<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 March 31, 1998
[_] 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,
151,734,565 shares outstanding as of May 112, 1998.
PAGE 1 of 22
<PAGE>
NGC CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
March 31, 1998 and December 31, 1997........................................ 3
Condensed Consolidated Statements of Operations:
For the three months ended March 31, 1998 and 1997.......................... 4
Condensed Consolidated Statements of Cash Flows:
For the three months ended March 31, 1998 and 1997.......................... 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings...................................................20
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....................................21
PAGE 2 OF 22
<PAGE>
NGC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 37,270 $ 23,047
Accounts receivable, net 1,331,504 1,536,451
Accounts receivable, affiliates 132,208 139,321
Inventories 88,476 136,485
Assets from risk management activities 241,921 127,929
Prepayments and other assets 56,145 55,547
---------- ----------
1,887,524 2,018,780
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 1,983,173 1,958,250
Less: accumulated depreciation (438,445) (436,674)
---------- ----------
1,544,728 1,521,576
---------- ----------
OTHER ASSETS:
Investments in unconsolidated affiliates 486,142 470,477
Assets from risk management activities 156,082 111,341
Other assets 408,651 394,729
---------- ----------
$4,483,127 $4,516,903
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,342,289 $1,404,736
Accounts payable, affiliates 27,398 24,187
Accrued liabilities 162,659 192,159
Liabilities from risk management activities 215,935 132,012
---------- ----------
1,748,281 1,753,094
LONG-TERM DEBT 897,550 1,002,054
OTHER LIABILITIES:
Liabilities from risk management activities 95,877 42,679
Deferred income taxes 259,688 254,059
Other long-term liabilities 250,293 245,892
---------- ----------
3,251,689 3,297,778
---------- ----------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED
DEFERRABLE INTEREST DEBENTURES 200,000 200,000
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 March 31, 1998 and December 31, 1997 75,418 75,418
Common stock, $0.01 par value, 400,000,000 shares
authorized; 152,340,794 shares issued at March 31, 1998
and 151,796,622 shares issued at December 31, 1997 1,523 1,518
Additional paid-in capital 923,965 919,720
Retained earnings 43,320 32,975
Less: treasury stock, at cost: 807,700 shares at March
31, 1998 and 654,900 shares at December 31, 1997 (12,788) (10,506)
---------- ----------
1,031,438 1,019,125
---------- ----------
$4,483,127 $4,516,903
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
PAGE 3 OF 22
<PAGE>
NGC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues $3,315,569 $3,272,080
Cost of sales 3,218,580 3,204,733
---------- ----------
Operating margin 96,989 67,347
Depreciation and amortization 25,532 23,348
General and administrative expenses 42,606 28,199
Severance charge 9,644 ---
---------- ----------
Operating income 19,207 15,800
Equity in earnings of unconsolidated 15,755 13,386
affiliates
Other income 2,968 5,586
Interest expense (16,005) (14,624)
Minority interest in income of a subsidiary (4,158) ---
Other expenses (1,356) (15,719)
---------- ----------
Income before income taxes 16,411 4,429
Income tax provision (benefit) 4,072 (185)
---------- ----------
NET INCOME $ 12,339 $ 4,614
---------- ----------
NET INCOME PER SHARE:
Net income $ 12,339 $ 4,614
Less: preferred stock dividends (96) (96)
---------- ----------
Net income applicable to common stockholders $ 12,243 $ 4,518
========== ==========
Basic earnings per share $ 0.08 $ 0.03
========== ==========
Diluted earnings per share $ 0.07 $ 0.03
========== ==========
Basic shares outstanding 151,533 150,176
========== ==========
Diluted shares outstanding 166,282 167,813
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
PAGE 4 OF 22
<PAGE>
NGC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 12,339 $ 4,614
Items not affecting cash flows from operating activities:
Depreciation and amortization 24,229 23,728
Equity in earnings of affiliates, net of cash distributions (2,744) (12,130)
Risk management activities (21,635) 11,893
Deferred income taxes 4,072 (5,474)
Amortization of bond premium (1,454) (1,653)
Other 6,047 4,790
Changes in assets and liabilities resulting from operating activities:
Accounts receivable 213,817 503,165
Inventories 48,169 92,951
Prepayments and other assets (2,255) (48,815)
Accounts payable (63,120) (315,008)
Accrued liabilities (27,007) (20,191)
Other, net (8,875) (2,209)
--------- ---------
Net cash provided by operating activities 181,583 235,661
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40,465) (41,615)
Investment in unconsolidated affiliates, net (18,231) (19,857)
Proceeds from asset sales --- 113,000
Other, net 6,200 ---
--------- ---------
Net cash (used in) provided by investing activities (52,496) 51,528
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings --- 364,000
Repayments of long-term borrowings (129,550) (583,000)
Net proceeds from commercial paper and
money market lines of credit 26,500 ---
Other, net (11,814) 80
--------- ---------
Net cash used in financing activities (114,864) (218,920)
--------- ---------
Net change in cash and cash equivalents 14,223 68,269
Cash and cash equivalents, beginning of period 23,047 50,209
--------- ---------
Cash and cash equivalents, end of period $ 37,270 $ 118,478
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
PAGE 5 OF 22
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
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 Company's Annual Report
on Form 10-K for the year ended December 31, 1997, filed with the SEC.
The financial statements include all material adjustments, which, in the opinion
of management, were necessary for a fair presentation of the results for the
interim periods. Other than recognition of the previously disclosed severance
charge, such adjustments consist only of normal recurring adjustments. 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 - BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS
DESTEC ENERGY, INC. ACQUISITION. On June 27, 1997, NGC acquired Destec Energy,
Inc. ("Destec"), an independent power producer, for $1.26 billion, or $21.65 per
share of Destec common stock. Concurrent with the acquisition, NGC sold Destec's
international facilities and operations for $439 million. Subsequently, certain
non-strategic domestic assets were sold for $296 million. Such proceeds were
used to retire indebtedness incurred in the acquisition. 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 three-month period ended March
31, 1997 (in thousands, except per share data):
================================================================================
1997
----
Pro forma revenues $3,337,537
Pro forma net income 4,861
Pro forma earnings per share 0.03
================================================================================
RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. 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 Partnership and Novagas Clearinghouse Pipelines
Limited Partnership (collectively "NCL"), a joint venture between NGC and NOVA.
Effective April 1, 1997, 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 ("NGI"), 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
PAGE 6 OF 22
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
NCL, NGC, NOVA and certain affiliates of both NGC and NOVA. NGC and NOVA
are pursuing separate midstream asset businesses in Canada with NGC operating
its Canadian marketing and midstream asset businesses through NGCCI.
RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). 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 occurs through its wholly owned subsidiary NGC UK Limited
("NGC UK"). In addition, as part of the restructuring, 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 restructuring and NGC's investment in Accord
continues to be accounted for under the equity method.
NOTE 3 -- EARNINGS PER SHARE
Basic earnings per share represents the amount of earnings for the period
available to each share of common stock outstanding during the period. Diluted
earnings per share represents the amount of earnings for the period available to
each share of common stock outstanding during the period plus each share that
would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period. Differences
between basic and diluted shares outstanding in all periods are attributed to
options outstanding and a warrant.
NOTE 4 -- UNCONSOLIDATED AFFILIATES
At March 31, 1998, NGC's investment in unconsolidated affiliates accounted for
by the equity method included: a 25 percent participating preferred stock
interest in Accord Energy Limited, a United Kingdom limited company; an
approximate 32 percent interest in Venice Energy Services Company, L.L.C.; a
38.75 percent partnership interest in Gulf Coast Fractionators; a 25 percent
interest in Midstream Barge Company, L.L.C.; a 49 percent partnership interest
in West Texas LPG Pipeline, Limited Partnership; interests ranging from eight to
50 percent in seventeen partnerships, each formed to build (or buy), own and
operate cogeneration power generation facilities; a 33.33 percent interest in
Waskom Gas Processing Company, a partnership that owns and operates a natural
gas processing, extraction and fractionation facility; and, a 50 percent
interest in NICOR Energy L.L.C., a retail energy alliance. Also at March 31,
1998, the Company had two cost-basis investments: Indeck North American Power
Fund, L.P. and Indeck North American Power Partners, L.P. Summarized unaudited
combined income statement information for the unconsolidated affiliates
accounted for by the equity method is presented in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
1998 1997
---------------------- ---------------------
EQUITY EQUITY
TOTAL SHARE TOTAL SHARE
-------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues(1) $200,048 $83,778 $48,206 $19,070
======== ======= ======= =======
Operating margin(1) $ 81,527 $32,620 $17,911 $ 7,243
======== ======= ======= =======
Net income(1) $ 31,540 $11,261 $13,355 $ 5,277
======== ======= ======= =======
=============================================================================================
</TABLE>
_______________________
PAGE 7 OF 22
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(1) The quarterly financial data for both periods presented is exclusive of
amounts attributable to the Company's investment in Accord and NCL as such
information was unavailable for the current period or is incompatible with
current presentation.
NOTE 5 - LONG-TERM DEBT
In February 1998, the Company delivered Notices of Redemption to the holders of
its $105 million principal amount of 10.25% Subordinated Notes and $65 million
principal amount of 14% Senior Subordinated Notes. On March 31, 1998 and April
15, 1998, the Company retired the Senior Subordinated Notes and the Subordinated
Notes, respectively, pursuant to the redemption provisions contained in the
respective indentures. NGC funded the estimated aggregate redemption value of
$180 million through a combination of borrowings under existing credit
facilities and commercial paper issuances.
NOTE 6 -- 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 five
percent general partner ownership interest together with an indirect 45 percent
limited partner interest (the Company increased its former indirect 20 percent
limited partner interest in San Joaquin to an indirect 45 percent limited
partner interest in April 1998 through the purchase of the interest of CNG Power
Company). 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 suit on May 15, 1997. On October 20, 1997, PG&E named
Libbey-Owens-Ford, the Partnership's steam host, as an additional defendant in
the action. On February 23, 1998, PG&E served by mail its Second Amended
Complaint on all defendants. On March 30, 1998, the defendants filed their
response to PG&E's Second Amended Complaint, denying PG&E's allegations and
alleging certain counterclaims against PG&E. The parties are actively engaged in
discovery and the September trial date has been moved to October 1998. The
Partnership has previously advised the Federal Energy Regulatory Commission of
PG&E's claims, and stated that it would submit any appropriate filings upon
completion of its investigation. If the facility were found by the court not to
have satisfied the California cogeneration facility standards, there is a strong
likelihood that it would also fail to satisfy the more stringent federal
standards. 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, 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 and McKittrick Limited
(collectively, the "Partnerships"), limited partnerships in which the Company
has an indirect five percent general partner interest together with an indirect
45 percent limited partner interest and an indirect 50 percent limited partner
interest, respectively (the Company increased its former indirect 20 percent
limited partner interest in Chalk Cliff Limited to an indirect 45 percent
limited partner interest in April 1998 through the purchase of the interest of
CNG Power Company). All 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 in an amount equal
to approximately $31,000,000. On
PAGE 8 OF 22
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
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 21, 1997, the
Partnerships filed for voluntary Chapter 11 bankruptcy protection in the Eastern
District of California. Normal business operations by the Partnerships will
continue throughout the course of these reorganization proceedings. On January
12, 1998, the Court entered a Final Order that (a) severs out the Partnerships
due to their Chapter 11 bankruptcy filings, (b) includes a finding of contract
liability against the Destec Defendants, (c) dismisses the tortious interference
claims against the Destec Defendants, and (d) assesses damages in an aggregate
amount of approximately $31,000,000. On that same day, the Destec Defendants
filed their Notice of Appeal, and posted a security bond, with the Second
Appellate District in Los Angeles based on the lack of allegations made or
proven by SOCAL which support holding those entities liable in contract. On
March 11, 1998, the Partnerships and their respective general partners filed
Notices of Appeal with respect to certain findings of fact in the Court's
January 12, 1998, Final Order that were adverse to those defendants. On or about
April 15, 1998, the Court entered a final judgment against the Partnerships in
recognition of the lifting of the automatic stay against those entities by the
Bankruptcy Court. The Partnerships will appeal that judgment. The appeal process
is anticipated to take approximately eighteen months. The liability of the
Destec Defendants under the judgment will be limited to that portion of the
damage award not paid to SOCAL by the Partnerships through the Chapter 11
bankruptcy proceedings.
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 loans 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 or results of operations
would not be materially adversely affected if the lenders chose to exercise
their option under the terms of such arrangements.
In March 1998, NGC settled all outstanding issues arising under a gas marketing
contract between Apache Corporation and Clearinghouse. A previously recognized
contingency reserve was sufficient to offset the confidential cash settlement.
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 affect
on the financial position or results of operations of the Company.
Changes in federal and state regulatory statutes will likely occur over the
foreseeable future that will impact the Company's businesses. The nature and
impact of such changes on the Company's projects, operations and contracts is
unknown at this time. NGC actively monitors these developments directly and
through industry trade groups to determine such impacts as well as to evaluate
new business opportunities created by restructuring of the electric power
industry. Depending on the outcome of these legislative matters, changes in
legislation could have an adverse effect on current operations or contract
terms.
NOTE 7 -- CAPITAL STOCK
At March 31, 1998, employee stock options aggregating 3.8 million shares were
exercisable at prices ranging from $2.03 to $21.63 per share. Employee stock
option grants made from 1993 to 1997 will become exercisable during 1998 and
1999, respectively, resulting in the potential exercise of approximately 6.8
million options during that two-year period, at exercise prices ranging from
$2.03 to $21.63. Other options currently granted under the Company's option
plans will fully vest periodically and become exercisable through the year 2003
at prices ranging from $2.03 to $21.63. Grants made under the
PAGE 9 OF 22
<PAGE>
NGC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
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
807,700 shares at a total cost of $12.8 million, or $15.83 per share on a
weighted average cost basis, through March 31, 1998.
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") 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"). In February 1998, the FASB issued Statement No. 132,
"Employers' Disclosure about Pension and Other Postretirement Benefits"
("Statement No. 132") that revised disclosure requirements for pension and other
postretirement benefits. Statement No. 132 does not impact NGC's disclosure or
reporting. During the first quarter of 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued two
Statements of Position ("SOPs"), "Reporting on the Costs of Start-up Activities"
and "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use".
Statement No. 130 established standards for reporting and display of
comprehensive income and its components in a full-set of general purpose
financial statements. This standard does not currently alter the Company's
reporting of operating results.
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. The Company is
assessing the impact Statement 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.
The SOPs establish guidance on the financial reporting for start-up costs and
organization costs, as defined, and on accounting for the costs of computer
software developed or obtained for internal use. The Company's current
accounting methodologies adhere to the provisions contained in the SOPs in all
material respects.
PAGE 10 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
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 on Form 10-K for
the year ended December 31, 1997.
GENERAL
COMPANY PROFILE. NGC Corporation, ("NGC" or the "Company") is a leading North
American marketer of natural gas, natural gas liquids, electricity and crude oil
and is engaged in natural gas gathering, processing and transportation through
direct and indirect ownership and operation of natural gas processing plants,
fractionators, storage facilities and pipelines and engages in electric power
generation through direct and indirect ownership of cogeneration and other
electric power producing facilities. 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.
The Company is a holding company that conducts substantially all of its business
through its subsidiaries. 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.
("Holding"), a fully integrated natural gas liquids company, merged and the
combined entity was renamed NGC Corporation ("Trident Combination"). 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 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 these transactions, NGC has established itself as an
industry leader providing quality, competitively priced energy products and
services to customers primarily throughout North America and in the United
Kingdom.
The Company currently reports operations under 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 May 14, 1998, NGC and Florida Power Corporation, a
Florida Progress Corporation company located in St. Petersburg, FL, announced an
agreement to form a power marketing alliance that will operate in the U.S.
wholesale electric and natural gas markets. The alliance creates a commercial
relationship between a power marketer and a utility focused on developing
wholesale energy markets in Florida and other regions. It will broaden each
company's ability to conduct electric power and related fuel transactions by
combining the energy marketing, trading and risk management skills of NGC with
the current power marketing capabilities and over 8,500 megawatts of power
generation assets and energy supply contracts of Florida Power.
NGC and its partner NRG Energy, Inc. ("NRG"), a wholly owned subsidiary of
Northern States Power Company, consummated in late March and early April 1998,
respectively, the previously announced acquisitions of the 560 megawatt gas-
fired Long Beach Generating Facility for $30.0 million and the 1,020 megawatt
gas-fired El Segundo Generating Facility for $87.9 million. NGC is the lead
party on fuel procurement, power marketing and asset management for the
ventures, while NRG will operate both facilities. The facilities were acquired
by separate partnerships, with NGC and NRG each owning a 50 percent interest in
the two ventures. NGC's aggregate capital outlay associated with the two
acquisitions approximated $59 million.
In February 1998, the Company delivered Notices of Redemption to the holders of
its $105 million principal amount of 10.25% Subordinated Notes and $65 million
principal amount of 14% Senior Subordinated Notes. On March 31, 1998 and April
15, 1998, the Company retired the Senior Subordinated Notes and the Subordinated
Notes, respectively, pursuant to the redemption provisions contained in the
respective indentures. NGC funded the estimated aggregate redemption value of
$180 million through a combination of borrowings under existing credit
facilities and commercial paper issuances.
In January 1998, the Company announced an agreement to sell the Ozark Gas
Transmission System for $55 million, resulting in an estimated pre-tax gain of
approximately $27 million to be recognized at closing. Closing of the
transaction is expected in the third quarter of 1998, subject to certain
conditions, including FERC and other governmental approvals.
PAGE 11 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. This Form 10-Q
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", and "expect" are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. 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 risk factors that
may have a direct bearing on NGC's results of operations and financial condition
are: (i) competitive practices in the industries in which NGC competes, (ii)
fluctuations in energy commodity prices which have not been properly hedged or
which are inconsistent with NGC's open position in its energy marketing
activities, (iii) operational and systems risks, (iv) environmental liabilities
which are not covered by indemnity or insurance, and (v) 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, prices contained in these contracts are tied to a
current spot or index price and, therefore, adjust directionally with changes in
overall market conditions. However, market price fluctuations for natural gas
and electricity can 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 commitments in terms
of contract volumes, and the timing of performance and delivery obligations.
However, to the extent a net open position exists, fluctuating commodity market
prices can impact NGC's financial position or results of operations, either
favorably or unfavorably. Further, differences in the comprehensive methods of
accounting for North American fixed-price natural gas transactions, which are
accounted for under the mark-to-market method, and electricity marketing
transactions, which are accounted for under accrual accounting, create
differences in the timing of the recognition of such commodity price movements.
The net open positions are actively managed, and the impact of changing prices
on the Company's financial condition at a point in time is not necessarily
indicative of the impact of price movements throughout the year.
Fuel costs, principally natural gas, represent the primary variable cost
impacting margins at the Company's power generating facilities. Historically,
operating margins 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 spot or index natural
gas price allowing revenues to adjust directionally with changes in natural gas
prices.
Operating margins associated with Liquids' natural gas gathering, processing and
fractionation activities are very sensitive to changes in natural gas liquids
prices principally as a result of contractual terms under which products are
sold by these businesses. Based upon current operations, a one cent movement in
the annual average price of natural gas liquids would impact annual operating
margin by approximately $10 million. 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 in the Company's fractionation operations and
residue gas sales in its gathering and processing activities. Commodity price
fluctuations also impact the operating margins derived from the Liquids
segment's natural gas liquids 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 inventories.
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, electricity, natural gas liquids
and crude oil. Marketing's natural gas 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. Conversely, electricity marketing operations are typically
impacted by higher demand and commodity price volatility during the summer
cooling season. Liquids is also subject to seasonal factors; however, such
factors typically have a greater impact
PAGE 12 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
on sales prices than on sales volumes. Natural gas liquids prices typically
increase during the winter season due to greater heating requirements. The
Company's wholesale propane business is seasonally weighted in terms of volume
and price consistent with the trend in Marketing's natural gas operations as a
result of greater demand for crop-drying and space-heating requirements in the
fall and winter months. Consistent with electricity marketing, the Company's
electricity generating facilities generally experience peak demand during the
summer cooling season.
LIQUIDITY AND CAPITAL RESOURCES
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, electricity, and natural gas liquids marketing businesses. In
addition, the Company is extensively involved in risk management activities,
which complement its firm purchase and sales commitments, capacity,
transportation and other similar obligations.
NGC has historically relied upon operating cash flow and borrowings from a
combination of money market lines of credit, sales of commercial paper and
various long-term credit arrangements for its liquidity and capital resource
requirements. The following briefly describes the terms of these arrangements.
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. NGC initiated a commercial
paper program in the fourth quarter of 1997 for amounts up to $600 million,
supported by its existing bank Credit Agreement. Also in the fourth quarter, the
Company established several uncommitted money market bank lines. The Company
utilizes commercial paper proceeds and borrowings under uncommitted money market
bank lines for general corporate purposes, including short-term working capital
requirements. At March 31, 1998, commercial paper outstanding totaled $256
million at a weighted average interest rate of 6.35 percent. There were no
amounts outstanding under the uncommitted money market bank lines at quarter
end.
CREDIT AGREEMENT. NGC has a $550 million revolving Credit Agreement, which
matures on March 14, 2000, providing for letters of credit and borrowings for
working capital, capital expenditures and general corporate purposes. The $550
million commitment under the Credit Agreement reduces by $22.5 million each
quarter beginning in June 1998 and continuing through maturity. The Company also
has a two-year $400 million term loan facility, proceeds from which were
designated to consummate the Destec acquisition. At March 31, 1998, letters of
credit and borrowings under the Credit Agreement aggregated approximately $94
million (which included $50 million under the term loan facility). At March 31,
1998, after consideration of the outstanding commercial paper, unused borrowing
capacity under the revolving credit facility approximated $250 million.
SENIOR NOTES. 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. 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.
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 an effective rate of 6.4
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. NGC has the right,
at any time on or after August 31, 1998, to prepay in whole or in part the
principal and accrued interest outstanding under the Chevron Note.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEFERRABLE INTEREST
DEBENTURES. During May 1997, NGC Corporation Capital Trust I ("Trust") issued
in a private transaction $200 million aggregate liquidation amount of 8.316%
PAGE 13 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
Subordinated Capital Income Securities ("Trust Securities") representing
preferred undivided beneficial interests in the assets of the Trust. The Trust
invested the proceeds from the issuance of the Trust Securities in an equivalent
amount of 8.316% 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 amounts outstanding 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.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is exposed to
certain market risks inherent in the Company's financial instruments that arise
from transactions entered into in the normal course of business. The Company
routinely enters into financial instrument contracts to hedge purchase and sale
commitments and inventories in its natural gas, natural gas liquids, crude oil,
electricity and coal businesses in order to minimize the risk of market
fluctuations. NGC also monitors its exposure to fluctuations in interest rates
and foreign currency exchange rates and may execute swaps, forward-exchange
contracts or other financial instruments to hedge and manage these exposures.
Market risks impacting the Company have not materially changed from those
identified and described in the December 31, 1997, Annual Report on Form 10-K.
YEAR 2000 ISSUES. The Company is continuing its analysis of the "Year 2000"
issue. The potential costs and uncertainties associated with this review are
dependent upon a number of factors, including legacy software and hardware
configurations and planned information technology infrastructure enhancements.
Results of the review conducted to date indicate that the Company will not be
burdened by a material event resulting from the Company's untimely resolution of
Year 2000 issues. Further, management does not currently believe the cost of
resolving such issues will be material to the Company's consolidated results of
operations or financial position.
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 and borrowings under its various credit
facilities, money market lines of credit, commercial paper issuances and long-
term debt issuances.
PAGE 14 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
RESULTS OF OPERATIONS
Provided below is a tabular presentation of certain domestic and international
operating and financial statistics for the Company's segments and subsegments
for the three-month periods ended March 31, 1998 and 1997, respectively. Both
the continuity of operations and the resulting comparability of results between
periods is impacted by the Destec acquisition and the reorganizations of the
Company's operations in Canada and in the United Kingdom.
<TABLE>
<CAPTION>
==================================================================================================
THREE-MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------- --------
($US IN THOUSANDS)
<S> <C> <C>
OPERATING MARGIN (1)(2):
NATURAL GAS AND POWER MARKETING SEGMENT -
Natural Gas Marketing $26,053 $ 17,605
Electric Power Marketing (2,435) 1,923
------- --------
23,618 19,528
------- --------
POWER GENERATION 9,515 ---
------- --------
NATURAL GAS LIQUIDS, CRUDE OIL AND GAS
TRANSMISSION SEGMENT -
Natural Gas Processing - Field Plants 22,616 49,327
Natural Gas Processing - Straddle Plants 5,180 3,622
Fractionation 7,252 6,082
Natural Gas Liquids Marketing 13,718 (16,335)
Crude Oil Marketing 2,709 (999)
Natural Gas Gathering and Transmission 4,056 4,154
Other --- (179)
------- --------
55,531 45,672
------- --------
GLOBAL:
Gas Sales 6,092 350
LPG Sales 2,233 1,797
------- --------
8,325 2,147
------- --------
$96,989 $ 67,347
======= ========
OPERATING STATISTICS (1)(2):
Natural Gas Marketing (Bcf/d) -
U.S. Sales Volumes (3) 6.5 6.2
Canadian Sales Volumes (4) 2.1 ---
Electric Power Marketing - Million Megawatt Hours Sold 25.0 17.4
Power Generation (Million Megawatt Hours Generated) -
Gross 3.3 ---
Net 2.1 ---
Natural Gas Liquids Processed (MBbls/d - Gross) -
Field Plants 86.7 80.3
Straddle Plants 40.8 48.3
Fractionation - Barrels Received for Fractionation (MBbls/d) 159.4 149.6
NGL Marketing - Sales Volumes (MBbls/d) 431.7 424.2
Natural Gas Gathering and Transmission (MMcf/d) 0.4 0.3
Crude Oil Marketing - Sales Volumes (MBbls/d) 195.2 151.9
Global Sales -
LPG Sales Volumes (MMBbls) (5) 5.4 3.9
Gas Sales Volumes (Bcf/d) (6) 0.7 0.1
==================================================================================================
</TABLE>
PAGE 15 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
(1) 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 in the Company's financial
statements and operating statistics effective July 1, 1997. The
reorganization of the Company's Canadian operations was effective April 1,
1997, and the reorganization of the Company's operations in the United
Kingdom was effective January 1, 1997.
(2) Information excludes the Company's proportionate share of margin and
operating statistics associated with ventures accounted for under the equity
method. In 1998, the most significant operations included equity investments
in Accord Energy Limited ("Accord"), Venice Energy Services Company L.L.C.
("VESCO"), West Texas Pipeline Partnership ("West Texas Pipeline"), Gulf
Coast Fractionators ("GCF") and interests in certain partnerships each
owning power generating assets. Significant equity investments in the 1997
period included the operations of Accord, Novagas Clearinghouse, Ltd.
("NCL"), VESCO, West Texas Pipeline and GCF, respectively.
(3) Includes immaterial amounts of inter-company gas sales for both periods.
(4) Represents volumes sold by NGC Canada, Inc. during 1998. Volumes sold by NCL
prior to the reorganization are not comparable.
(5) Includes 2.1 and 0.8 MMBbls of inter-company sales for the three-month
periods ended March 31, 1998 and 1997, respectively.
(6) Represents volumes sold by NGC UK Ltd. in each period.
THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
For the quarter ended March 31, 1998, NGC realized net income of $12.3 million,
or $0.07 per share compared with first quarter 1997 net income of $4.6 million,
or $0.03 per share. Total revenues approximated $3.3 billion in both periods.
Current period results include an after-tax charge of $6.3 million, or $0.04 per
share, related to the previously disclosed severance charge resulting
principally from the restructuring of the Company's natural gas liquids
business. First quarter 1997 results include after-tax charges of $24.2 million,
or $0.14 per share, attributed to lower-of-cost-or-market writedowns of the
Company's natural gas liquids and crude oil inventories, a hedging-related loss
and recognition of a reserve related to the Company's investment in Avoca
Natural Gas Storage ("Avoca"). Such charges were partially offset by an after-
tax gain of $2.2 million, or $0.01 per share, related to the sale of the Mont
Belvieu I fractionation facility. Normalized earnings, which exclude the net
charges in both periods, totaled $18.6 million, or $0.11 per share, in 1998 as
opposed to $26.6 million, or $0.16 per share, in 1997.
Consolidated operating margin for the first quarter of 1998 totaled $97.0
million as compared to $67.3 million for the corresponding 1997 period.
Consolidated operating margins in both quarters were unfavorably impacted by
commodity price variability from historic norms. The El Nino influenced mild
winter during 1998 depressed demand for natural gas and natural gas liquids and
reduced average natural gas liquids prices to their lowest levels in several
years, negatively impacting profitability, particularly in the Liquids segment.
The precipitous drop in commodity prices during the first quarter of 1997
followed the unprecedented escalation in natural gas liquids prices during the
fourth quarter of 1996, resulting in an unfavorable pricing environment
throughout that period, culminating in the aforementioned lower-of-cost-or-
market writedowns.
Operating income increased $3.4 million period to period reflecting the
aforementioned increase in consolidated operating margin offset by increases in
depreciation and amortization and general and administrative expenses as well as
the severance charge. The increase in depreciation and amortization expense
period to period resulted principally from inclusion in the 1998 period of the
depreciable assets acquired in the Destec acquisition 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 March 31, 1998. The increase in depreciation and amortization
expense was partially offset by the favorable impact on current period expense
of the impact of the asset abandonments and impairments recognized during the
fourth quarter of 1997. The increased level of general and administrative
expenses period to period resulted principally from the incremental expense
associated with the Destec acquisition, the reorganization and expansion of
operations in Canada and in the United Kingdom, expansion of the electricity
marketing and global transportation businesses and the effect of increased
overhead required to support the technology infrastructure improvements
currently being implemented.
Incremental to NGC's consolidated operating income is the Company's equity share
in the earnings of its unconsolidated affiliates which contributed an aggregate
$15.8 million to 1998 pre-tax quarterly results, compared to $13.4 million
during the
PAGE 16 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
comparable 1997 period. The increase in equity earnings generally reflects the
addition of equity investments as part of the Destec acquisition offset by lower
earnings from the Company's investment in Accord period to period. The following
table provides a summary of equity earnings by investment for the comparable
periods:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED MARCH 31,
------------------------------------
1998 1997
--------- ---------
<S> <C> <C> <C>
Accord(1) $ 4,500 $ 9,000
Gulf Coast Fractionators 1,189 1,373
West Texas LPG Pipeline Limited Partnership 1,717 1,540
Venice Energy Services Company, L.L.C. 1,763 2,691
Destec equity investments (aggregate) 7,154 ---
Other, net(1) (568) (1,218)
--------- ---------
$ 15,755 $ 13,386
========= =========
=============================================================================================
</TABLE>
1. For a discussion of the Accord and NCL restructurings, refer to Note 2 of the
Condensed Consolidated Financial Statements.
Interest expense totaled $16.0 million for the three-months ended March 31,
1998, compared with $14.6 million for the comparable 1997 period. The higher
interest expense period to period is principally attributed to higher average
outstanding principal amounts resulting primarily from debt resulting from the
Destec acquisition.
During the second quarter of 1997, the Company sold $200 million of 8.316%
Guaranteed Preferred Beneficial Interests in Subordinated Deferrable Interest
Debentures ("Securities") and the accumulated distributions attributable to
these Securities are reported as minority interest in income of a subsidiary in
the consolidated statements of operations. Accumulated distributions associated
with these Securities totaled $4.2 million for the quarter ended March 31, 1998.
Other income and expenses, net for the three-month period ended March 31, 1998
is not material to consolidated results. For the quarter ended March 31, 1997,
other income and expenses, net totaled $10.1 million, which includes the pre-tax
amounts attributable to the aforementioned gain on sale of the Mont Belvieu I
fractionation facility and the charge attributable to the investment in Avoca.
The Company reported an income tax provision of $4.1 million for the three-month
period ended March 31, 1998, representing an effective rate of 25 percent,
compared to an income tax benefit of $0.2 million and an effective rate of (4)
percent for the comparable 1997 period. Differences between the aforementioned
effective rates and the statutory rate of 35 percent in each period results
principally from permanent differences attributable to amortization of certain
intangibles and debt premiums, 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 three-month period ended March 31, 1998,
totaled $23.6 million compared to $19.5 million in the same 1997 period,
reflecting improved operating margins in its natural gas marketing operations
offset by lower results in electricity marketing period to period. Increased
operating margins in the segment's gas marketing operations reflect higher
volumes and slightly improved margins period to period. However, the
aforementioned El Nino influenced weather pattern negatively impacted
anticipated 1998 first quarter unit margins throughout North America,
particularly in Canada. The lack of sustained demand for delivery of gas volumes
during both periods also negatively impacted the segment's financial results. In
the 1998 quarter, electricity marketing reported a margin loss of $2.4 million
as compared with operating margin of $1.9 million in the 1997 quarter.
Electricity marketing continued to improve its sales volumes dramatically,
increasing total megawatt hours sold by 7.6 million period to period. However,
continued downward pressure on electricity prices particularly in the western
United States negatively impacted the operating margins of this business.
PAGE 17 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
POWER GENERATION
The Company's power generation operations, acquired effective June 30, 1997,
contributed $9.5 million of operating margin and $7.2 million of equity earnings
during the 1998 period. The Company's ownership of power generating assets is
predominantly through varying interests held in partnerships that own and
operate power generation facilities. During the period, the power generating
assets in which NGC maintains an interest generated 3.3 million megawatt hours
of electricity (2.1 million megawatt hours, net to the Company's interest).
NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION
Liquids reported a first quarter 1998 operating margin of $63.9 million,
representing an increase of $16.0 million over the same 1997 period. Included
in the 1997 quarter are the charges related to the aforementioned inventory
writedowns and the hedge-related loss totaling $23.3 million, on a pre-tax
basis, which, when normalized, improves 1997's quarterly operating margin to
$71.1 million. The lower normalized 1998 results were principally a result of
the negative impact lower average natural gas liquids prices had on the
segment's gas processing business mitigated, in part, by aggressive management
of inventories, which contributed to improved operating margins in the natural
gas liquids marketing business period to period. The segment benefited from
improved operating margins in its Global operations reflecting the expanding
energy marketing operations in the United Kingdom, which was essentially a
start-up operation during the first quarter of 1997, and increased international
liquids transportation in 1998. Additionally, the segment owns interests in
joint ventures, partnerships and limited liability companies that contributed an
aggregate $9.6 million to pre-tax earnings during the three-months ended March
31, 1998, compared with $14.6 million in the comparable 1997 period. The
segment's lower equity earnings period to period reflect the aforementioned
impact that lower average natural gas liquids prices had on the domestic
investments and the lower equity earnings from the investment in Accord.
Operationally, the segment generally reflected improved volumes period to period
principally as a result of improved efficiencies resulting from the segment's
restructuring and reorganization. Processing volumes at natural gas liquid field
plants improved by 6.4 thousand gross barrels per day period to period averaging
86.7 thousand gross barrels per day as compared to 80.3 thousand barrels per day
in 1997. Straddle plant processing volumes were lower during the 1998 quarter as
compared to the 1997 quarter principally as a result of the relationship between
average natural gas and natural gas liquids prices during the 1998 period.
Barrels received for fractionation increased 9.8 thousand to 159.4 thousand
barrels per day during the 1998 quarter reflecting improved efficiencies and
enhanced contractual commitments to the facility. NGL marketing volumes
increased from 424.2 thousand barrels per day in the 1997 quarter to 431.7
thousand barrels per day in 1998 and crude oil sales volumes increase 43.3
thousand barrels per day period to period. Volumes transported internationally
increased from 3.9 million barrels to 5.4 million barrels period to period.
OPERATING CASH FLOW
Cash flow from operating activities totaled $181.6 million for the three-month
period ended March 31, 1998, compared to $235.7 million reported in the same
1997 period. Changes in operating cash flow reflect the operating results
previously discussed herein and the continued focus on management of working
capital, particularly 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 the timing of payments or
recognition of liabilities and are not directly impacted by seasonal factors.
PAGE 18 OF 22
<PAGE>
NGC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 1998 AND 1997
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
During the quarter ended March 31, 1998, the Company spent a net $52.5 million,
principally on the acquisition of a 50 percent interest in the Long Beach
Generating Facility, construction costs associated with the previously disclosed
Lake Charles fractionation facility and on expenditures for capital improvements
at existing facilities. During the first three months of 1997, the Company spent
$41.6 million principally on acquisitions of additional interests in gas
processing facilities, on capital improvements at existing facilities and on
capital additions at the Company's new headquarters. The Company also invested
$19.9 million in its unconsolidated affiliates principally for amounts committed
to VESCO. Additionally, during the period, the Company divested itself of the
Mont Belvieu I fractionation facility pursuant to an agreement reached with the
Federal Trade Commission related to the Chevron Combination.
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.. The Company paid approximately $2.0 million in cash dividends and
distributions during each of the quarters ended March 31, 1998 and 1997,
respectively.
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 acquired 152,800
shares of its stock through open market trades during the three-month period
ended March 31, 1998, at a total cost of $2.3 million, or $14.93 per share on a
weighted average cost basis.
PAGE 19 OF 22
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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 five
percent general partner ownership interest together with an indirect 45 percent
limited partner interest (the Company increased its former indirect 20 percent
limited partner interest in San Joaquin to an indirect 45 percent limited
partner interest in April 1998 through the purchase of the interest of CNG Power
Company). 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 suit on May 15, 1997. On October 20, 1997, PG&E named
Libbey-Owens-Ford, the Partnership's steam host, as an additional defendant in
the action. On February 23, 1998, PG&E served by mail its Second Amended
Complaint on all defendants. On March 30, 1998, the defendants filed their
response to PG&E's Second Amended Complaint, denying PG&E's allegations and
alleging certain counterclaims against PG&E. The parties are actively engaged in
discovery and the September trial date has been moved to October 1998. The
Partnership has previously advised the Federal Energy Regulatory Commission of
PG&E's claims, and stated that it would submit any appropriate filings upon
completion of its investigation. If the facility were found by the court not to
have satisfied the California cogeneration facility standards, there is a strong
likelihood that it would also fail to satisfy the more stringent federal
standards. 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, 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 and McKittrick Limited
(collectively, the "Partnerships"), limited partnerships in which the Company
has an indirect five percent general partner interest together with an indirect
45 percent limited partner interest and an indirect 50 percent limited partner
interest, respectively (the Company increased its former indirect 20 percent
limited partner interest in Chalk Cliff Limited to an indirect 45 percent
limited partner interest in April 1998 through the purchase of the interest of
CNG Power Company). All 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 in an amount equal
to approximately $31,000,000. 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 21, 1997, the Partnerships filed for voluntary Chapter
11 bankruptcy protection in the Eastern District of California. Normal business
operations by the Partnerships will continue throughout the course of these
reorganization proceedings. On January 12, 1998, the Court entered a Final
Order that (a) severs out the Partnerships due to their Chapter 11 bankruptcy
filings, (b) includes a finding of contract liability against the Destec
Defendants, (c) dismisses the tortious interference claims against the Destec
Defendants, and (d) assesses damages in an aggregate amount of approximately
$31,000,000. On that same day, the Destec Defendants filed their Notice of
Appeal, and posted a security bond, with the Second Appellate District in Los
Angeles based on the lack of allegations made or proven by SOCAL which support
holding those entities liable in contract. On March 11, 1998, the Partnerships
and their respective general partners filed Notices of Appeal with respect to
certain findings of fact in the Court's January 12, 1998, Final Order that were
adverse to those defendants. On or about April 15, 1998, the Court entered a
final
PAGE 20 OF 22
<PAGE>
judgment against the Partnerships in recognition of the lifting of the automatic
stay against those entities by the Bankruptcy Court. The Partnerships will
appeal that judgment. The appeal process is anticipated to take approximately
eighteen months. The liability of the Destec Defendants under the judgment will
be limited to that portion of the damage award not paid to SOCAL by the
Partnerships through the Chapter 11 bankruptcy proceedings.
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 loans 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 or results of operations
would not be materially adversely affected if the lenders chose to exercise
their option under the terms of such arrangements.
In March 1998, NGC settled all outstanding issues arising under a gas marketing
contract between Apache Corporation and Clearinghouse. A previously recognized
contingency reserve was sufficient to offset the confidential cash settlement.
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 affect
on the financial position or results of operations of the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following instruments and documents are included as exhibits to this
Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION
4.1 - Sixth Supplemental Indenture among NGC Corporation, the Subsidiary
Guarantors named therein and The First National Bank of Chicago, as
Trustee, dated as of January 5, 1998, supplementing and amending the
Indenture dated as of December 11, 1995./1/
4.2 - Seventh Supplemental indenture among NGC Corporation, the Subsidiary
Guarantors named therein and The First National Bank of Chicago, as
Trustee, dated as of February 20, 1998, supplementing and amending
the Indenture dated as of December 11, 1995./1/
4.3 - Indenture, dated as of September 26, 1996, restated as of March 23,
1998, to include amendments in the First through Fifth Supplemental
Indentures, between NGC Corporation and The First National Bank of
Chicago, as Trustee./1/
(b) No reports on Form 8-K were filed by the Company during the quarter-ended
March 31, 1998.
(1) Incorporated by reference to exhibits to the Annual Report on Form 10-K of
NGC Corporation for the fiscal year ended December 31, 1997, Commission
File No. 1-11156.
PAGE 21 OF 22
<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: May 15, 1998 By: /s/ BRADLEY P. FARNSWORTH
-------------------------------------
Bradley P. Farnsworth, Vice President and
Controller (Principal Accounting Officer)
PAGE 22 OF 22
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