, representing an effective tax rate of 33
percent, compared to an income tax provision of $10.4 million and an effective
rate of 33 percent for the comparable 1996 period. Differences between the
aforementioned effective rates and the statutory rate of 35 percent result
principally from permanent differences attributable to amortization of certain
intangibles and debt premiums, state income taxes and permanent differences
arising from the effect of certain foreign investments.
NATURAL GAS AND ELECTRIC POWER MARKETING
Marketing's operating margin for the three-month period ended September 30,
1997, totaled $25.0 million, consisting of $21.0 million related to gas
marketing operations and $4.0 million related to electric power marketing
operations. These amounts compare to operating margins of $19.4 million, $18.0
million and $1.4 million, respectively, for the three-month period ended
September 30, 1996.
Natural Gas Marketing
The $3.0 million increase in operating margin attributable to gas marketing's
operations reflects higher sales volumes offset by lower unit margins period to
period. Total natural gas volumes sold in North America increased to 7.8
billion cubic feet per day from 4.1 billion cubic feet per day during last
year's third quarter, principally as a result of the Chevron Combination and the
inclusion of volumes sold by NGC Canada Inc. Average unit margins in North
America approximated $0.03 per thousand cubic feet during the 1997 quarter,
reflecting higher unit margins on volumes sold in the U.S. offset by lower unit
margins on volumes sold in Canada during the period. During the comparable 1996
period, unit margins approximated $0.05 per thousand cubic feet on volumes sold
in the U.S. only.
Electric Power Marketing
ECI's operating margin increased $2.6 million period to period principally as a
result of increased volume offset by lower unit margins. The lower unit margins
resulted principally from a higher quantity of low margin trading volume in the
1997 period. Comparative sales volumes increased nearly tenfold period to
period, as incremental volumes derived from the Destec acquisition combined with
the continued growth of ECI's operations resulted in sales volume of 39.3
million megawatts during the 1997 quarter.
Marketing's business strategy includes expansion of relationships with existing
LDCs and industrial customers as a means for expanding its customer base. The
segment continues to execute its strategy of not competing with LDCs and will
initiate additional retail programs through alliances with strategic partners.
In addition, the segment expects to continue to capitalize off the
PAGE 27 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
synergies provided by the Destec acquisition in expanding sales efforts to
industrials, expanding and enhancing its Integrated Energy Management Services
and expanding its power generation asset base.
POWER GENERATION
The Company's power generation operations, managed by Destec, contributed $10.4
million of operating margin and $6.0 million of equity earnings during the
quarter. Destec's ownership of power generating assets is predominantly through
varying interests held in partnerships that own and operate the facilities.
During the period, the power generating assets in which Destec maintains an
interest generated 3.7 million megawatt hours (2.2 million net to Destec's
interest).
The business strategy employed by Destec is to be the low-cost producer of
electric power and Destec will actively pursue expansion of its position as a
developer, manager and operator of power generation facilities. NGC expects the
expertise of Destec's personnel, displayed through proven knowledge of power
technology and engineering and experience in development, construction and
operation of power facilities, to provide a platform for expansion of its power
generating business worldwide.
NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION
Liquids reported a third quarter 1997 operating margin of $75.5 million,
representing an increase of $12.6 million over operating margins reported in the
comparable 1996 period. The increase in operating margin reflected improved
results period to period in substantially all of the segment's businesses
principally as a result of increased volumes.
Liquids production volumes increased 45 percent this quarter to 137.7 thousand
barrels per day, up from 95.0 thousand barrels per day in the third quarter last
year, principally as a result of the inclusion of the processing facilities
acquired in the Chevron Combination. NGL marketing volumes sold increased from
240.3 thousand barrels per day in the 1996 quarter to 412.6 thousand barrels per
day in 1997, also primarily as a result of the Chevron Combination. Barrels
received for fractionation were relatively constant period to period while
natural gas gathering and transmission volumes increased 109.0 million cubic
feet per day to 431.7 million cubic feet per day in the 1997 period. Crude oil
volumes increased 83 percent period to period, from 94.9 thousand barrels a day
in 1996 to 173.5 thousand barrels a day in 1997, reflecting continued growth of
this business in both the U.S. and in Canada. Global LPG sales volumes totaled
9.1 million barrels during the period.
The segment's business strategy is predicated on being a low-cost producer of
energy products. The integration of the assets acquired in the Trident and
Chevron Combinations has resulted in improved capacity utilization and enhanced
operating performance. The segment continues to actively address cost
containment initiatives at existing facilities and will pursue asset
acquisitions and/or the construction of new assets when it is considered
economically and strategically appropriate in order to align its operations with
other commercial aspects of NGC's business. In addition, the segment is
actively pursuing acquisitions, strategic alliances, joint ventures and
construction projects in order to capitalize on new gas production in the Gulf
of Mexico.
Internationally, the Company, principally through its wholly owned subsidiary
NGC Global Energy, Inc., is pursuing economically viable near term strategic
opportunities. The intent of the strategy is to expand the multi-commodity
Energy Store concept in selected international locations and it is likely the
Company will leverage off foreign investments held by its major shareholders as
a means for initiating most of these near term projects.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
For the nine-months ended September 30, 1997, NGC realized net income of $61.8
million, or $0.37 per share, on revenues of approximately $9.6 billion. This
compares with net income of $65.6 million, or $0.53 per share, on total revenue
of $4.3 billion reported in the same 1996 period. Current period results
include an aggregate after-tax charge related to certain special items of $13.8
million, or $0.08 per share, attributed to the combination of lower-of-cost-or-
market writedowns of the
PAGE 28 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Company's NGL liquids and crude oil inventories, a hedging-related loss,
recognition of a reserve related to the Company's investment in Avoca Natural
Gas Storage ("Avoca") and an adjustment to increase NGL Marketing's cost of
sales for a true-up to actual of prior accruals offset by the gain on sale of
the Mont Belvieu I fractionation facility, the gain on sale of NGC's interest in
NCL and an adjustment to reduce gas marketing's cost of sales for a true-up to
actual of prior accruals. Normalized earnings for the 1997 period, which exclude
the aforementioned aggregate net charge, totaled $75.6 million, or $0.45 per
share. Cash flow provided by operating activities increased $190.0 million to
$282.5 million during the 1997 period as compared to the $92.5 million reported
in the first nine months of 1996.
Consolidated operating margin for the first nine months of 1997 totaled $276.0
million, which is net of $18.1 million of pre-tax charges related to the
aforementioned special items. Operating margin in the corresponding 1996 period
totaled $224.4 million. Marketing contributed $88.0 million to the 1997
consolidated operating margin, compared to $73.8 million reported a year ago;
whereas, Liquids contributed an aggregate $177.6 million to the consolidated
operating margin or $27.0 million more than the $150.6 million reported in 1996.
Included in the 1997 operating margin is $10.4 million contributed by Destec.
Operating income totaled $94.8 million for the nine-months ended September 30,
1997, compared to $114.3 million in the comparable 1996 period. The decrease of
$19.5 million reflects the aforementioned increase in consolidated operating
margin, which was more than offset by the aggregate increase in depreciation and
amortization and general and administrative expenses. The increases in
depreciation and amortization expense and general and administrative expenses
result principally from the same reasons and circumstances that impacted these
items during the three-months ended September 30, 1997, discussed previously.
NGC's results include the Company's equity share in the earnings of its
unconsolidated affiliates which contributed an aggregate $41.0 million to pre-
tax income during the 1997 period, more than doubling the $17.0 million reported
during the comparable 1996 period. The increase in equity earnings period to
period principally reflects the incremental earnings impact of the Company's
investments in the West Texas LPG Pipeline Partnership, VESCO and the Destec
partnerships. The following table provides a summary of equity earnings by
investment ($ in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Accord Energy Limited $18,000 $11,649
Novagas Clearinghouse Ltd. (892) 2,276
Gulf Coast Fractionators 5,642 2,671
West Texas LPG Pipeline Limited Partnership 5,313 675
Venice Energy Services Company, L.L.C. 7,085 ---
Waskom Gas Processing Company 844 ---
Destec equity investments (aggregate) 5,988 ---
Other, net (944) (315)
------- -------
$41,036 $16,956
======= =======
</TABLE>
NGC restructured its investment in Accord effective January 1, 1997, converting
its 49 percent common stock interest in Accord to a 25 percent participating
preferred stock interest. Management expects equity earnings accruing to the
Company from its participating preferred stock interest to be materially the
same in the last quarter of 1997 as compared to amounts reported in the fourth
quarter of 1996. Effective April 1, 1997, the Company sold its 49.9 percent
interest in NCL and, as a result, there were no equity earnings accruing to the
Company from this investment after March 31, 1997.
Interest expense totaled $44.3 million for the nine-month period ended September
30, 1997, compared to $30.3 million for the comparable 1996 period. The
increase of $14.0 million is principally attributed to the debt assumed in and
resulting from the Chevron Combination and Destec acquisition.
PAGE 29 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Other income and expenses, net was immaterial to the nine-month periods ended
September 30, 1997 and 1996, respectively. As discussed previously, the Company
sold $200 million of Securities during the period and the accumulated
distributions attributable to these Securities are reported as minority interest
in income of a subsidiary in the condensed consolidated statements of
operations. Accumulated distributions associated with these Securities totaled
$5.7 million in the period.
The Company reported an income tax provision of $23.6 million for the nine-month
period ended September 30, 1997, representing an effective tax rate of 28
percent, compared to an income tax provision of $30.1 million and an effective
rate of 31 percent for the comparable 1996 period. The difference between the
aforementioned effective rate and the statutory rate of 35 percent for the nine-
month period ended September 30, 1997, results principally from permanent
differences attributable to amortization of certain intangibles and debt
premiums, state income taxes and the tax effect of the sale of the NCL interest.
The difference between the aforementioned effective rate and the statutory rate
of 35 percent for the nine-month period ended September 30, 1996, results
primarily from a refund received related to foreign taxes paid on dividends
received from Accord, permanent differences attributable to amortization of
certain intangibles, permanent differences arising from the effect of certain
foreign equity investments and state income taxes.
NATURAL GAS AND ELECTRIC POWER MARKETING
Marketing's operating margin for the nine-month period ended September 30, 1997,
totaled $88.0 million compared to $73.8 million during the 1996 period.
Consolidated operating margin for gas marketing's operations totaled $79.3
million during the first nine months of 1997 compared to $72.9 million in the
1996 period; whereas, consolidated operating margin for electric power
marketing's operations totaled $8.7 million in the 1997 period, a $7.8 million
increase over the 1996 period. Included in gas marketing's 1997 period operating
margin is an $8.8 million benefit resulting from adjustments related to a
reconciliation and true-up to actual results of certain accruals made in prior
periods for price and volumes.
North American natural gas volumes sold increased to 7.9 billion cubic feet per
day from 3.7 billion cubic feet per day during the first three quarters of last
year, principally as a result of the Chevron Combination and the inclusion of
volumes sold by NGC Canada Inc. Average unit margins approximated $0.04 per
thousand cubic feet during the 1997 period as compared to unit margins of
approximately $0.07 per unit during the 1996 period. The 1996 period includes
the higher operating margins earned by the Company during the extremely cold
winter last year. ECI continued to improve its sales volumes dramatically,
selling 73.3 million megawatt hours during the first nine months of 1997, an
increase of approximately 65 million megawatt hours period to period. ECI's per
unit sales margins were approximately the same period to period.
POWER GENERATION
As NGC acquired Destec effective July 1, 1997, the results for the nine months
ended September 30, 1997, are the same as the results for the three-month period
previously discussed.
NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION
Liquids operating margin of $177.6 million for the 1997 period reflects an
increase of $27.0 million over the same 1996 period. Included in the 1997
period are the charges related to the aforementioned inventory writedowns, the
hedge-related loss and the actualization of cost accruals totaling $26.9
million, on a pre-tax basis. The increase in operating margin was principally
the result of higher production volumes from the Warren Petroleum gas processing
plants and improved profitability in the Company's fractionation operations,
offset by lower results from the NGL marketing business, principally as a result
of the first quarter charge, and lower crude oil marketing margins period to
period.
Operationally, the segment's businesses reflect significantly improved volumes
period to period principally as a result of the Chevron Combination. Aggregate
NGL processing volumes averaged 132.4 thousand gross barrels per day during the
1997 period as compared to 78.7 thousand barrels per day in the same 1996
period. Barrels received for fractionation increased 31.3 thousand barrels per
day to 165.9 thousand barrels per day during the 1997 period. NGL marketing
volumes increased
PAGE 30 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
from 182.3 thousand barrels per day in the 1996 period to 406.5 thousand barrels
per day in 1997 and crude oil sales volumes increased 67.2 thousand barrels per
day period to period.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
NGC has historically relied upon operating cash flow and borrowings under its
credit facilities for its liquidity and capital resource requirements.
Operating Cash Flow
Cash flow from operating activities totaled $282.5 million during the first nine
months of 1997, an improvement of $190.0 million over the amount reported in the
1996 period, principally reflecting an improved working capital position.
Significant items impacting reported cash flow from operations in the 1997
period as compared to the 1996 period include higher depreciation and
amortization charges period to period, a lower non-cash equity earnings
adjustment period to period, the non-cash effects of the aforementioned
inventory writedowns, Avoca reserve and the gains on the sale of the Mont
Belvieu I fractionator and the 49.9 percent interest in NCL, improved management
of the Company's trade accounts receivables and payables and the reduction of
discretionary inventory volume purchases period to period. Changes in other
working capital accounts, which include prepayments, other current assets and
accrued liabilities, reflect expenditures or recognition of liabilities for
insurance costs, certain deposits, salaries, taxes other than on income, certain
deferred revenue accounts and other similar items. Fluctuations in these
accounts, period to period, reflect changes in facts or changes in the timing of
payments or recognition of liabilities and are not directly impacted by seasonal
factors.
CAPITAL EXPENDITURES, COMMITMENTS AND DIVIDEND REQUIREMENTS
The Company's business strategy has been to grow horizontally across all sectors
of the midstream energy business segment through strategic acquisitions or
construction of core operating facilities in order to capture the significant
synergies which management believes exist among these types of assets and NGC's
natural gas, power and NGL marketing businesses.
Destec Acquisition
NGC acquired Destec effective July 1, 1997, in a $1.26 billion deal, or $21.65
per share of Destec common stock. Concurrent with this acquisition, NGC sold
Destec's international facilities and operations to The AES Corporation for $439
million. NGC's closing commitment relative to this transaction approximated $718
million, including transaction costs and net of Destec cash acquired at closing
and the proceeds from the sale of Destec's international facilities and
operations to The AES Corporation. NGC financed a majority of its closing
commitment through an interim bank facility arranged as a separate tranche to
the existing NGC Corporation Credit Agreement ("Credit Agreement"). In July and
August 1997, the Company consummated a sale of Destec's interest in Tiger Bay
and a sale of certain oil, gas and lignite reserves, respectively, for aggregate
proceeds of $296 million. Proceeds from the sales of these non-strategic assets
were used to retire debt incurred in the acquisition. The Company is continuing
to explore other opportunities to monetize its investment in certain assets
acquired from Destec if, and when, it is determined that such divestitures are
economically and strategically appropriate. These non-strategic assets are
classified in the accompanying balance sheet as assets held for sale.
Capital Expenditures and Investing Activities
During the first nine months of 1997, the Company spent an aggregate $862.5
million, principally on the Destec acquisition, the purchase of NCL's gas
marketing operations and on acquisitions of additional interests in gas
processing facilities, pipelines and other midstream assets, on capital
improvements at existing facilities and on capital additions at the Company's
new headquarters. The Company also invested $28.7 million in its unconsolidated
affiliates, principally for amounts committed to VESCO. During the period, the
Company divested itself of the Mont Belvieu I fractionation facility pursuant to
an
PAGE 31 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
agreement reached with the Federal Trade Commission related to the Chevron
Combination. Further, NGC sold its 49.9 percent interest in NCL and acquired
NCL's existing gas marketing business, as part of the restructuring of that
investment. Further, NGC consummated the aforementioned sales of certain non-
strategic Destec assets. Aggregate net proceeds from these dispositions
approximated $449 million. During the first nine months of 1996, the Company
spent $63.9 million, principally for the acquisition of LPG Services, Inc. and
capital improvements at existing facilities. Also in that period, the Company
received a payment of $4.6 million from Avoca representing a return of capital
and a $14.5 million payment from a third party representing partial payment for
certain contracts related to a processing facility.
Dividend Requirements and Stock Repurchases
NGC declares quarterly dividends on its outstanding common stock at the
discretion of its Board of Directors. The holders of the Series A Preferred
Stock are entitled to receive dividends or distributions equal per share in
amount and kind to any dividend or distribution payable on shares of the
Company's common stock, when and as the same are declared by the Company's Board
of Directors. During the nine-month periods ended September 30, 1997 and 1996,
the Company paid approximately $5.9 million and $4.8 million in cash dividends,
respectively.
During the first nine months of 1997, the Company repurchased 654,900 shares of
its common stock in open market transactions at a cost of $10.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Credit Agreement
On March 14, 1995, the Company entered into the Credit Agreement, which
established a five-year $550 million revolving credit facility. The revolving
facility provides for letters of credit and borrowings for working capital,
capital expenditures and general corporate purposes of up to $550 million in the
aggregate. The $550 million commitment under the revolving facility reduces by
$22.5 million each quarter beginning in June 1998 and continuing through
maturity. On June 27, 1997, the Credit Agreement was amended to provide, among
other things, for the establishment of a new two-year $400 million term loan
facility. Proceeds from the $400 million of borrowings under the term loan
facility were required to be used solely for the purpose of consummating the
Destec acquisition. The Credit Agreement contains certain financial covenants
which require the Company to meet certain financial position and performance
tests.
At September 30, 1997, aggregate principal outstanding under the Credit
Agreement and the interim bank facility totaled $340 million. Additionally, as
of that date, letters of credit outstanding under the Credit Agreement
aggregated $24.3 million and unused borrowing capacity under the Credit
Agreement approximated $410.7 million. The average interest rate applicable to
all borrowings under the Credit Agreement approximated 5.95 percent at September
30, 1997.
Letter of Credit Agreement
On September 1, 1996, the Company entered into a new credit agreement (the
"Letter of Credit Agreement"), which established a 364-day, $300 million letter
of credit facility. The Letter of Credit Agreement provides for the issuance of
letters of credit in support of the Company's obligation to purchase
substantially all of the natural gas produced or controlled by Chevron in the
United States (except Alaska). The Letter of Credit Agreement contains certain
financial covenants which require the Company to meet certain financial position
and performance tests. In general, these financial covenants are identical to
those contained in the Credit Agreement. At September 30, 1997, amounts
outstanding under the Letter of Credit Agreement totaled $211.0 million.
PAGE 32 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Senior Notes and Shelf Registration
In October 1996, NGC sold $175 million of 7.625% 30-year Senior Notes due 2026
("Senior Debentures"). Interest on the Senior Debentures is payable semiannually
on April 15 and October 15 of each year. The Senior Debentures are redeemable,
at the option of the Company, in whole or in part from time to time, at a
formula based redemption price as defined in the associated indenture. On
December 15, 1995, the Company sold $150 million of 6.75% Senior Notes due 2005
("Senior Notes"). Interest on the Senior Notes is payable semiannually on June
15 and December 15 of each year. At September 30, 1997, the Company had $175
million of available debt securities remaining under its $350 million shelf
registration.
The Senior Debentures and Senior Notes represent general unsecured obligations
of the Company and are fully and unconditionally guaranteed on a joint and
several basis by certain of the Company's wholly owned subsidiaries
(collectively the "Guarantors"), as defined in the associated indentures. The
wholly owned subsidiaries that have fully and unconditionally guaranteed, on a
joint and several basis, the Senior Debentures, are the same wholly owned
subsidiaries that have fully and unconditionally guaranteed, on a joint and
several basis, the Senior Notes. Such Guarantors are also guarantors under the
Credit Agreement and certain of the Guarantors guarantees pursuant to the Senior
Debentures, Senior Notes and Credit Agreement are subject to release under
certain circumstances. The Company also has direct and indirect subsidiaries
that are not guarantors of the Senior Debentures or the Senior Notes.
Chevron Note
As part of the Chevron Combination, NGC assumed approximately $155.4 million
payable to Chevron upon demand on or after August 31, 1998 (the "Chevron Note").
The Chevron Note bears interest at 7.95 percent per annum payable semiannually
in arrears each February and August. Should Chevron choose not to demand
payment of the Chevron Note then principal plus accrued interest is payable in
full on August 14, 2004. An unamortized premium balance of $2.2 million
associated with the Chevron Note is being amortized using the interest method,
resulting in an effective interest rate of 6.4 percent per annum.
Warren NGL, Inc. ("Warren", Formerly Trident NGL, Inc.) Notes
At September 30, 1997, Warren had outstanding $105 million principal amount of
10.25% Subordinated Notes due 2003 (interest payable semi-annually in arrears
each April and October) and $65 million principal amount of 14% Senior
Subordinated Notes due 2001 (interest payable semi-annually in arrears each
February and August). Beginning in 1998, corresponding with the first call
dates, the Company may repurchase the Subordinated Notes and Senior Subordinated
Notes at 104.5 percent and 107 percent of the principal amount, respectively,
with such reacquisition prices reducing as the notes mature. The indentures
covering the Subordinated Notes and Senior Subordinated Notes contain covenants
that, among other things, require Warren to meet certain financial tests; limit
the amount of investments, dividends and asset sales that can be made by Warren;
and restrict the ability of Warren and its subsidiaries to incur additional
indebtedness, create or permit liens and engage in certain transactions.
Although Warren's net assets at September 30, 1997, approximated $386 million,
management does not believe that the terms of the indentures materially restrict
the ability of Warren to transfer funds to the Company given that Warren is a
Subsidiary Guarantor combined with the level of advances made by NGC to Warren.
The unamortized premium balance associated with each of the Subordinated Notes
and Senior Subordinated Notes represents a fair value adjustment to the
aggregate principal balance of the notes recognized as part of the Trident
Combination. The unamortized premium balance of $11.4 million at September 30,
1997, is being amortized using the interest method and results in effective
interest rates of 8.4 percent and 8.3 percent per annum on the Subordinated
Notes and Senior Subordinated Notes, respectively.
Company Obligated Preferred Securities of a Subsidiary Trust
During May 1997, NGC Corporation Capital Trust I ("Trust") issued in a private
transaction $200 million aggregate liquidation amount of 8.316 percent
Subordinated Capital Income Securities ("Securities") representing preferred
PAGE 33 OF 38
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
undivided beneficial interests in the assets of the Trust. The Trust invested
the proceeds from the issuance of the Securities in an equivalent amount of
8.316 percent Subordinated Debentures ("Subordinated Debentures") of the
Company. The sole assets of the Trust are the Subordinated Debentures. Proceeds
from issuance of the Securities were used to reduce outstanding principal under
the Credit Agreement. During October 1997, the Trust completed an exchange offer
through which all of the outstanding Securities were exchanged by the holders
thereof for registered securities having substantially the same rights and
obligations.
The Securities are subject to mandatory redemption in whole but not in part on
June 1, 2027, upon payment of the Subordinated Debentures at maturity or in
whole but not in part at any time, contemporaneously with the optional
prepayment of the Subordinated Debentures as allowed by the associated
indenture. The Subordinated Debentures are redeemable, at the option of the
Company, in whole at any time or in part from time to time, at formula-based
redemption prices, as defined. The Subordinated Debentures represent unsecured
obligations of the Company and rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
associated indenture. The Company has irrevocably and unconditionally
guaranteed, on a subordinated basis, payment for the benefit of the holders of
the Securities the obligations of the Trust as described in the indenture
("Guarantee"). Distributions on the Securities are payable each June 1 and
December 1, coinciding with the interest payment due dates on the Subordinated
Debentures, commencing December 1, 1997. The periodic distributions accruing at
an annual rate of 8.316 percent of the aggregate liquidation amount are recorded
as minority interest in income of a subsidiary in the Company's condensed
consolidated statements of operations. So long as no Debenture Event of
Default, as defined, has occurred and continues, the Company has the right to
defer the payment of interest on the Subordinated Debentures for any Extension
Period elected by the Company, which period cannot extend beyond 10 consecutive
semi-annual periods, end on a date other than an Interest Payment Date or extend
beyond the Stated Maturity Date.
CONCLUSION
The Company continues to believe that it will be able to meet all foreseeable
cash requirements, including working capital, capital expenditures and debt
service, from operating cash flow supplemented by borrowings under its credit
facilities, if required.
PAGE 34 OF 38
<PAGE>
NGC CORPORATION
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in
the Superior Court of the State of California, City and County of San Francisco,
against Destec, Destec Holdings, Inc. ("Holdings"), Destec Operating Company and
San Joaquin CoGen, Inc., wholly owned direct and indirect subsidiaries of the
Company as well as against San Joaquin CoGen Limited ("San Joaquin" or the
"Partnership"), a limited partnership in which the Company has an indirect
twenty-five percent general partner ownership interest. In the lawsuit, PG&E
asserts claims and alleges unspecified damages for fraud, negligent
misrepresentation, unfair business practices, breach of contract and breach of
the implied covenant of good faith and fair dealing. PG&E alleges that due to
the insufficient use of steam by San Joaquin's steam host, the Partnership did
not qualify as a cogenerator pursuant to the California Public Utilities Code
("CPUC") Section 218.5, and thus was not entitled under CPUC Section 454.4 to
the discount the Partnership received under gas transportation agreements
entered into between PG&E and San Joaquin in 1989, 1991, 1993 and 1995. All of
PG&E's claims in this suit arise out of the Partnership's alleged failure to
comply with CPUC Section 218.5. The defendants filed a response to the lawsuit
on May 15, 1997. The parties are actively engaged in discovery, and a trial has
been set by the Court for September 28, 1998. On October 20, 1997, PG&E named
Libbey-Owens-Ford, the Partnership's steam host, as an additional defendant in
the action. The Company's subsidiaries intend to vigorously defend this action.
In the opinion of management, the ultimate resolution of this lawsuit will not
have a material adverse effect on the Company's financial position or results of
operations.
On March 24, 1995, Southern California Gas Company, ("SoCal") filed a lawsuit in
the Superior Court of the State of California for the County of Los Angeles,
against Destec, Holdings and Destec Gas Services, Inc., wholly owned direct and
indirect subsidiaries of the Company (collectively the "Destec Defendants"), as
well as against Chalk Cliff Limited ("Chalk Cliff") and McKittrick Limited
(collectively the "Partnerships"), limited partnerships in which the Company has
an indirect twenty-five percent general partner interest and an indirect fifty
percent limited partner interest, respectively. The general partners of the
Partnerships are also named defendants. The lawsuit alleges breach of contract
against the Partnerships and their respective general partners, and interference
and conspiracy to interfere with contracts against the Destec Defendants. The
breach of contract claims arise out of the "transport-or-pay" provisions of the
gas transportation service agreements between the Partnerships and SoCal. SoCal
has sought damages from the Partnerships for past damages and anticipatory
breach damages. On October 24, 1997, the Court granted SoCal's motion for
summary judgment relating to the breach of contract causes of action against the
Partnerships and their respective general partners, and requested that SoCal
submit a proposed order consistent with that ruling for the Court's signature.
On November 6, 1997, SoCal submitted such an order to the Court. The
Partnerships' objections to the order were filed on November 11, 1997, with oral
argument requested. No hearing date has been set. The October 24, 1997 ruling
by the Court did not include any quantification of the damages assessed against
the Partnerships, pending the outcome of the December 1, 1997 trial of SoCal's
interference claims against the Destec Defendants. SoCal's proposed order
quantifies damages associated with the claims granted in the summary judgment at
approximately $30 million. Absent a settlement with SoCal, the Partnerships'
alternatives are limited, with bankruptcy remaining as the most viable option
available. The Company's subsidiaries intend to vigorously defend the
interference causes of action at trial. In the opinion of management, the
ultimate resolution of this lawsuit will not have a material adverse effect on
the Company's financial position or results of operations.
The PG&E and SoCal litigations represent pre-acquisition contingencies acquired
by NGC in the Destec acquisition. Resolution of these lawsuits could impact the
purchase price allocation contained in the accompanying balance sheet as
described in Note 2. In a related matter, Chalk Cliff and San Joaquin have each
guaranteed the obligations of the other partnership, represented by the project
financing loan used to construct the power generation facilities owned by the
respective partnerships. Chalk Cliff and San Joaquin believe there is little
incentive for their lenders to call on this cross-guarantee at this time. In the
opinion of management, the Company's financial position and results of
operations would not be materially adversely effected if the lenders chose to
exercise their option under the terms of such arrangements.
On February 12, 1996, Apache Corporation ("Apache") requested arbitration to
resolve issues arising under a gas marketing contract ("Contract") with Natural
Gas Clearinghouse ("Clearinghouse"), a wholly owned subsidiary of the Company,
pursuant to the arbitration provisions of such Contract. On February 26, 1996,
Clearinghouse responded by denying Apache's claims and by alleging several
counterclaims of its own with respect to Apache's performance under the
Contract. In connection with the arbitration proceedings, on April 9, 1996,
Apache filed a lawsuit against Clearinghouse in the 55th Judicial District Court
of Harris County, Texas ("Court"). In that lawsuit, Apache alleged that
Clearinghouse was intentionally delaying the progress of the arbitration, and it
requested relief, pursuant to the Texas General Arbitration
PAGE 35 OF 38
<PAGE>
NGC CORPORATION
PART II. OTHER INFORMATION
Act, in the form of an order appointing a third arbitrator, compelling discovery
and requiring Clearinghouse to assign certain contracts allegedly belonging to
Apache. Clearinghouse filed a response to the lawsuit on May 6, 1996, asking
that the Court dismiss Apache's application for relief or abate the suit pending
resolution of all matters by the arbitration panel according to the terms of the
Contract. Clearinghouse also requested payment of all attorneys' fees and other
litigation expenses incurred in responding to and defending the lawsuit. The
hearing date has been postponed several times to allow the parties time to
complete discovery, most recently on August 29, 1997, when the hearing was
delayed until March 9, 1998. That hearing may be delayed further due to several
pending procedural disputes. In the arbitration and again in the lawsuit, Apache
claims that it is entitled to actual damages in an undetermined amount in excess
of $8 million and punitive damages. Clearinghouse intends to vigorously defend
the Apache suit and arbitration. Based on review of the facts and through
consultation with outside counsel, NGC management believes the ultimate
resolution of the Apache suit will not have a material adverse effect on the
Company's financial position or results of operations.
On October 11, 1996, Pan-Alberta Gas Ltd. ("Pan-Alberta") was named in a lawsuit
filed in Alberta, Canada, by a group of Canadian producers. The suit alleges
that, since 1992, Pan-Alberta has breached contractual, regulatory and fiduciary
obligations that resulted in the plaintiffs' being deprived of the best
available prices for their natural gas production. The suit asks for damages in
an amount to be determined at trial, punitive or exemplary damages of $5 million
(in Canadian dollars) and other costs. The plaintiffs' contend in the suit that
actual damages may exceed $50 million (in Canadian dollars). Pan-Alberta has
indicated their belief that the claims are without merit and the Company expects
Pan-Alberta to vigorously defend its position in the case. From the date the
lawsuit was filed through the effective date of the sale of its 49.9 percent
interest in NCL, NGC indirectly owned an interest in Pan-Alberta. As part of
the reorganization of NCL, NOVA assumed full ownership of the operations of Pan-
Alberta, but did not indemnify NGC for this lawsuit. NGC is not currently a
party to this lawsuit and NGC's management does not believe that a claim could
be successfully asserted against it related to the lawsuit and does not expect
the lawsuit to have any effect on NGC's results of operations or financial
position.
The Company assumed liability for various claims and litigation in connection
with the Chevron Combination, the Trident Combination, the Destec acquisition
and in connection with the acquisition of certain gas processing and gathering
facilities from Mesa Operating Limited Partnership. NGC believes, based on its
review of these matters and consultation with outside legal counsel, that the
ultimate resolution of such items will not have a material adverse effect on the
Company's financial position or results of operations. Further, the Company is
subject to various legal proceedings and claims which arise in the normal course
of business. In the opinion of management, the amount of ultimate liability
with respect to these actions will not have a material adverse effect the
financial position or results of operations of the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following instruments and documents are included as exhibits to this
Form 10-Q.
EXHIBIT
Number DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger by and among Destec Energy, Inc., The
Dow Chemical Company, NGC Corporation and NGC Acquisition Corporation
II dated as of February 17, 1997. (1)
2.2 Asset Purchase Agreement by and between NGC Corporation and The AES
Corporation dated as of February 17, 1997. (1)
2.3 First Amendment to Asset Purchase Agreement and the related schedules
dated as of June 29, 1997. (2)
2.4 Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE
Enterprises, Inc. dated July 1, 1997. (2)
PAGE 36 OF 38
<PAGE>
NGC CORPORATION
PART II. OTHER INFORMATION
EXHIBIT
NUMBER DESCRIPTION
4.1 NGC Corporation Guaranty dated as of June 27, 1997
(CoGen).(2)
4.2 NGC Corporation Guaranty dated as of June 27, 1997
(Wabash).(2)
4.3 Amended and Restated Credit Agreement dated as of June 27,
1997, among NGC Corporation and The First National Bank of
Chicago, Individually and as Agent, The Chase Manhattan Bank
and NationsBank of Texas N.A., and as Co-Agents, and the
Lenders named therein. (2)
4.4 First Amendment to Letter of Credit Facility Agreement dated
as of April 23, 1997. (2)
4.5 Subordinated Debenture Indenture between NGC Corporation and
The First National Bank of Chicago, as Debenture Trustee,
dated as of May 28, 1997.
4.6 Amended and Restated Declaration of Trust among NGC
Corporation, Wilmington Trust Company, as Property Trustee
Delaware Trustee, and the Administrative Trustees named
therein, dated as of May 28, 1997.
4.7 Form of Capital Security certificate originally issued by
NGC Corporation Capital Trust I on April 24, 1997 (included
as Exhibit A-1 of Exhibit 4.6).
4.8 Form of certificate for Series A 8.316% Subordinated
Deferrable Interest Debenture due June 1, 2027 originally
issued by NGC Corporation on May 28, 1997 (included as
Exhibit A of Exhibit 4.5).
4.9 Series A Capital Securities Guarantee executed by NGC
Corporation and The First National Bank of Chicago, as
Guarantee Trustee, dated as of May 28, 1997.
4.10 Common Securities Guarantee of NGC Corporation dated as of
May 28, 1997.
+ 4.11 Second Supplement Indenture among NGC Corporation, Destec
Energy, Inc. and The First National Bank of Chicago, as
Trustee, dated as of June 30, 1997, supplementing and
amending the Indenture dated as of June 30, 1997.
+ 4.12 Fourth Supplement Indenture among NGC Corporation, Destec
Energy, Inc. and The First National Bank of Chicago, as
Trustee, dated as of June 30, 1997, supplementing and
amending the Indenture dated as of December 11, 1995.
_____________________________
+ Filed herewith.
(1) Incorporated by reference to exhibits to the Annual Report on Form 10-K of
NGC Corporation for the Fiscal Year Ended December 31, 1996, Commission
File No. 1-11156.
(2) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, Commission File No. 1-11156, dated June 27, 1997.
(b) No reports on Form 8-K were filed by the Company during the quarter-ended
September 30, 1997.
PAGE 37 OF 38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
NGC CORPORATION
Date: November 14, 1997 By: /s/ JOHN U. CLARKE
------------------ ----------------------------------------
John U. Clarke, Senior Vice President and
Chief Financial Officer (Principal
Financial Officer and Principal Accounting
Officer)
PAGE 38 OF 38
<PAGE>
Exhibit 4.11
- --------------------------------------------------------------------------------
NGC CORPORATION,
DESTEC ENERGY, INC.
AND
THE FIRST NATIONAL BANK OF CHICAGO
TRUSTEE
_______________
SECOND SUPPLEMENTAL INDENTURE
Dated as of June 30, 1997
________________
Supplementing and Amending the Indenture
dated as of
September 26, 1996
- --------------------------------------------------------------------------------
<PAGE>
THIS SECOND SUPPLEMENTAL INDENTURE, dated as of June 30, 1997, is among NGC
Corporation, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
1000 Louisiana Street, Suite 5800, Houston, Texas 77002, Destec Energy, Inc., a
Delaware corporation ("Destec"), and The First National Bank of Chicago, a
national banking association, as Trustee (herein called the "Trustee"). Any
capitalized term used in this Second Supplemental Indenture and not defined
herein shall have the meaning specified in the Indenture (as defined below).
RECITALS OF THE COMPANY
The Company and each of the Initial Subsidiary Guarantors heretofore have
made, executed and delivered to the Trustee an Indenture dated as of September
26, 1996 (the "Original Indenture") to provide for the issuance from time to
time of unsecured debentures, notes or other evidences of indebtedness of the
Company (herein called the "Securities"), to be issued in one or more series as
provided in the Original Indenture.
The Company's obligations under the Indenture and the Securities are
guaranteed by the Subsidiary Guarantors.
The Company has duly authorized and issued a series of $175,000,000 of its
7 5/8% Senior Debentures due October 15, 2026 as Securities pursuant to the
Original Indenture.
Pursuant to a First Supplemental Indenture dated as of April 23, 1997 (the
"First Supplemental Indenture"), the Original Indenture was amended to clarify
an ambiguity in Section 1506 of the Original Indenture addressing the release of
a Subsidiary Guarantee and to memorialize the name change of NGC UK Limited to
NGC Great Britain, Ltd.
Destec will become a guarantor of certain Funded Indebtedness of the
Company.
Section 1505 of the Original Indenture generally provides that if a
Subsidiary of the Company guarantees or becomes primarily obligated with respect
to any Funded Indebtedness of the Company other than the Securities at any time
subsequent to the Issue Date, then the Company shall cause the Securities to be
equally and ratably guaranteed by such Subsidiary and cause such Subsidiary to
execute and deliver a supplemental indenture evidencing its provision of a
Subsidiary Guarantee in accordance with the terms of the Original Indenture.
It is deemed necessary and desirable to supplement and amend the Original
Indenture to add Destec as a Subsidiary Guarantor as provided in Section 1505 of
the Original Indenture (the Original Indenture, as so supplemented and amended
by the First Supplemental Indenture and this Second Supplemental Indenture,
being sometimes referred to herein as the "Indenture").
The Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, stating that this Second Supplemental Indenture has been
duly authorized and executed by Destec and constitutes the legal, valid, binding
and enforceable obligation of Destec subject to certain exceptions regarding
enforceability.
1
<PAGE>
All things necessary to make this Second Supplemental Indenture and the
Original Indenture a valid agreement of the Company and each of the Subsidiary
Guarantors, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
(together with the related Subsidiary Guarantees) by the Holders thereof, it is
mutually agreed, for the equal and proportionate benefit of all Holders of the
Securities or of a series thereof (together with the related Subsidiary
Guarantees), as follows:
ARTICLE ONE
ADDITIONAL SUBSIDIARY GUARANTOR
SECTION 1.1. ADDITION OF DESTEC AS A SUBSIDIARY GUARANTOR. Destec by
execution of this Second Supplemental Indenture hereby agrees to be bound by the
terms of the Indenture as a Subsidiary Guarantor and agrees to be subject to the
provisions (including the representations and warranties) of the Indenture
applicable to Subsidiary Guarantors.
ARTICLE TWO
ADDITIONAL REPRESENTATIONS AND
COVENANTS OF THE COMPANY AND DESTEC
SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and
warrants that it is duly authorized by a resolution of its Board of Directors to
execute and deliver this Second Supplemental Indenture, and all corporate action
on its part required for the execution and delivery of this Second Supplemental
Indenture has been duly and effectively taken.
SECTION 2.2 AUTHORITY OF DESTEC. Destec represents and warrants that it
is duly authorized by a resolution of its Board of Directors to execute and
deliver this Second Supplemental Indenture, and all corporate action on its part
required for the execution and delivery of this Second Supplemental Indenture
has been duly and effectively taken.
SECTION 2.3 RECITALS AND STATEMENTS. The Company warrants that the
recitals of fact and statements contained in this Second Supplemental Indenture
are true and correct, and that the recitals of fact and statements contained in
all certificates and other documents furnished hereunder will be true and
correct.
ARTICLE THREE
CONCERNING THE TRUSTEE
SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust
hereunder and agrees to perform the same, but only upon the terms and conditions
set forth in the Indenture, to all of which
2
<PAGE>
the Company, the Subsidiary Guarantors and the respective Holders of Securities
at any time hereafter outstanding agree by their acceptance thereof.
SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals
and statements contained in this Second Supplemental Indenture shall be taken as
the recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Second Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Second Supplemental Indenture.
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Second
Supplemental Indenture shall be deemed to be effective immediately upon the
execution and delivery hereof. This Second Supplemental Indenture and all the
terms and provisions herein contained shall form a part of the Indenture as
fully and with the same effect as if all such terms and provisions had been set
forth in the Original Indenture. The Original Indenture is hereby ratified and
confirmed and shall remain and continue in full force and effect in accordance
with the terms and provision thereof, as supplemented and amended by the First
Supplemental Indenture and this Second Supplemental Indenture. The Original
Indenture as so supplemented shall be read, taken and construed together as one
instrument.
SECTION 4.2 COUNTERPARTS OF SECOND SUPPLEMENTAL INDENTURE. This Second
Supplemental Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
SECTION 4.3 GOVERNING LAW. This Second Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be effective, all as of the day and year first above written.
COMPANY
NGC CORPORATION
By:____________________________________
Name:
Title:
SUBSIDIARY GUARANTOR
DESTEC ENERGY, INC.
By:____________________________________
Name:
Title:
4
<PAGE>
TRUSTEE
THE FIRST NATIONAL BANK OF CHICAGO
By:____________________________________
Name:
Title:
5
<PAGE>
Exhibit 4.12
- --------------------------------------------------------------------------------
NGC CORPORATION,
DESTEC ENERGY, INC.
AND
THE FIRST NATIONAL BANK OF CHICAGO
TRUSTEE
_______________
FOURTH SUPPLEMENTAL INDENTURE
Dated as of June 30, 1997
________________
Supplementing and Amending the Indenture
dated as of
December 11, 1995
- --------------------------------------------------------------------------------
<PAGE>
THIS FOURTH SUPPLEMENTAL INDENTURE, dated as of June 30, 1997, is among NGC
Corporation, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
1000 Louisiana, Suite 5800, Houston, Texas 77002, Destec Energy, Inc., a
Delaware corporation ("Destec"), and The First National Bank of Chicago, a
national banking association, as Trustee (herein called the "Trustee"). Any
capitalized term used in this Fourth Supplemental Indenture and not defined
herein shall have the meaning specified in the Indenture (as defined below).
RECITALS OF THE COMPANY
The Company and each of the Initial Subsidiary Guarantors heretofore have
made, executed and delivered to the Trustee an Indenture dated as of December
11, 1995 (the "Original Indenture") to provide for the issuance from time to
time of unsecured debentures, notes or other evidences of indebtedness of the
Company (herein called the "Securities"), to be issued in one or more series as
provided in the Original Indenture.
The Company's obligations under the Original Indenture and the Securities
are guaranteed by the Subsidiary Guarantors.
The Company has duly authorized and issued a series of $150,000,000
aggregate principal amount of its 6 3/4% Senior Notes due December 15, 2005 (the
"Notes") as Securities pursuant to the Original Indenture.
Pursuant to a First Supplemental Indenture dated as of August 31, 1996 (the
"First Supplemental Indenture"), (i) Warren Petroleum Company, Limited
Partnership, a Delaware limited partnership ("Warren Petroleum"), (ii) WPC LP,
Inc., a Delaware corporation, and (iii) WTLPS, Inc., a Delaware corporation,
each became an Additional Subsidiary Guarantor.
Pursuant to a Second Supplemental Indenture dated as of October 11, 1996
(the "Second Supplemental Indenture"), Electric Clearinghouse, Inc. became an
Additional Subsidiary Guarantor.
Pursuant to a Third Supplemental Indenture dated as of April 23, 1997 (the
"Third Supplemental Indenture"), (i) Warren Petroleum was reclassified as an
Initial Subsidiary Guarantor rather than an Additional Subsidiary Guarantor,
(ii) Warren Energy Resources, Limited Partnership, Warren Gas Marketing, Inc.,
Warren NGL Pipeline Company, Kansas Gas Supply Corporation, Warren Intrastate
Gas Supply, Inc., NGC Great Britain Limited, NGC Canada, Inc. and NGC Futures,
Inc. were each reclassified as Additional Subsidiary Guarantors rather than
Initial Subsidiary Guarantors and (iii) NGC Storage, Inc., HUB Services, Inc.
and NGC Anadarko Gathering Systems, Inc. were permanently released as guarantors
of the Securities. In addition, the names of certain Subsidiary Guarantors were
changed in the Third Supplemental Indenture.
Destec will become a guarantor of certain Funded Indebtedness of the
Company.
Section 1505 of the Original Indenture provides that if any Subsidiary of
the Company guarantees or becomes primarily obligated with respect to any Funded
Indebtedness of the Company other than the Securities at any time subsequent to
the Issue Date, then the Company shall cause the Securities to be equally and
ratably guaranteed by such Subsidiary and cause such Subsidiary to
<PAGE>
execute and deliver a supplemental indenture evidencing its provision of a
Subsidiary Guarantee in accordance with the terms of the Original Indenture.
It is deemed necessary and desirable to supplement and amend the Original
Indenture to add Destec as a Subsidiary Guarantor as provided in Section 1505 of
the Original Indenture (the Original Indenture, as so supplemented and amended
by the First Supplemental Indenture, the Second Supplemental Indenture, the
Third Supplemental Indenture and this Fourth Supplemental Indenture, being
sometimes referred to herein as the "Indenture").
The Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, stating that this Fourth Supplemental Indenture has been
duly authorized and executed by Destec and constitutes the legal, valid, binding
and enforceable obligation of Destec subject to certain exceptions regarding
enforceability.
All things necessary to make this Fourth Supplemental Indenture and the
Original Indenture a valid agreement of the Company and each of the Subsidiary
Guarantors, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
(together with the related Subsidiary Guarantees) by the Holders thereof, it is
mutually agreed, for the equal and proportionate benefit of all Holders of the
Securities or of a series thereof (together with the related Subsidiary
Guarantees), as follows:
ARTICLE ONE
ADDITIONAL SUBSIDIARY GUARANTOR
SECTION 1.1. ADDITION OF DESTEC AS A SUBSIDIARY GUARANTOR. Destec by
execution of this Fourth Supplemental Indenture hereby agrees to be bound by the
terms of the Indenture as a Subsidiary Guarantor and agrees to be subject to the
provisions (including the representations and warranties) of the Indenture
applicable to Subsidiary Guarantors.
ARTICLE TWO
ADDITIONAL REPRESENTATIONS AND
COVENANTS OF THE COMPANY AND DESTEC
SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and
warrants that it is duly authorized by a resolution of its Board of Directors to
execute and deliver this Fourth Supplemental Indenture, and all corporate action
on its part required for the execution and delivery of this Fourth Supplemental
Indenture has been duly and effectively taken.
SECTION 2.2 AUTHORITY OF DESTEC. Destec represents and warrants that it
is duly authorized by a resolution of its Board of Directors to execute and
deliver this Fourth Supplemental Indenture,
-2-
<PAGE>
and all corporate action on its part required for the execution and delivery of
this Fourth Supplemental Indenture has been duly and effectively taken.
SECTION 2.3 RECITALS AND STATEMENTS. The Company warrants that the
recitals of fact and statements contained in this Fourth Supplemental Indenture
are true and correct, and that the recitals of fact and statements contained in
all certificates and other documents furnished hereunder will be true and
correct.
ARTICLE THREE
CONCERNING THE TRUSTEE
SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust
hereunder and agrees to perform the same, but only upon the terms and conditions
set forth in the Indenture, to all of which the Company, the Subsidiary
Guarantors and the respective Holders of Securities at any time hereafter
outstanding agree by their acceptance thereof.
SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals
and statements contained in this Fourth Supplemental Indenture shall be taken as
the recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Fourth Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Fourth Supplemental Indenture.
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Fourth
Supplemental Indenture shall be deemed to be effective immediately upon the
execution and delivery hereof. This Fourth Supplemental Indenture and all the
terms and provisions herein contained shall form a part of the Indenture as
fully and with the same effect as if all such terms and provisions had been set
forth in the Original Indenture. The Original Indenture is hereby ratified and
confirmed and shall remain and continue in full force and effect in accordance
with the terms and provision thereof, as supplemented and amended by the First
Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture and this Fourth Supplemental Indenture. The Original
Indenture as so supplemented shall be read, taken and construed together as one
instrument.
SECTION 4.2 COUNTERPARTS OF FOURTH SUPPLEMENTAL INDENTURE. This Fourth
Supplemental Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
SECTION 4.3 GOVERNING LAW. This Fourth Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Supplemental
Indenture to be effective, all as of the day and year first above written.
COMPANY
NGC CORPORATION
By__________________________________
Name:
Title:
ADDITIONAL SUBSIDIARY GUARANTOR
DESTEC ENERGY, INC.
By____________________________________
Name:
Title:
-4-
<PAGE>
TRUSTEE
THE FIRST NATIONAL BANK OF CHICAGO
By_____________________________________
Name:
Title:
-5-
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<PAGE>
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<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 97,161 50,209
<SECURITIES> 0 0
<RECEIVABLES> 1,513,150 1,518,385
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<INVENTORY> 192,854 257,005
<CURRENT-ASSETS> 2,125,024 1,936,721
<PP&E> 1,882,622 1,819,811
<DEPRECIATION> (186,734) (128,432)
<TOTAL-ASSETS> 4,781,786 4,186,810
<CURRENT-LIABILITIES> (1,757,863) (1,548,987)
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<LOSS-PROVISION> 0 4000
<INTEREST-EXPENSE> 44,275 30,317
<INCOME-PRETAX> (85,330) (95,699)
<INCOME-TAX> 23,560 30,081
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