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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 0-17389
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TEJAS GAS CORPORATION
(Exact Name of Registrant As Specified in Its Charter)
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DELAWARE 76-0263364
(State of Incorporation) (I.R.S. Employer Identification No.)
1301 McKINNEY, SUITE 700
Houston, Texas 77010
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (713) 658-0509
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.25 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Depositary Shares, each representing a one-tenth
interest in a share of 9.96% Cumulative
Preferred Stock, $1.00 Par Value New York Stock Exchange
Depositary Shares, each representing a one-fifth
interest in a share of 5 1/4% Convertible Preferred
Stock, $1.00 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
9.96% Cumulative Preferred Stock, $1.00 Par Value
5 1/4% Convertible Preferred Stock, $1.00 Par Value
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 the subject to
such filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 12, 1996 was approximately $395,000,000 based on the ending
sales price of the Registrant's common stock as reported on the New York Stock
Stock Exchange Composite Tape.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Outstanding
Class March 12, 1996
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Common Stock, $.25 Par Value 11,603,263 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement, to be filed with
the Commission within 120 days of December 31, 1995, for its Annual Meeting of
Stockholders to be held on May 9, 1996, are incorporated by reference in Part
III of this Annual Report.
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
PART I
Item 1. Business...................................................... 2
General....................................................... 2
Summary of Operations......................................... 6
Natural Gas Pipeline Operations............................... 6
Storage Facilities............................................ 9
Natural Gas Sales............................................. 10
Natural Gas Supplies.......................................... 12
Natural Gas Transportation.................................... 14
Natural Gas Processing........................................ 14
Natural Gas Treating.......................................... 15
Competition................................................... 15
Employees..................................................... 16
Regulatory Matters............................................ 16
Item 2. Properties.................................................... 17
Item 3. Legal Proceeding.............................................. 17
Item 4. Submission of Matters to a Vote of Security Holders........... 18
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 19
Item 6. Selected Financial Data....................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Item 8. Financial Statements and Supplementary Data................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 55
PART III
Item 10. Directors and Executive Officers of the Registrant............ 55
Item 11. Executive Compensation........................................ 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 55
Item 13. Certain Relationships and Related Transactions................ 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 56
</TABLE>
1
<PAGE>
PART I
Item 1. BUSINESS
GENERAL
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Tejas Gas Corporation ("Tejas") is a major intrastate natural gas
pipeline company engaged in the business of purchasing, gathering, processing,
treating, transporting and marketing natural gas. Tejas' operations are situated
primarily in the major gas producing areas in South Texas, East Texas and the
Texas and Louisiana Gulf Coast regions, with additional facilities located in
West Virginia and Oklahoma. Tejas is a holding company that conducts operations
through three principal second tier subsidiaries, Tejas Gas Corp. ("Tejas Gas"),
Acadian Gas Corporation ("Acadian") and Tejas Natural Gas Company ("TNGC").
Tejas-Acadian Holding Company ("TAHC"), a wholly owned subsidiary of Tejas, was
organized in December 1994 and owns the capital stock of each of Tejas Gas,
Acadian and TNGC. Tejas Alliance Holding Company ("TALHC"), a wholly owned
subsidiary of Tejas, was organized in July 1995 to hold an interest in Coral
Energy Resources, L.P. ("Coral"), an energy marketing joint venture with Shell
Oil Company ("Shell"). Unless the context indicates otherwise, the term "Tejas"
includes TAHC, Tejas Gas, Acadian, TNGC, and TALHC and their respective
subsidiaries.
Tejas is one of the largest independent intrastate gatherers and
transporters of natural gas volumes through company-owned pipelines in the
United States. During 1995, Tejas had an average throughput of 3.2 billion cubic
feet ("BCF") of natural gas per day in its natural gas sales, transportation and
processing activities. In 1995, Tejas' core business of purchasing, selling and
transporting natural gas through its pipeline systems accounted for
approximately 97% of its total volumes and 96% of earnings from operations, with
the balance attributable to natural gas processing, treating and off-system
marketing.
As of December 31, 1995, Tejas owned and/or operated intrastate
pipeline systems collectively comprising approximately 5,488 miles of pipeline.
This includes 20% and 50% interests, respectively, in two joint venture
pipelines (the "South Texas Joint Venture Pipelines") comprising approximately
230 miles of pipeline, a 50% interest in a 48-mile pipeline system (the "Big
Cowboy System") and a 50% capital interest in a partnership, Gulf Coast Natural
Gas Company ("Gulf Coast"), which owns approximately 580 miles of pipeline.
Tejas' pipeline systems consist of main lines, lateral lines and
gathering lines and have 205 interconnections with both interstate and
intrastate pipelines in Texas and Louisiana. Through these interconnections,
Tejas can access natural gas supplies from sources not directly connected to its
pipelines and deliver natural gas to those customers who are outside of Tejas'
geographical area of pipeline operations.
Tejas owns an underground natural gas storage facility in Texas and
leases an underground natural gas storage facility in Louisiana. The Texas
facility, known as the West Clear Lake Storage Facility ("WCLSF"), is one of the
largest natural gas storage facilities in Texas.
Tejas owns, or owns interests in, eight natural gas processing plants
which have processing capacities ranging from 10 million cubic feet ("MMCF") per
day to 40 MMCF per day. Tejas' two treating plants have an aggregate treating
capacity of 100 MMCF per day.
Tejas, a Delaware corporation, was organized on September 16, 1988 by
Hamilton Oil Corporation ("HOC") for the purpose of holding the capital stock of
Tejas Gas, which had been an indirect, wholly owned subsidiary of HOC or its
predecessor since 1979. Tejas Gas has been engaged in natural gas pipeline
operations and related activities since its inception in 1967. On July 1, 1988,
Tejas Gas purchased all of the outstanding capital stock of Gulf Energy Holding
Inc. another company engaged through subsidiaries
2
<PAGE>
in natural gas pipeline operations, principally in Texas. On December 27, 1988,
Tejas' capital stock was distributed to the stockholders of HOC in the form of a
spin-off. On December 28, 1990, Tejas purchased through a wholly owned
subsidiary, Acadian, all of the capital stock of several corporations comprising
the Acadian Gas Group, a group of companies engaged in natural gas pipeline
operations, principally in Louisiana. On September 15, 1993, Tejas, through a
newly formed wholly owned subsidiary, TNGC, acquired from Exxon Corporation
("Exxon") substantially all of Exxon's Texas and Louisiana intrastate natural
gas pipeline operations as well as a significant natural gas storage facility.
In January 1995, Tejas transferred the capital stock of each of Tejas Gas,
Acadian and TNGC to its wholly owned subsidiary, TAHC, in connection with the
amendment and consolidation of Tejas' credit facilities, which is more fully
discussed under "Liquidity" included in Item 7 herein. Tejas, through
subsidiaries of TALHC, holds a one-third interest in Coral, a natural gas
marketing venture.
Formation of Coral Energy Resources, L.P.
- -----------------------------------------
On November 1, 1995, Coral, a new independently managed energy
marketing venture between Tejas and Shell, commenced operations. Coral is a
Delaware limited partnership formed in September 1995 to market natural gas and
energy for Tejas and Shell. Coral is owned one-third by subsidiaries of Tejas
and two-thirds by certain subsidiaries of Shell. Tejas has the option to acquire
up to a 50% interest in Coral in either 1998 or 1999 based on the attainment of
certain earnings and/or volume levels. Coral's board of directors consists of
four members, two of whom are appointed by Tejas and two by Shell.
Coral initially began marketing 3.7 BCF per day of Tejas and Shell
natural gas volumes. Tejas provides Coral access to Tejas' 5,488 miles of
natural gas pipeline. Tejas' pipeline system has more than 200 interconnects
with other pipelines serving the U.S. and has access to gas supplies from Tejas'
gathering and transmission systems located in Texas and Louisiana. Coral was
initially staffed with employees from Tejas and Shell. In addition, Coral has
entered into a contractual arrangement with Bankers Trust to assist the new
company in providing a variety of specially tailored risk management services.
Pursuant to the Coral limited partnership agreement and related gas
sales contracts, the new company has access to Tejas' pipelines and storage
facilities and Shell dedicates over 2 BCF per day of gross natural gas
production and approximately 5.5 trillion cubic feet of natural gas reserves.
Tejas has committed to Coral substantially all of its natural gas supply, and
Shell has committed to Coral substantially all of its gas production in the
United States (excluding Alaska and Hawaii). In addition, Tejas provides
intrastate marketing expertise, and Shell provides interstate marketing
expertise, as well as treasury and administrative support services. Coral
conducts natural gas marketing activities for both Tejas and Shell.
Tejas and Shell have each contributed cash and economic interests in
natural gas sales contracts to Coral for their respective interests. Each
partner has received equity credit for natural gas committed to the partnership
that is subject to long-term contracts, and natural gas volumes and margins are
subject to make-up payments by the responsible partner if actual volumes and
margins fail to meet targeted contract levels. If Coral is unable to take all of
the natural gas tendered for delivery by the parties, Coral is obligated to pay
for such natural gas at the price that would have otherwise been applicable,
mitigated by the amount obtained from any sales of such natural gas to third
parties.
Exxon Transaction
- -----------------
In September 1993, Tejas through TNGC, acquired substantially all of
Exxon's intrastate natural gas pipeline operations in Texas and Louisiana (the
"Exxon Transaction"). Significant assets acquired, either through cash purchase
or lease, included a 1,442-mile pipeline system in Texas (the "Tejas Gas
Pipeline System," formerly known as the EGSI System), a 565-mile pipeline system
in Louisiana (the "Cypress Gas
3
<PAGE>
Pipeline System," formerly known as the Monterrey System) and a 125 BCF natural
gas storage facility located near the Houston Ship Channel (the WCLSF). These
pipeline systems have a combined throughput capacity of approximately 3.2 BCF
per day.
The Exxon Transaction increased Tejas' miles of pipeline systems which
it owns and/or operates by approximately 2,000 miles and increased Tejas'
average daily throughput by approximately 1.8 BCF. Approximately 508 miles of
the Tejas Gas Pipeline System were purchased from Exxon by an unrelated third
party (the "Lessor") and leased to Tejas under a five-year operating lease.
Tejas has the option to purchase the leased portion of the pipeline system (the
"Leased System") during the term of the lease for approximately $144.5 million
or pay a termination fee at the end of the lease of approximately $122.8
million. The total consideration paid to Exxon for the Exxon Transaction at
closing was $380 million, of which $235.5 million was paid by Tejas and $144.5
million was paid by the Lessor. Tejas financed its cash requirements for the
Exxon Transaction, including transaction costs of approximately $12 million,
primarily with bank borrowings (see Notes 3 and 11 of "Notes to Consolidated
Financial Statements").
The executive offices of Tejas are at 1301 McKinney, Suite 700,
Houston, Texas 77010, and its telephone number is (713) 658-0509.
4
<PAGE>
On page 5 of the printed document, a map appears that shows the
physical locations of the principal natural gas pipeline systems and natural gas
processing and treating plants within the states of Texas, Louisiana and West
Virginia.
5
<PAGE>
SUMMARY OF OPERATIONS
- ---------------------
The following table sets forth summary data for Tejas' operations.
TNGC's pipelines and operations are included in this table only for periods
subsequent to its acquisition by Tejas in September 1993.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
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<S> <C> <C> <C>
Miles of pipeline(1) 5,488 5,426 5,323
Operating natural gas processing plants 8 8 8
Operating treating plants 2 2 2
Average daily throughput in MMCF:
System sales 1,515 1,285 831
Transportation 1,469 1,688 913
Gulf Coast (Tejas' share) 115 113 110
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Total system throughput 3,099 3,086 1,854
Gas processed and other 87 94 151
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Total throughput 3,186 3,180 2,005
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Average daily natural gas liquids
production in thousands of gallons 179 190 215
Average daily treating plant inlet volumes
in MMCF(2) 43 53 54
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<FN>
- ------------------------
(1) Includes 230 miles of the South Texas Joint Venture Pipelines, 48 miles of
the Big Cowboy System, 580 miles for the Gulf Coast System and the 508 mile
Leased System.
(2) Treated volumes are also included in transportation volumes as such volumes
are handled by Tejas' natural gas pipelines.
</FN>
</TABLE>
NATURAL GAS PIPELINE OPERATIONS
- -------------------------------
Tejas' natural gas pipeline operations involve the purchase of natural
gas from various suppliers and the transportation and resale, through Coral, of
such natural gas to electric utility companies, local distribution companies,
industrial customers, affiliates of other pipeline companies, and pure marketing
companies as well as the transportation of natural gas for others on a fee
basis. Tejas' natural gas pipeline operations also include compression and
dehydration.
Tejas' natural gas pipeline systems are substantially all located on
properties owned by others. Tejas has obtained easements or rights-of-way for
its natural gas pipeline systems which generally provide for perpetual
possession and use. In certain instances, periodic payments are required to be
made. Where believed required, permits and licenses for natural gas pipeline
systems crossing or adjacent to public properties have also been obtained.
Certain easements have been acquired through eminent domain proceedings.
6
<PAGE>
Tejas' principal natural gas pipeline systems in Texas are the South
Texas Systems, the Tejas Gas Pipeline System, the Fort Worth Basin Systems, the
East Texas Systems, the Gulf Coast System and the Neches Pipeline System. Tejas'
principal natural gas pipeline systems in Louisiana are the Acadian Gas Pipeline
System, the Cypress Gas Pipeline System and the LEDCO System ("LEDCO").
The South Texas System consists of 801 miles of pipeline and includes
10 compressors ranging in size from 157 horsepower to 1,100 horsepower, for a
total of 6,400 horsepower. The South Texas System interconnects with the South
Texas Joint Venture Pipelines, which consist of approximately 230 miles of 16-
to 30-inch diameter pipelines. In September 1994, Tejas completed construction
of a 24-inch diameter, 250 MMCF per day capacity natural gas pipeline,
connecting Tejas' extensive gathering system in South Texas to its Tejas Gas
Pipeline System at a location near the King Ranch gas plant in Kleberg County.
The 90 mile pipeline provided much needed additional capacity to move
significant new natural gas production from the Bob West Field being developed
in Starr County as well as from other sources of natural gas located along
Tejas' South Texas gathering system. This new pipeline has increased Tejas'
throughput in South Texas and along the Gulf Coast as well as secured additional
natural gas supplies for future term sales. Total costs for the pipeline and an
interconnected three-mile section of 12-inch pipeline were $26.2 million. Also
interconnecting with the South Texas Joint Venture Pipelines, as well as the
Tejas Gas Pipeline System, is the Big Cowboy System which consists of 48 miles
of 16-inch diameter pipeline. Tejas completed construction and began operating
the Big Cowboy System, owned jointly by Tejas Gas and Houston Pipe Line Company
("HPL"), in March 1993. Tejas paid $7.3 million in total construction costs for
the Big Cowboy System and, for a specified term during which Tejas has 100% of
the capacity rights, HPL is committed to transport a minimum volume of natural
gas. Since commencing operation, the Big Cowboy System has transported an
average of approximately 100 MMCF of natural gas per day. Together, the South
Texas System, the South Texas Joint Venture Pipelines and the Big Cowboy System
have 19 interconnections with other pipelines, and Tejas' capacity of these
combined systems is 855 MMCF per day.
The Tejas Gas Pipeline System is comprised of a 949-mile pipeline
system that extends from the King Ranch processing plant in Kleberg County,
Texas along the Texas Gulf Coast to the Louisiana border and the 508-mile Leased
System which extends from north of Houston to Carthage, Texas. The Tejas Gas
Pipeline System has approximately 52 major interconnections with other pipelines
and has a throughput capacity of approximately 2,900 MMCF per day. The Leased
System is leased under the terms of an operating lease as described in this Item
1. under "Exxon Transaction."
The Fort Worth Basin Systems consist of 343 miles of pipeline and
include 22 compressors ranging in size from 96 horsepower to 2,200 horsepower,
for a total of 16,000 horsepower. The throughput capacity of the Fort Worth
Basin Systems is 75 MMCF per day.
The East Texas Systems include several individual systems which
collectively contain 320 miles of pipeline and have an aggregate throughput
capacity of 422 MMCF per day. During 1993, Tejas added approximately 50 miles of
pipeline to its East Texas Systems with the purchase of East Texas Industrial
Gas Company ("ETIG"). ETIG's pipeline interconnects with Tejas' existing East
Texas Systems and the Tejas Gas Pipeline System.
The South Texas System, the Fort Worth Basin Systems and the East Texas
Systems generally consist of numerous 2- to 4-inch diameter lines laid from
individual wells or common receiving points to points of connection with 6- to
20-inch diameter transmission lines which move the natural gas to the facilities
of end-user customers or to delivery points on third-party pipelines for further
delivery to Tejas' customers. The Tejas Gas Pipeline System primarily consists
of 12- to 36-inch diameter transmission lines.
Gulf Coast is a partnership formed on January 1, 1992 in which Tejas
Gas and ENSERCH Corporation ("ENSERCH") each own a 50% interest. Tejas operates
the partnership's 580-mile pipeline
7
<PAGE>
system (the "Gulf Coast System") which extends along the Texas Gulf Coast from
Bee County eastward to a point near the Katy pipeline hub west of Houston. The
Gulf Coast System has a capacity of approximately 200 MMCF per day and is
connected to Tejas' South Texas pipeline network, thereby accessing supplies for
Gulf Coast's markets. The Gulf Coast System is also connected to ENSERCH's Lone
Star Gas Company pipeline system and through such connection has access to
pipeline hubs in West Texas and East Texas.
The Neches Pipeline System, which consists of two pipeline segments
located in Jefferson, Orange and Montgomery Counties of Texas, has a total of 65
miles of 10- to 16-inch diameter pipelines with a combined throughput capacity
of approximately 185 MMCF per day. The system is used primarily to deliver
natural gas sold by Tejas to electrical utility power plants in Texas.
The Acadian Gas Pipeline System, located in southern Louisiana,
consists of 426 miles of 12- to 20-inch diameter transmission lines and lesser
diameter lateral and gathering lines. Natural gas is received at numerous
interconnections with natural gas producers' facilities or from third-party
pipelines and delivered to customers' facilities in southern Louisiana and,
through numerous interconnections with other pipelines, to markets in other
areas of the state. The throughput capacity of this system is approximately 600
MMCF per day. The principal market areas served by this system include the
industrial corridor along the Mississippi River between Baton Rouge and New
Orleans.
The Cypress Gas Pipeline System is a 577-mile pipeline located in south
central Louisiana. It consists of 10- to 22-inch diameter transmission lines and
lesser diameter lateral and gathering lines. This pipeline system has
interconnections with most of the interstate and intrastate pipeline systems
operating in southern Louisiana and has a throughput capacity of approximately
300 MMCF per day.
The LEDCO System is comprised of several Louisiana companies involved
in the intrastate gathering, transportation, and marketing of natural gas in
Louisiana. These facilities which were acquired in 1995 include over 110 miles
of pipelines with an aggregated capacity of approximately 200 MMCF per day and a
1995 average throughput of 69 MMCF. The pipelines range in size from 4- to
16-inch diameter with major systems located in North and South Louisiana. The
majority of the supply connected to LEDCO's pipeline systems is from wellhead
sources.
Tejas' remaining wholly owned pipeline systems have pipelines which
range in size from 18-inch diameter transmission lines to 2-inch diameter
gathering lines and in length from 87 miles to less than one mile. These smaller
systems generally gather natural gas from individual wells or from producers'
common delivery points and deliver such gas to third-party pipelines for further
delivery to Tejas' customers or for the account of the producers. These systems
are located in Texas, offshore Texas state waters and Louisiana.
8
<PAGE>
The following table sets forth information as to Tejas' natural gas
pipeline systems as of December 31, 1995.
<TABLE>
<CAPTION>
1995
Average
Pipeline Pipeline
Miles of Capacity Throughput
Pipeline (MMCF/D)(1) (MMCF/D)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
South Texas Systems:
South Texas System 801 680
South Texas Joint Venture Pipelines(3) 230 75
Big Cowboy System(3) 48 100
- --------------------------------------------------------------------------------
Total 1,079 855 565
Tejas Gas Pipeline System(4) 1,457 2,900 1,747
Fort Worth Basin Systems 343 75 44
East Texas Systems 320 422 128
Acadian Gas Pipeline System 426 600 424
Cypress Gas Pipeline System 577 300 271
LEDCO System 110 200 69
Gulf Coast System(3) 580 200 115
Other(5) 596 N/A(6) (264)
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Total 5,488 3,099
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<FN>
- ------------------------
(1) Pipeline capacity is subject to increases or decreases depending upon
natural gas pressures, compression and points of delivery into or out
of pipelines.
(2) Excludes off-system sales. Includes only Tejas' share of throughput in
joint ventures.
(3) Systems are owned less than 100% by Tejas.
(4) Includes the Leased System.
(5) Includes inter-segment eliminations.
(6) Capacity calculations for these natural gas systems are not meaningful
because of variances in supply availability, wellhead pressures and
delivery point pressures.
</FN>
</TABLE>
STORAGE FACILITIES
- ------------------
In late 1992, Tejas began operation of a leased salt dome natural gas
storage facility near Napoleonville, Louisiana. Located at the center of
Acadian's pipeline system, the facility has a storage capacity of 3.7 BCF and
withdrawal capacity of 225 MMCF per day. The storage facility is designed to
support the supply swing requirements relating to significant business with
electric utility companies and natural gas distribution companies resulting from
contracts entered into with such companies as well as other new business that
may develop in the future. The facility site was obtained under a 10-year lease,
under which Tejas has an option to extend the lease term for an additional 10
years. An affiliate of the lessor has contractual rights to 25% of the
facility's storage and withdrawal capacity. Another company has purchased a 25%
interest in the storage project and has borne a proportionate amount of the
construction costs, in order to obtain greater delivery flexibility for its peak
winter requirements. Its rights to total withdrawal capacity will be reduced to
approximately 5% during Tejas' peak summer demand period.
9
<PAGE>
As a part of the Exxon Transaction, Tejas purchased the WCLSF. This
storage facility, strategically located near the Houston Ship Channel, is one of
the largest natural gas storage reservoirs in Texas. The WCLSF is currently
capable of storing up to approximately 125 BCF of natural gas with injection
rates of approximately 80 MMCF per day. The injection rate is expected to
increase to 240 MMCF per day during the first quarter of 1996 as a result of
capital expenditures. Capital expenditures have enhanced the withdrawal rates at
the facility from 220 MMCF per day as of September 1993 to 550 MMCF per day
during the fourth quarter of 1995. The $9.8 million of capital invested through
December 31, 1995 (excluding $22.5 million for cushion gas) by Tejas at WCLSF
since September 1993 has increased the availability of natural gas and the
operational flexibility of the WCLSF. This will permit Tejas to sell
approximately 11 BCF of additional natural gas volumes out of the storage
facility during the current winter season and to provide additional volumes to
accommodate the seasonal needs of customers. Further development of the WCLSF is
possible and Tejas will continue to monitor and review the economic benefit of
such development.
NATURAL GAS SALES
- -----------------
Through Coral, Tejas sells natural gas to electric utilities, local
distribution companies, industrial end-users, marketing affiliates of other
pipeline companies and pure marketing companies. Tejas' electric utility and
industrial customers normally consume the natural gas in their own operations
while local distribution companies, pipeline affiliated customers, and pure
marketing customers generally resell the natural gas. Tejas' natural gas sales
are made pursuant to long-term contracts of primarily 5 to 20 1/2 years in
duration as well as under short-term agreements which generally range from one
month to one year in duration. Substantially all of Tejas' long-term sales
contracts, or an interest in those contracts, have been assigned to Coral. The
majority of the sales agreements discussed below are subject to this arrangement
with Coral. For further discussion of Coral, see "Formation of Coral Energy
Resources, L.P." and Note 8 of "Notes to Consolidated Financial Statements".
Long-Term Sales Agreements
- --------------------------
The majority of Tejas' long-term sales agreements provide for minimum
annual volumes to be delivered at market prices, determined monthly, plus a
predetermined margin. A small portion of Tejas' long-term sales are also made
under contracts whereby natural gas produced from a designated geographical
area, and which Tejas elects to purchase, is sold at a fixed price.
Substantially all of Tejas' long-term sales are made to electric utility
companies, local natural gas distribution companies and industrial customers.
The margins available to Tejas from such sales are greater than those currently
available under short-term contracts because of the additional services provided
by Tejas in connection with such sales. These services include aggregation of
supplies, assurance of supplies and the dedication of such Tejas facilities as
are necessary to provide for large swings in the volumes of deliveries to the
customers as the customers' requirements vary from season to season or from day
to day. Long-term sales contracts comprised approximately 42% of total system
sales volumes in both 1995 and 1994.
Evangeline Gas Pipeline Company, L.P.
- -------------------------------------
Under 20 1/2-year agreements with Evangeline Gas Pipeline Company, L.P.
("Evangeline") expiring at the end of 2012, Tejas sold to Evangeline minimum
volumes of 85 MMCF per day in 1994 and 100 MMCF per day in 1995 and will sell
100 MMCF per day each year thereafter. These volumes are sold to Evangeline at
market-responsive prices plus predetermined margins. Evangeline uses such supply
to meet its own supply obligation under a corresponding sales agreement with
Louisiana Power & Light ("LP&L"), a major utility company in the Louisiana Gulf
Coast area. Tejas owns direct and indirect ownership interests totaling 49.5% in
Evangeline.
10
<PAGE>
Gulf States Utilities Company
- -----------------------------
Under agreements with 8-year terms expiring on October 31, 1999 with
Gulf States Utilities Company ("GSU"), Tejas sells minimum annual volumes of
approximately 24 BCF to GSU's electric generating plants in Texas (Sabine and
Lewis Creek plants) and Louisiana (Willow Glen plant). Such volumes are sold to
GSU at market-responsive prices plus predetermined margins. As part of the Exxon
Transaction, Tejas assumed an existing agreement between Exxon and GSU which
provides for estimated average sales of approximately 30 MMCF per day at GSU's
Lewis Creek and Sabine electric generating plants which expires in June 1996.
New Orleans Public Service, Inc.
- --------------------------------
During the first quarter of 1992, Tejas executed an agreement with New
Orleans Public Service, Inc. ("NOPSI") to extend for ten years its winter season
natural gas supply agreement. The agreement provides that Acadian will sell a
minimum of 20 BCF of natural gas over the ten-year period at market-responsive
prices plus predetermined margins. During the term of the agreement, NOPSI will
have the right to purchase up to 3.5 BCF of natural gas during each winter
season from Acadian.
LGS Natural Gas Company
- -----------------------
Under a 12-year agreement expiring on April 1, 2003, Tejas sells a
minimum annual volume of approximately 3 BCF of natural gas to LGS Natural Gas
Company ("LGS"), a wholly owned subsidiary of Citizens Utilities Company. Such
volumes are sold at market-responsive prices plus predetermined margins.
Exxon Sales Agreement
- ---------------------
As discussed under the caption "Long-Term Supply Agreements" included
in this Item 1, Tejas has entered into certain long-term transportation and
supply agreements with Exxon in conjunction with the Exxon Transaction. Such
agreements as therein described provide for Tejas to transport Exxon's
production through Tejas' systems; however, Exxon has the option to purchase
certain volumes of natural gas from Tejas in lieu of transporting certain
committed volumes.
Short-Term Sales Contracts
- --------------------------
Short-term sales agreements generally provide for delivery of
negotiated volumes for a 30-day period at prevailing market prices. Customers
for short-term sales agreements are principally industrial companies, marketing
affiliates of other pipeline companies, and pure marketing companies, but may
also include local distribution companies and electric utilities. Profit margins
for such sales are currently much lower than those made under long-term sales
contracts and vary from month to month since they are affected by competition
for natural gas markets at the time of sale as well as the cost of natural gas
supplies. The cost of supplies will vary depending upon competition for such
supplies and the services provided by Tejas to producers, including gathering of
the natural gas from the producers' wells, compression and dehydration. Tejas
delivered from its systems an average of 923 MMCF per day under short-term sales
agreements during 1995 and 778 MMCF per day during 1994. In addition, Tejas sold
11 MMCF per day off-system during 1995 and 10 MMCF per day during 1994.
Off-system sales generally provide for substantially lower profit margins per
unit sold than sales made from Tejas' systems.
Seasonal Variations
- -------------------
Tejas' natural gas sales are affected by seasonal changes in demand for
natural gas because of weather. Tejas has its greatest demands during the winter
heating season and the summer air conditioning
11
<PAGE>
season so that greater volumes, revenues and earnings from operations are
usually experienced during those periods of the year. Variations in extremes of
weather from year to year have in the past resulted in significant variations in
Tejas' natural gas throughput, revenues and earnings for those years.
Principal Customers
- -------------------
Sales to Coral represented 10% of Tejas' revenues in 1995. No single
customer accounted for 10% of Tejas' revenues in 1994. In 1993, long-term and
short-term sales to GSU and sales to Evangeline represented 10% and 13% of
Tejas' revenues, respectively.
NATURAL GAS SUPPLIES
- --------------------
Tejas purchases natural gas from a variety of suppliers, ranging from
small independent producers to major oil and gas companies and marketing
affiliates of other pipeline companies, under approximately 1,681 long-term and
short-term natural gas purchase contracts. Tejas does not own any natural gas
reserves.
Natural gas supplies connected to Tejas' pipeline systems in Texas are
concentrated in South Texas, offshore Texas, the onshore Gulf Coast Region of
Texas, the Fort Worth Basin, and in various producing areas in central and East
Texas. Supplies are also obtained from other producing areas through
interconnections with third-party pipelines.
The South Texas System is located in an area in which active drilling
and completion of natural gas wells have continued over the past several years
and in which production levels have, therefore, remained generally constant.
Tejas believes active drilling in this area will continue because of its
geological nature and relatively high rate of successful well completions.
The Tejas Gas Pipeline System has access to major producing areas and
reserves located in the South Texas, offshore Texas, onshore Gulf Coast and East
Texas areas. It is connected to the King Ranch production via the King Ranch Gas
Processing Plant tailgate, with further access to additional third-party
production from the McAllen Ranch area. The Tejas Gas Pipeline System is also
expected to benefit from access to reserves and production connected to Tejas'
South Texas System, which gathers natural gas from the Wilcox Trend in Webb,
Zapata, Starr and Hidalgo Counties.
The Fort Worth Basin Systems' access to supplies is more limited than
that of the South Texas System and the Tejas Gas Pipeline System and the
connected producing wells are subject to greater production rate declines. While
supplies for the systems have been relatively stable over the past several years
because of new supplies made available, the maintenance or increase of the
supply levels will be highly dependent on new drilling in the area.
The East Texas Systems have direct connections to numerous natural gas
wells for a majority of their supplies, but a portion of their supplies are
obtained from other sources in the Carthage area through third-party pipelines.
The ability of these systems to maintain or increase the amount of their
supplies is largely dependent upon Tejas' ability to maintain or increase its
sales volumes to customers at market prices which will allow Tejas to be
competitive in bidding for available supplies.
Supplies for the Neches Pipeline System in Texas, and the Acadian Gas
Pipeline System and Cypress Gas Pipeline System in Louisiana, are purchased
principally under short-term contracts from producers in southern and offshore
Louisiana and offshore Texas through direct pipeline connections or through
interconnections with a number of third-party pipelines. The Acadian Gas
Pipeline System also
12
<PAGE>
has a direct connection with the Henry Hub, a major natural gas receipt and
delivery point in southern Louisiana from which supplies may be obtained from
numerous sources. Currently, as well as during the last several years, natural
gas supplies available for purchase on a short-term basis for these systems have
been relatively stable and abundant. Tejas foresees no significant reduction in
the availability of such supplies in the near term. However, if quantities of
supplies should diminish in the future, Tejas believes that it can successfully
compete for available supplies because a significant portion of Tejas' sales
will be made under long-term sales contracts which provide for sales volumes at
market-related prices plus a predetermined margin. This will allow Tejas to
offer suppliers competitive prices as well as a reasonably continuous market for
their supplies.
During 1995, Tejas purchased approximately 47% of its natural gas
supplies under month-to-month purchase contracts. The remaining 53% of its
supplies were obtained from wells which are directly connected to Tejas' systems
and which Tejas considers to be long-term supplies either because of a lack of
competing pipelines being reasonably accessible to such wells or because of
contractual long-term dedications of the wells' production to Tejas' systems.
These supplies are subject to decline through natural depletion of the wells.
The maintenance or increase in the amount of such long-term supplies will depend
upon the drilling and completion of new natural gas wells and upon Tejas'
ability to successfully compete for such newly developed supplies.
Purchases of natural gas from Tejas' five largest suppliers accounted
for approximately 34% of its total purchased volume during 1995 and
approximately 42% of its total purchased volume during 1994. The largest single
supplier accounted for approximately 19% and 23% of such total volume for 1995
and 1994, respectively. See also "Long-Term Supply Agreements" herein.
Long-Term Supply Agreements
- ----------------------------
NERCO Oil & Gas
- ---------------
In December 1991, Tejas entered into a 20-year contract with a
producer, NERCO Oil & Gas, Inc. ("NOG"), under which, beginning January 1, 1993,
minimum annual average volumes of 50 MMCF per day are purchased at prices
approximately equal to current average producers' prices, determined monthly.
NOG subsequently assigned such contract to Louisiana Land and Exploration
Company. These purchases are intended to provide approximately one-half of the
supply requirements for the sales contract with Evangeline, which is described
under "Natural Gas Sales" herein.
Exxon Purchase and Transportation Agreements
- --------------------------------------------
As part of the Exxon Transaction, Tejas has entered into certain
purchase and transportation agreements with Exxon. In Texas, Exxon has committed
to the Tejas Gas Pipeline System a substantial portion of its available natural
gas production from certain fields for a period of ten years. Such volume
commitment includes agreements under which Tejas transports volumes on the Tejas
Gas Pipeline System for Exxon and/or purchases volumes Exxon delivers to the
Tejas Gas Pipeline System. Volumes purchased by Tejas under these agreements are
at prices determined by monthly indices which are intended to reflect current
market prices. This volume commitment for natural gas is approximately 500 MMCF
per day, including Exxon's commitment for ten years to transport a minimum of
175 MMCF per day on the Tejas Gas Pipeline System for delivery to Exxon's
Baytown Refinery, unless limited by the total natural gas requirements of the
refinery. In Louisiana, Tejas transports a minimum of 70 MMCF per day on the
Cypress Gas Pipeline System to Exxon's Baton Rouge Chemical/Refinery Complex and
also transports certain volumes of natural gas to Exxon's Baton Rouge Gas
Processing Plant, as determined by the requirements of the processing plant.
13
<PAGE>
Other Contracts
- ---------------
Other than the supply contracts referred to above, for the past several
years the contracts entered into by Tejas do not obligate it to purchase fixed
quantities of natural gas and such contracts are effectively terminable by
either the buyer or the seller on relatively short notice (generally 30 to 90
days). However, Tejas is party to some older, longer-term natural gas purchase
contracts under which it is required, under certain circumstances, to purchase,
or to pay for if not taken, certain minimum volumes of natural gas at set prices
(so-called "take-or-pay" contracts). Possible take-or-pay claims may continue to
accrue under such older contracts until their expiration or renegotiation. Most
of these take-or-pay contracts will expire within the next four years. Payments,
if any, made under these take-or-pay provisions for natural gas not actually
taken are sometimes subject to being recouped out of takes of natural gas in
future periods in accordance with the terms of the contracts. In certain
instances, Tejas has similar take-or-pay provisions in sales contracts with its
customers.
Tejas Gas is a defendant in one pending take-or-pay lawsuit for which
alleged damages in excess of $36.0 million is claimed against Tejas Gas. See
"Item 3. Legal Proceedings" herein. Certain other producers have made claims
against Tejas Gas pursuant to take-or-pay provisions. Tejas estimates that such
claims are not material. Management believes that Tejas has adequate defenses or
recourse to third parties relating to such lawsuit and claims, and does not
believe that these matters will have a material adverse effect on Tejas'
financial condition. However, the ultimate outcome of the lawsuit and such
claims is uncertain at the present time.
NATURAL GAS TRANSPORTATION
- --------------------------
Tejas' business includes the transportation of natural gas through its
pipelines for others on a fee basis. Tejas receives natural gas from producers
or other pipelines or shippers at specified points on its systems and redelivers
the natural gas at other points. Transportation agreements provide for a fee per
unit of volume transported. During 1995 and 1994, Tejas delivered an average of
1,469 MMCF and 1,688 MMCF per day, respectively, under transportation
agreements. The decrease in volumes during 1995 is primarily the result of the
expiration of two low margin transportation contracts and a reduction in volumes
nominated under a third low margin contract. In addition, volumes were
negatively impacted by warmer than normal weather in Tejas' market area during
the first half of 1995.
NATURAL GAS PROCESSING
- ----------------------
At December 31, 1995, Tejas owned, or owned significant interests in,
eight natural gas processing plants.
Tejas' natural gas processing operations consist of extracting natural
gas liquids (ethane, propane, butanes and heavier products, collectively,
"NGLs") from natural gas supplied by producers and other pipeline companies,
either through Tejas-owned pipelines or directly from other companies'
pipelines. After processing, the residue natural gas is returned to the
pipelines. The NGLs extracted are transported to third- party fractionation
facilities where the products are separated and then generally sold to
wholesalers.
The processing contracts for some of Tejas' more significant natural
gas processing plant operations provide that Tejas receive certain minimum
revenues for processing. The processing contracts for Tejas' other plants
generally provide that Tejas receive all or a portion of the NGLs extracted as
its fee for processing, and the profitability of such plants depends directly
upon the volumes and sales prices of NGLs extracted, the volumes and prices of
natural gas consumed in the processing and the volume of natural gas
14
<PAGE>
supplies available for processing. During 1995, Tejas' natural gas plants
processed an average of 76 MMCF per day and produced an average of 178,800
gallons of NGLs per day.
The following table sets forth information as to Tejas' natural gas
processing plants as of and for the year ended December 31, 1995. Tejas'
interest in the operations of these plants is 100% unless otherwise indicated:
<TABLE>
<CAPTION>
1995
--------------------------------------
AVERAGE DAILY VOLUMES
--------------------------------------
Daily Inlet
Processing Natural Gas NGL
Number Capacity Volume Production
Plant Location of Plants (MMCF) (MMCF) (Gallons)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
West Virginia (1) 3 65 38 66,100
Texas 4 85 36 108,000
Louisiana (45% owned) 1 15 2 4,700
- --------------------------------------------------------------------------------
Total 8 165 76 178,800
- --------------------------------------------------------------------------------
- --------------------------
<FN>
(1) Operated under guaranteed return contracts.
</FN>
</TABLE>
NATURAL GAS TREATING
- --------------------
Natural gas treating operations involve removing hydrogen sulfide and
carbon dioxide from natural gas to make it marketable. These services are
normally conducted under long-term contracts for a fee per unit of natural gas
volume treated. Tejas owns and operates two natural gas treating plants in Texas
which have an aggregate treating capacity of approximately 100 MMCF of natural
gas per day. During 1995 and 1994, these plants treated an average of 43 MMCF
and 53 MMCF per day, respectively.
COMPETITION
- -----------
Significant competition exists for Tejas in many of its geographic
areas of operations in both purchasing natural gas supplies and in marketing
such supplies. The ability to offer competitive prices, reasonable assurances of
a continuous market and a favorable performance history with producers are the
principal factors in being competitive for supplies. Additionally, the extent of
direct connections between the producers' wells or gathering facilities and
Tejas' gathering or transmission lines is an important competitive factor.
Successful competition for markets depends primarily upon the ability to deliver
natural gas supplies to customers at competitive prices and in such quantities
as the customer may need from time to time as well as having a record of
reliability in performing the services required.
Currently, a significant portion of Tejas' volumes of natural gas
purchased and resold are under short-term contracts which are subject to
renegotiation of prices and volumes, usually on a monthly basis. Although this
affords Tejas greater flexibility in responding to changing market conditions,
supplies and markets under such contracts are not assured. In addition, excess
supplies in relation to demand causes competition for available markets. Tejas
has numerous competitors in its geographic area of operations,
15
<PAGE>
many of which are larger interstate pipeline companies with more extensive
pipeline networks and greater capital resources. Accordingly, for Tejas to
remain competitive it must continually meet or exceed such competitors' ability
to offer reliable services and competitive pricing. Tejas also faces varying
degrees of competition from the use of alternative energy sources, such as
electricity, coal, and oil.
EMPLOYEES
- ---------
Tejas had 383 employees at December 31, 1995. In connection with the
formation of Coral, Tejas transferred 25 employees to Coral in November 1995.
None of Tejas' employees are represented by a union. Management believes that
Tejas' relations with its employees are satisfactory.
REGULATORY MATTERS
- ------------------
Tejas' acilities and operations are subject to regulation by various
governmental agencies at both the federal and state level. Tejas' intrastate
Operations in Texas are subject to state regulations issued by the Railroad
Commission of Texas under the Cox Act, the Gas Utilities Regulatory Act and the
Natural Resources Code. The Railroad Commission of Texas regulates intrastate
pipeline companies as to rates, services and safety. Tejas' Louisiana operations
are subject to state regulations issued by the Louisiana Public Service
Commission and the Louisiana Department of Natural Resources. The Louisiana
Public Service Commission regulates Tejas' city gate sales. Within the Louisiana
Department of Natural Resources, the Office of Conservation has the authority to
regulate all pipeline interconnections, transportation and construction or
abandonment of facilities, and the Office of Pipeline Safety monitors the
implementation of U.S. Department of Transportation and Louisiana pipeline
safety regulations.
At the federal level, Tejas is subject to regulations of the Federal
Energy Regulatory Commission (the "FERC") under the Natural Gas Policy Act of
1978 and regulations implementing the Federal Natural Gas Pipeline Safety Act of
1968, which concerns pipeline safety. With respect to interstate pipeline
operations, the FERC has promulgated a series of orders that have led to the
restructuring of pipeline services and to the requirements that all interstate
pipelines provide "open access" service to anyone so requesting. While the
detailed "open access" regulations do not apply to intrastate pipelines such as
those of Tejas, the FERC does require that intrastate pipelines which provide
certain interstate services pursuant to Section 311 of the Natural Gas Policy
Act do so on an open and nondiscriminatory basis and make certain filings and
reports in compliance with the regulations. These "open access" regulations are
designed to encourage the transportation of gas on a nondiscriminatory basis to
increase the competitiveness and flexibility of natural gas markets. Several of
Tejas' pipelines are providing Section 311 service and compliance with the FERC
regulations has posed no significant problem. Tejas has three Hinshaw-qualified
pipelines which provide the means to purchase natural gas supplies from
interstate sources for redelivery and sale to intrastate markets without
regulation by the FERC. In addition to the above regulations, the natural gas
industry has historically been subject to numerous other forms of federal and
state regulation, and the effect of future regulations upon Tejas cannot be
predicted.
The operations of Tejas are subject to various federal, state and local
environmental laws, which can increase the costs of planning, designing,
installing and operating its facilities. In most instances, the regulatory
requirements relate to water and air pollution control measures. Operations in
Texas are subject to the Texas Clean Air Act as administered by the Texas
Natural Resources Conservation Commission, which Act restricts emissions from
wells, pipelines, compressors, processing plants and treating plants.
Furthermore, the Railroad Commission of Texas has the authority to issue permits
and regulations necessary to prevent environmental pollution by pipeline
operations. The Louisiana operations are subject to regulation by the Louisiana
Conservation Commission and other state agencies. The operations of Tejas
16
<PAGE>
are also subject to regulation on the federal level by the Federal Environmental
Protection Agency. Tejas is also subject to other federal, state and local laws
covering the handling or discharging into the environment of materials used by
Tejas, or otherwise relating to protection of the environment, safety and
health. The exact nature of environmental issues which Tejas and its
subsidiaries may encounter in the future cannot be predicted. Additional
environmental liabilities may result in the future as more stringent
environmental laws and regulations are implemented. The nature of Tejas'
business requires Tejas to monitor its compliance with environmental laws and
regulations and assess the likelihood of Tejas incurring environmental
liabilities, including liabilities associated with remediation. At present, no
estimate of any such liability, or range of liability amounts, can be made.
There can be no assurance that the amount of any such liabilities would not be
material.
Item 2. PROPERTIES
A description of Tejas' properties is included under "Item 1. Business"
above and is incorporated herein by reference. Substantially all of Tejas' net
assets reside at the subsidiary level. The capital stock and partnership
interests of all material TAHC subsidiaries and partnerships (excluding the
capital stock of Acadian, but including the capital stock and partnership
interests of the material operating subsidiaries and partnerships of Acadian)
and various intercompany notes are pledged as collateral under Tejas' credit
facilities. Such credit facilities are also guaranteed by substantially all of
TAHC's subsidiaries and partnerships.
Item 3. LEGAL PROCEEDINGS
The Long Trust Litigation
- -------------------------
Tejas is a defendant or party in various lawsuits that have arisen in
the ordinary course of Tejas' business. In particular, a subsidiary of Tejas is
a defendant in The Long Trust v. Tejas Gas Corp. et. al., 123rd Judicial
District Court, Panola County, Texas, filed March 1, 1989, in which plaintiffs
assert claims and allege damages for breach of contract and failure to
take-or-pay for natural gas pursuant to three natural gas purchase contracts.
Plaintiffs allege that, in addition to failing to take or pay for gas, Tejas
breached (a) one of the contracts by failing to take a minimum quantity of gas
and to install and maintain pipeline facilities sufficient to permit Tejas to
meet its quantity purchase obligations, and (b) all three contracts by failing
to take gas in quantities sufficient to enable plaintiffs to produce ratably
with other producers in a common reservoir. In plaintiffs' Sixth Amended
Original Petition filed June 6, 1995, the plaintiffs are seeking take-or-pay
damages for the ten year period 1984-1994 in excess of $36.0 million, plus
pre-judgment interest, post-judgment interest, attorneys' fees and court costs
and other unspecified actual damages. In connection with their depositions in
this matter, certain expert witnesses retained by The Long Trusts have presented
damage models purporting to show substantial additional damages related to the
take-or-pay and ratability claims. Management disputes The Long Trusts' claims
and believes that The Long Trusts' damage models are seriously flawed. On
January 6, 1993, the court entered an interlocutory summary judgment order
granting in part and denying in part plaintiffs' motions for summary judgment.
The court found, among other things, as a matter of law that (a) Tejas breached
the minimum take obligations under one of the contracts, (b) Tejas is not
entitled to any credits or offsets for natural gas purchased by third parties,
and (c) the "availability" of natural gas for take-or-pay purposes is
established by the delivery capacity testing procedures in the contracts.
Damages, if any, have not been determined. The effect of this order on Tejas'
case is unclear and Tejas has sought clarification and rehearing, but intends
nevertheless to defend its position aggressively.
17
<PAGE>
Although Tejas has not obtained a formal opinion, based on discussions
with outside counsel and an internal examination of this lawsuit, management
believes that it has adequate defenses or recourse to third parties relating to
such lawsuit and does not believe this matter will have a material adverse
effect on Tejas' financial condition. Because of the relationship between The
Long Trust contracts and certain contracts between Tejas and Valero Transmission
Company ("VTC"), and in order to resolve existing and potential claims and
disputes, Tejas, VTC and Valero Transmission, L.P. ("VTLP") entered into an
agreement, pursuant to which, among other things, Tejas, VTC and VTLP would
cooperate in the conduct of The Long Trust litigation, and VTC and VTLP would
bear a substantial portion of the costs of any appeal and of the amount of any
nonappealable final judgment rendered against Tejas. On April 15, 1994, the
plaintiffs named VTC and VTLP (collectively "Valero") as additional defendants
to the lawsuit, alleging that Valero intentionally and maliciously interfered
with the plaintiffs' contracts with Tejas. In its Sixth Amended Original
Petition, plaintiffs are seeking damages against Valero in an amount in excess
of $36.0 million, and plaintiffs added a conspiracy claim against Tejas alleging
that Tejas conspired with Valero in interfering with the contracts. Plaintiffs
also have added a claim for exemplary damages treble the amount of the actual
damages, if any, found by the court for the interference and conspiracy claims.
Plaintiffs assert that Tejas should be jointly liable with Valero for the
damages plaintiffs have asserted against Valero.
City of Baytown Litigation
- --------------------------
Tejas is a member of a joint defense group comprised of twenty-seven
companies that have been threatened with claims by various cities in Texas that
the companies owe franchise type fees for commercial gas operations within their
city limits. Tejas and certain of its subsidiaries were named as defendants in
City of Baytown v. Tejas Gas Corporation, 11th Judicial District Court, Harris
County, Texas, filed August 31, 1995. Plaintiff alleged that the defendants
carried on their commercial gas operations within the city limits of Baytown
without the City of Baytown's permission and without payment of fees to the
City, and asserted a number of causes of action against the defendants.
Plaintiff sought unspecified damages based on various theories of recovery,
including a percentage of gross receipts from gas sales inside the City of
Baytown, and other remedies, including injunctive relief and exemplary damages.
On January 18, 1996, the City of Baytown filed a Notice of Nonsuit Without
Prejudice, thereby dismissing its claims against Tejas. Tejas has filed a
counterclaim against the plaintiff seeking injunctive and declaratory relief
with respect to certain issues raised in the plaintiff's suit, which
counterclaim is pending. The law firm that represented the City of Baytown
announced that it would continue its efforts to bring similar suits by other
cities against pipeline companies. It is possible that claims by other cities
may be filed against Tejas and other pipeline companies alleging similar causes
of action. Management believes that Tejas has adequate defenses relating to
these types of claims, and does not believe that these matters will have a
material adverse effect on Tejas' financial condition. However, there can be no
assurance that additional lawsuits will not be filed against Tejas or that Tejas
will prevail in any lawsuit that may be filed against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1995.
18
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, for the periods indicated, the high and
low sales prices of the Common Stock, as reported on the NYSE Composite Tape.
<TABLE>
<CAPTION>
------------------------------------------------------
High Low
------------------------------------------------------
<S> <C> <C>
Period:
1994
First Quarter $ 51 5/8 $ 44 1/2
Second Quarter 49 1/8 43 5/8
Third Quarter 47 5/8 41
Fourth Quarter 43 1/4 37 1/4
1995
First Quarter $ 43 1/4 $ 36 7/8
Second Quarter 50 7/8 40 1/8
Third Quarter 53 7/8 45
Fourth Quarter 54 45 3/4
-------------------------------------------------------
</TABLE>
On March 12, 1996, the last reported sales price for the Common Stock,
as reported on the NYSE Composite Tape, was $45 3/8 per share. On March 12,
1996, there were 940 stockholders of record of the Common Stock.
On July 19, 1995, Tejas' Board of Directors authorized a stock dividend
of one-tenth of one share of Common Stock for each share of Common Stock
outstanding payable to stockholders of record on July 27, 1995. Stock prices
used in this Item 5 have been adjusted to give retroactive effect to the stock
dividend for the periods presented prior to July 27, 1995. Such adjusted prices
may not reflect prices which may actually have occurred had the stock dividend
been in effect during such periods.
No cash dividends have been paid on the Common Stock by Tejas since its
shares were publicly distributed, and Tejas does not currently intend to pay
cash dividends on its Common Stock. Such policy will be reviewed by the Board of
Directors of Tejas from time to time in light of, among other things, Tejas'
earnings and financial position, capital requirements and limitations imposed by
its credit facilities. The terms of Tejas' outstanding 9.96% Cumulative
Preferred Stock and 5 1/4% Convertible Preferred Stock restrict the
distributions Tejas may make if there is any arrearage in the dividends thereon.
Tejas' credit facilities restrict the distributions it may receive from its
subsidiaries, as more fully described in Note 5 of "Notes to Consolidated
Financial Statements" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 6. SELECTED FINANCIAL DATA
Set forth below is certain selected financial information for Tejas.
Such information is based upon, and should be read in conjunction with, the
Consolidated Financial Statements of Tejas and the notes
19
<PAGE>
thereto included elsewhere in this report. The amounts shown below include the
operations of TNGC only for the period subsequent to the acquisition on
September 15, 1993. For a description of the 1993 acquisition of TNGC's
properties, see "Exxon Transaction" included in Item 1. herein.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 1,043,621 $ 1,031,967 $ 790,178 $ 524,471 $ 454,528
Gross Profit(1) 166,533 158,138 111,980 78,773 78,596
Earnings from operations 75,721 71,323 51,292 33,930 33,855
Interest expense (26,130) (24,670) (18,053) (18,534) (22,933)
Earnings before income taxes 51,790 48,005 35,980 17,794 13,426
Net earnings(2) 32,937 30,546 22,069 11,903 10,828
Net earnings applicable to
common stock(2) 24,544 22,153 17,016 11,903 10,828
- ---------------------------------------------------------------------------------------------------------------
Other Data:
Capital expenditures(3) 19,101 63,225 10,066 24,175 8,658
Depreciation and amortization 32,324 30,398 23,314 18,938 18,713
Cash operating income(4) 107,887 102,778 76,649 54,049 52,568
- ---------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at year end):
Working capital (deficit) 40,610 23,040 (21,911) (13,009) (1,475)
Property, plant and equipment, net 614,734 621,528 588,352 347,684 342,538
Total assets 915,451 840,958 786,504 471,883 439,191
Long-term obligations(5) 356,758 378,875 337,275 224,965 224,965
Common stockholders' equity(6) 187,485 162,474 140,050 127,970 115,941
Stockholders' equity 302,485 277,474 255,050 127,970 115,941
- ---------------------------------------------------------------------------------------------------------------
Per Share Data:
Earnings per common share(2)(7) $ 2.12 $ 1.87 $ 1.44 $ 1.03 $ 0.94
Average common shares
outstanding (7) 11,568 11,825 11,825 11,606 11,563
- ---------------------------------------------------------------------------------------------------------------
- ----------------------
<FN>
(1) Revenues less cost of sales.
(2) Net earnings, net earnings applicable to common stock and earnings per
common share for the year 1991 include an increase of $2,290,000,
$2,290,000 and $0.20, respectively, for the cumulative effect of a
change in the accounting method for income taxes.
(3) Excludes acquisitions and investments in unconsolidated entities.
(4) Earnings from operations plus depreciation and amortization plus equity
in earnings from unconsolidated entities.
(5) Includes preferred membership units of a subsidiary in 1995.
(6) Total stockholders' equity less liquidation value of preferred stock.
(7) Earnings per common share and average common shares outstanding have
been adjusted to give retroactive effect to a three-for-two stock split
implemented in March 1993 and a stock dividend of one-tenth of one
share of common stock on each share of common stock outstanding paid to
stockholders of record on July 27, 1995 as if the stock split and the
stock dividend had occurred at the beginning of each period presented.
</FN>
</TABLE>
20
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONTITION AND
RESULTS OF OPERATIONS
The following is a discussion of Tejas' financial condition, results of
operations, capital resources and liquidity. This discussion and analysis should
be read in conjunction with the Consolidated Financial Statements of Tejas and
the notes thereto included elsewhere in this report.
Results of Operations
- ---------------------
Year Ended December 31, 1995 Versus 1994
----------------------------------------
Tejas' net earnings increased to $32.9 million for the year ended
December 31, 1995, compared to $30.5 million for the year ended December 31,
1994, an 8% increase. Net earnings applicable to common stock for the year ended
December 31, 1995, were $24.5 million, up from $22.2 million in 1994. Earnings
per common share increased to $2.12 per share for the 1995 annual period as
compared to $1.87 for the 1994 annual period, an increase of 13%. Net earnings
applicable to common stock and per share results for 1995 and 1994 are after
provisions for $8.4 million in dividends on the Company's 9.96% Cumulative
Preferred Stock (the "9.96% Preferred Stock") issued in February 1993 and the
Company's 5 1/4% Convertible Preferred Stock (the "5 1/4% Preferred Stock")
issued in November 1993.
Natural Gas Systems
- -------------------
Sales, storage and transportation of natural gas through its owned
and/or operated natural gas pipeline systems and gas storage facilities is
Tejas' core business. Volumes related to those activities accounted for 97% of
total systems throughput and 95%, or $158.3 million, of gross profit (revenues
less cost of sales) during 1995 as compared to 97% of total throughput and 95%,
or $150.1 million, of gross profit in 1994. Improved sales volumes, a $4.5
million gain associated with a long-term gas sales contract, and gas purchase
and sales activity supported by Tejas' WCLSF were partially offset by lower
transportation volumes. (For further discussion of WCLSF, see "Storage
Facilities.") Transportation volumes were impacted by the expiration of two low
margin transportation contracts and a reduction in volumes nominated under a
third low margin contract. In addition, transportation volumes were negatively
impacted by warmer than normal weather in Tejas' market area during the first
half of 1995.
Revenues for Tejas' natural gas systems increased to $1,012.5 million
in 1995 as compared to $999.3 million for 1994, an increase of $13.2 million.
This increase resulted from increased system sales volumes which were partially
offset by lower average sales prices and decreased transport volumes.
Natural Gas Processing/Off-System Marketing
- -------------------------------------------
Natural gas processing and off-system marketing activities contributed
approximately 2.4% and 0.3%, respectively, to total 1995 throughput and 4.8% and
0.1%, respectively, to gross profit. Gross profit from these two components of
Tejas' operations increased to $8.2 million in 1995 as compared to $8.0 million
in 1994 as a result of lower fuel and shrinkage costs for natural gas
processing.
Revenues for natural gas processing and off-system marketing decreased
to $31.1 million in 1995 as compared to $32.6 million in 1994, as a result of
decreased throughput and production by suppliers.
Operating Expenses/Depreciation/General and Administrative Expenses
- -------------------------------------------------------------------
Operating expenses, depreciation, and general and administrative
expenses increased by $4.0 million during 1995 over 1994. Reduced operating
expenses and depreciation as a result of a small, non-strategic
21
<PAGE>
system in Louisiana disposed of during the second quarter of 1995, was partially
offset by increased ad valorem taxes along with the depreciation on the fixed
assets of a small gathering and marketing company acquired in February 1995 and
other capital expenditures.
Other Income (Expense)
- ----------------------
Equity in earnings (loss) of unconsolidated entities decreased by $1.2
million in 1995 over 1994 reflecting Tejas' share of losses in Evangeline and
decreased earnings of Gulf Coast. The decreased earnings from Gulf Coast Natural
Gas Company ("Gulf Coast") and Tejas' increased share of the losses incurred by
Evangeline Gas Pipeline Company, LP and Evangeline Gas Corp. ("Evangeline") was
partially offset by the two months of earnings of Coral. Earnings in Gulf Coast
were lower primarily due to lower margins on sales of natural gas volumes. In
1995, Tejas' interests in Evangeline bore 100% of all losses compared to 45% in
1994. A gain of approximately $1.6 million, net of certain reserves, was
recognized by Tejas during the second quarter of 1995, on the sale of a small,
non-strategic gathering system located offshore Louisiana.
Interest expense increased by $1.5 million in 1995 as compared to 1994
primarily due to a slightly higher effective rate of interest and an increase in
the average outstanding debt balance.
Income Taxes
- ------------
Income tax expense increased $1.4 million in 1995 over 1994 due to
increased pre-tax earnings.
Year Ended December 31, 1994 Versus 1993
----------------------------------------
Tejas' net earnings increased to $30.5 million for the year ended
December 31, 1994, compared to $22.1 million for the year ended December 31,
1993, a 38% increase. Net earnings applicable to common stock for the year ended
December 31, 1994, were $22.2 million, up from $17.0 million in 1993. Earnings
per common share increased to $1.87 per share for the 1994 annual period as
compared to $1.44 for the 1993 annual period, an increase of 30%. Net earnings
applicable to common stock and per share results for 1994 and 1993 are after
provisions for $8.4 million and $5.1 million, respectively, in dividends on the
9.96% Cumulative Preferred Stock and the 5 1/4% Convertible Preferred Stock.
As more fully discussed below, Tejas' growth in net earnings for the
year ended December 31, 1994 is the result of several factors, the most
significant of which was the inclusion of operations acquired by Tejas from
Exxon Corporation (the "Acquired Exxon Operations") on September 15, 1993.
Natural Gas Systems
- -------------------
Sales and transportation of natural gas through its wholly or jointly
owned pipeline systems is Tejas' core business and accounted for 97% of total
throughput and 95%, or $150.1 million of gross profit (revenues less cost of
sales) during 1994 as compared to 92% of total throughput and 92%, or $103.3
million of gross profit during 1993. Additionally, the gross profit attributable
to Tejas' share of Gulf Coast gross profit decreased to $4.8 million in 1994 as
compared to $5.5 million in 1993. As Gulf Coast is accounted for using the
equity method of accounting, the gross profit attributable to Tejas' share of
Gulf Coast volumes is reported net of all expenses in the "Equity in earnings of
unconsolidated entities" amount on Tejas' Consolidated Statements of Earnings.
During 1994, Tejas' average daily system throughput increased by 1,232 MMCF or
66% while natural gas systems gross profit increased by $46.8 million.
22
<PAGE>
Substantially all of the increase in systems throughput and gross profit is
attributable to the Acquired Exxon Operations and the South Texas expansion.
Revenues for Tejas' natural gas systems increased to $999.3 million in
1994 as compared to $720.1 million for 1993, an increase of $279.2 million. Such
increase reflects the inclusion of the Acquired Exxon Operations for a full year
in 1994 partially offset by a 13% decrease in natural gas commodity prices
during 1994 as compared to 1993.
Natural Gas Processing/Off-System Marketing
- -------------------------------------------
Natural gas processing and off-system marketing activities contributed
approximately 2.7% and 0.3%, respectively, to total 1994 throughput and 4.9% and
0.1%, respectively, to gross profit. Gross profit from these two components of
Tejas' operations decreased to $8.0 million in 1994 as compared to $8.7 million
in 1993 as a result of lower volumes for off-system marketing activities and
higher fuel and shrinkage costs primarily in the first quarter, for natural gas
processing.
Revenues for natural gas processing and off-system marketing decreased
to $32.6 million in 1994 as compared to $70.1 million in 1993, principally
because of lower volumes sold in off-system marketing activities.
Operating Expenses/Depreciation/General and Administrative Expenses
- -------------------------------------------------------------------
Operating expenses, depreciation, and general and administrative
expenses increased by $26.1 million during 1994 over 1993. Such increase was due
largely to the inclusion of the Acquired Exxon Operations.
Other Income (Expense)
- ----------------------
Equity in earnings (loss) of unconsolidated entities decreased by $1.0
million in 1994 over 1993 reflecting Tejas' share of losses in Evangeline and
decreased earnings of Gulf Coast. Gulf Coast's throughput for 1994 increased by
approximately 3% over 1993 because of additional supplies available from South
Texas, however, margins were lower.
Interest expense increased by $6.6 million in 1994 as compared to 1993.
Such increase was primarily due to the addition of debt to finance the
acquisition of the Acquired Exxon Operations, partially offset by reductions in
debt from the proceeds of Tejas' issuance of preferred stock in 1993.
Income Taxes
- ------------
In August 1993, new legislation raised the maximum income tax rate for
corporations from 34% to 35%. A $0.8 million non-cash charge to deferred income
tax was made in 1993 for prior years as a result of the change in tax rates.
The remaining $4.3 million increase in income tax expense for 1994 as compared
to 1993 is primarily the result of higher pretax earnings.
Capital Resources, Liquidity and Outlook
- ----------------------------------------
Cash Flows from Operating Activities
- ------------------------------------
For the year ended December 31, 1995, net cash provided by operating
activities totaled $48.7 million as compared to $33.7 million for the same
period in 1994. This increase in net cash provided
23
<PAGE>
by operations is due to a $3.2 million increase in net earnings adjusted for
depreciation and amortization and other noncash items and a $11.8 million
decrease in the use of cash for working capital components. As more fully
described in Note 15 of "Notes to Consolidated Financial Statements", the
decrease in use of cash for working capital was due to a $7.4 million decrease
in storage gas inventory with the remainder due primarily to the timing of cash
receipts and payments. Excluding net changes in working capital components,
Tejas' operating activities generated $76.4 million in cash during 1995 as
compared to $73.1 million in 1994.
Cash Flows from Investing Activities
- ------------------------------------
Net cash used in investing activities totaled $25.2 million for capital
expenditures and other investment activities. Capital expenditures totaled $19.1
million, which included $3.8 million for the WCLSF, $2.9 million for a new
natural gas pipeline in Grimes County, Texas and $12.4 million for other capital
expenditures. In addition, $6.7 million was used to acquire a small gathering
and marketing system in Louisiana.
Cash Flows from Financing Activities
- ------------------------------------
Tejas made debt payments under its revolving credit facilities of $74.1
million during 1995 with the necessary funds being provided by cash generated
from its operating activities and $55.0 million in proceeds from the sale of
preferred equity interests in a subsidiary during December 1995, as described in
further detail under "Liquidity" below. During the same period, Tejas also made
periodic borrowings totaling $22.0 million under its revolving credit facilities
to fund capital expenditures and to supplement its working capital requirements
including purchases of storage gas inventory. Additionally, Tejas made net
payments of $19.7 million under its various money market credit lines.
Liquidity
- ---------
Tejas' net cash from operating activities increased to $48.7 million at
December 31, 1995, a change of $15.0 million from $33.7 million reported at
December 31, 1994. This improvement was due to increases in net earnings,
depreciation and amortization, deferred income taxes and reduced increases in
working capital. These increases were partially offset by decreases in
distributions from unconsolidated subsidiaries. Working capital stood at $40.6
million at year-end 1995, compared to $23.0 million at year-end 1994. This $17.6
million increase in working capital is principally due to higher storage gas
inventories and larger net receivable balances.
At December 31, 1995, Tejas' long-term debt with banks totaled $295.9
million consisting of $284.9 million borrowed under revolving credit facilities
and $11.0 million borrowed under various money market credit lines. In addition,
Tejas had $11.2 million in notes payable related to Industrial Development
Refunding Revenue Bonds issued by Lewis and Pleasants Counties, West Virginia.
Effective January 12, 1995, Tejas amended its credit facilities to
roll-up a majority of the existing bank debt of its three principal operating
subsidiaries into a single, $455.0 million, eight-year, revolving credit
facility at a newly formed subsidiary, TAHC. One of the subsidiaries, TNGC,
retained a $25 million working capital facility with terms and conditions
substantially similar to the rolled-up facility. The two facilities combined
provide Tejas' subsidiaries with $480.0 million in borrowing capacity. At
December 31, 1995, Tejas had available borrowing capacity under the TAHC and
TNGC revolving credit agreements (the "Credit Agreements") of $178.9 million
after giving effect to borrowings under the Credit Agreements and its money
market lines (offset by available cash pursuant to the terms of such money
market lines of credit) and certain letters of credit. Under the terms of the
Credit Agreements, after two years, the revolving credit facilities will, unless
extended at the option of the lenders, convert to six-year reducing revolvers.
During
24
<PAGE>
the fourth quarter of 1995, the lenders under such Credit Agreements agreed to
extend by one year both the maturity date and the period in which commitment
reductions commence. Commitment reductions of $15.0 million per quarter are
currently scheduled to begin March 31, 1998 with the final remaining commitment
reduction to occur on December 31, 2003. Based upon the current terms of the
Credit Agreements and the outstanding principal balance at December 31, 1995, no
principal payments are required until early 2001. Tejas' Credit Agreements are
subject to certain covenants, including the maintenance of certain financial
ratios, with which Tejas expects to be able to comply in the ordinary course of
business.
The Credit Agreements are secured by guaranties and the capital stock
and partnership interests of all material subsidiaries and partnerships of TAHC
(excluding the capital stock of Acadian, but including the capital stock and
partnership interests of the material operating subsidiaries and partnerships of
Acadian) and various intercompany notes.
The amount of loans, advances and distributions (collectively
"Distributions") that may be made directly or indirectly by TAHC and TNGC to
Tejas under the Credit Agreements is subject to certain limitations. At year-end
1995, Distributions to Tejas of $ 231.5 million were permitted, of which $ 45.1
million and $ 186.4 million could be paid in dividends and loaned, respectively.
In general, dividend and loan allowances may be adjusted by a percentage of
consolidated quarterly net earnings or losses of TAHC, certain investments and
any cumulative aggregate Distributions. Such limitations as herein described are
not expected to have any material effect on the ability of Tejas to meet its
cash obligations.
Tejas has uncommitted money market credit lines which allow Tejas to
borrow up to $40.0 million for periods of up to one month. Any such borrowings
are unsecured and may be extended for additional periods if agreed to by the
lender. At December 31, 1995, Tejas had an outstanding balance of $11.0 million
under such lines. Tejas has agreed to maintain funds including availability
under the Credit Agreements sufficient to repay borrowings under the money
market credit lines.
The notes payable related to Lewis and Pleasants counties' bonds are
secured by bank letters of credit which in turn are secured by mortgages on two
natural gas processing plants located in West Virginia. The notes are also
subject to certain covenants and require that Tejas Gas' subsidiaries, Gulf
Energy Development Corporation and Gulf Energy Gathering & Processing
Corporation, maintain certain financial standards.
On December 29, 1995, a subsidiary of Tejas, Tejas-Magnolia Energy,
L.L.C. ("Tejas-Magnolia"), issued preferred equity interests to a third party in
return for a capital investment of $55.0 million. Tejas-Magnolia is required to
make preferred distributions to the third party which constitute a return on
capital (at an effective fixed after tax cost to Tejas of 4.2%) and return of
capital over an eight-year term. Annual distributions (including return of
capital and dividends) of approximately $8.7 million are payable from 1996
through 2001 and approximately $9.5 million in each of 2002 and 2003. In
connection with the issuance of the preferred equity interests in
Tejas-Magnolia, another subsidiary of Tejas has contributed a portion of the
proceeds from sales under certain long-term natural gas sales contracts to
Tejas-Magnolia in exchange for common equity interests in Tejas-Magnolia. This
ongoing contribution supports the preferred distribution obligations of
Tejas-Magnolia during the eight-year term.
As part of the Exxon Transaction, Tejas entered into a five-year
operating lease for the Leased System (see Notes 3 and 14 of "Notes to
Consolidated Financial Statements"). Lease payments are adjusted quarterly based
upon the Lessor's financing costs; however, Tejas has entered into interest rate
swap agreements in a notional amount of $144.5 million to fully hedge the
effects of such adjustments on the required minimum lease payments. The lease
currently currently expires on September 14, 1998. At such time, Tejas, at its
options, may either purchase the Leased System or pay a termination fee of
$122.8 million.
25
<PAGE>
Tejas' WCLSF requires the maintenance of cushion gas in order to
sustain anticipated operational requirements. Such cushion gas requirements have
been satisfied by a combination of natural gas purchased by Tejas and third
party natural gas stored in the facility. At December 31, 1995, Tejas had
purchased approximately 10.4 BCF of cushion gas. In late 1994, Tejas entered
into an agreement with a third party whereby the third party agreed to purchase
up to 35 BCF of natural gas at a cost not to exceed $65.0 million and to store
such gas in the WCLSF. The agreement with the third party is currently scheduled
to expire in September 2000. In order to secure Tejas' ability to purchase the
gas from the third party, the agreement provides for the payment by Tejas of a
reservation fee to the third party which is adjusted quarterly based upon the
third party's financing costs. On certain option dates, Tejas may elect to
purchase specified volumes of the third party's natural gas based on market
prices. Should Tejas decline to purchase the natural gas, the third party may
instruct Tejas to sell such volumes on the third party's behalf. In such case,
it will be necessary for Tejas to obtain cushion gas through other means in
order to meet the anticipated operational requirements of the WCLSF. At December
31, 1995, the third party had 34.6 BCF of natural gas in storage at the WCLSF,
which such party purchased for $ 62.4 million. Based upon the volumes and rates
in effect at December 31, 1995, Tejas estimates the net annual cost related to
the reservation fee on the 34.6 BCF of natural gas to be approximately $ 1.9
million.
Tejas has an obligation to redeliver certain volumes of gas from the
WCLSF. In addition to the 34.6 BCF described above, Tejas has an obligation to
redeliver approximately 2.7 BCF of gas held in storage for other third parties.
Tejas bears the cost of physical loss, if any, incurred during storage.
Management estimates that physical losses will not be significant and has
insured against physical losses due to catastrophic events. Of the total 65.4
BCF of natural gas in the WCLSF at December 31, 1995, 37.3 BCF was owned by
third parties.
In order to hedge the interest rate risks associated with Tejas'
financing activities (including an operating lease obligation), Tejas frequently
enters into interest rate swaps with financial institutions in order to manage
interest rate risk. While the interest rate swaps eliminate the risks associated
with increases in the floating interest rates of Tejas' obligations, the swaps
also eliminate the opportunities associated with reductions in such floating
interest rates. Payments received or made by Tejas under such interest rate
swaps are recorded as reductions to or increases in interest expense over the
life of the interest rate derivative instrument.
Tejas uses derivative financial instruments (primarily futures, swaps
and other contracts) as an extension of its commercial natural gas purchases and
sales and to hedge price exposure, including location and pricing basis, of its
storage and exchange gas inventories, commitments, and certain anticipated
transactions. While the derivative financial instruments are intended to reduce
the risks associated with unfavorable changes in such prices, the derivative
financial instruments also reduce the opportunities associated with favorable
changes in market prices. Any increases or decreases in the market value of such
derivative transactions are deferred and accounted for as part of the
transactions or activities being hedged.
Tejas' interest rate and other derivative agreements are with
established exchanges, energy companies, and major financial institutions, and
Tejas believes that its counterparties will be able to satisfy their contractual
obligations. See Note 7 of "Notes to Consolidated Financial Statements" for
additional information with respect to Tejas' derivative transactions.
Coral engages in similar derivatives transactions for its own account.
In the normal course of business, Tejas regularly reviews opportunities
for the possible acquisition of additional natural gas pipelines and companies
that own natural gas pipelines. When potential acquisition opportunities are
deemed to be consistent with Tejas' growth strategy, bids or offers in amounts
and with terms acceptable to Tejas may be submitted. It is uncertain whether any
such bids or offers which
26
<PAGE>
may be submitted by Tejas would be acceptable to the sellers of such acquisition
targets. In the event of a future significant acquisition, Tejas may require
additional financing in connection therewith.
New Financial Accounting Standards
- ----------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Certain long-lived assets and certain identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell. SFAS No. 121 is effective for the fiscal years
beginning after December 15, 1995. Tejas is in the process of evaluating the
implications of SFAS No. 121, but does not, at this time, expect the impact, if
any, to be material.
In October, 1995, the FASB issued SFAS No. 123 Accounting for Stock
Based Compensation which defines a fair value method of accounting for employee
stock options and similar equity instruments. This statement is effective for
fiscal years beginning after December 15, 1995. As allowed by SFAS No. 123,
Tejas plans to continue to measure compensation cost for their plans using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees with pro forma
disclosure in the future of any difference between compensation cost determined
by using the intrinsic value method and the related cost measured by using the
fair value method.
Outlook
- -------
The profitability of Tejas' pipeline operations is affected by two
primary factors, the amount of natural gas volumes sold under long-term sales
contracts and the balance of supply and demand in the short-term markets. Tejas'
long-term sales contracts currently require Tejas to provide a greater amount of
service than is required under short-term sales contracts and therefore,
generally have substantially higher profit margins than the short-term sales
contracts. The proportion of Tejas volumes sold under long-term contracts was
42% in 1995 and is not expected to change materially in 1996. In addition to the
above factors, volumes of natural gas transported for third parties and profit
margins for short-term sales are affected by the supply and demand for natural
gas. Average prices for natural gas during 1995 were substantially lower than
such prices for 1994. This was in part due to a mild summer and a warmer winter
in early 1995 resulting in a weaker than anticipated demand for natural gas.
Natural gas prices increased significantly in the fourth quarter of 1995 due to
the colder than normal weather experienced primarily in December 1995. During
the fourth quarter, heating degree days for Tejas markets were up 19% versus
1994 and 3% higher than normal. The impact on Tejas of this short-term demand
volatility was mitigated by natural gas available to Tejas held in storage at
the WCLSF.
During 1995, the WCLSF both enhanced Tejas' operational flexibility and
improved gross profit by providing the ability to purchase gas at attractive
prices and store it for future delivery to Tejas' customers, thus freeing other
gas supplies for delivery under fully hedged futures contracts at assured profit
margins as well as providing the availability of additional competitively priced
natural gas which was supplied to Coral for marketing during the fourth quarter
of 1995. The 1995 profitability identified with system sales volumes related to
WCLSF, including associated system sales gross profit margins, accounted for 14%
of the total natural gas systems gross profit, an increase from the 1994 level
of approximately 4%. While Tejas' management believes that the enhanced
injection and withdrawal capabilities at WCLSF permits the facility to be
operated in such a manner as to continue this performance, there can be no
assurances that market conditions, including the average cost of natural gas
held in storage, will always be conducive to maintaining that profitability.
27
<PAGE>
Tejas is encouraged by the many opportunities available for future
growth and continued expansion of operations. Tejas recently entered into a
natural gas marketing venture with Shell (Coral). Coral commenced operations on
November 1, 1995. While no prediction can be made as to the impact of the
marketing joint venture on Tejas' prospects, Tejas' management believes that
over the next several years Coral should be in a position to take advantage of
the unutilized capacity in Tejas' major long-distance transmission lines. In
addition, the large number of interconnects between Tejas pipelines and other
intrastate and interstate pipelines have the potential to become important
supply points for Coral. Additionally, substantial capacity remains to be
developed at the WCLSF which has the potential to continue to enhance profits
from services provided to both suppliers and consumers and from gas held in
storage for future delivery. Tejas has historically shown the ability to adapt
to changing operational requirements and capitalize on new market opportunities.
Although the foregoing factors present Tejas with opportunities to grow and
expand, there can be no assurance that such factors will result in future growth
and expansion of Tejas' operations and revenues and earnings.
Tejas management knows of no trends or uncertainties that will impair
Tejas' ability to comply with its debt covenants or pay the dividends on the
9.96% Preferred Stock and 5 1/4% Preferred Stock.
28
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEJAS GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report.......................................... 30
Consolidated Financial Statements
- ---------------------------------
Consolidated Balance Sheets, December 31, 1995 and 1994........... 31
Consolidated Statements of Earnings for the Years Ended
December 31, 1995, 1994 and 1993............................... 32
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993................... 33
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993................... 34
Notes to Consolidated Financial Statements........................ 35
Financial Statement Schedule
- ----------------------------
I - Condensed Financial Information of Registrant................. 60
</TABLE>
All other schedules are omitted because they are not
required or the required information is shown in the
financial statements or notes thereto.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Tejas Gas Corporation:
We have audited the accompanying consolidated balance sheets of Tejas
Gas Corporation and its subsidiaries ("Tejas") as of December 31, 1995 and 1994,
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
Our audits also included the financial statement schedule listed in the Index at
Item 8. These financial statements and the financial statement schedule are the
responsibility of Tejas' management. Our responsibility is to express an opinion
on the financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Tejas as of December 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
February 14, 1996
30
<PAGE>
TEJAS GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,816 $ 7,954
Accounts receivable 181,704 112,368
Exchange gas receivable 10,004 8,543
Storage gas inventory 38,733 28,139
Prepaids and other current assets 9,124 4,900
Deferred income tax asset 2,024 3,997
- ------------------------------------------------------------------------------
Total current assets 246,405 165,901
- ------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 793,376 769,642
Less accumulated depreciation 178,642 148,114
- ------------------------------------------------------------------------------
Property, plant and equipment, net 614,734 621,528
- ------------------------------------------------------------------------------
Goodwill, net 10,278 10,745
- ------------------------------------------------------------------------------
Investments in Unconsolidated Entities 31,927 30,515
- ------------------------------------------------------------------------------
Other Assets 12,107 12,269
- ------------------------------------------------------------------------------
Total $ 915,451 $ 840,958
==============================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Gas purchases payable $ 153,867 $ 104,990
Exchange gas payable 9,825 8,776
Accounts payable 9,508 4,543
Accrued liabilities 25,397 23,518
Income taxes payable 1,881 1,034
Current maturities of long-term obligations 5,317 -
- ------------------------------------------------------------------------------
Total current liabilities 205,795 142,861
- ------------------------------------------------------------------------------
Long-Term Debt 306,075 378,875
- ------------------------------------------------------------------------------
Deferred Income Taxes 50,413 41,748
- ------------------------------------------------------------------------------
Commitments and Contingencies - -
- ------------------------------------------------------------------------------
Preferred Membership Units of a Subsidiary 50,683 -
- ------------------------------------------------------------------------------
Stockholders' Equity:
Preferred Stock, $1 par value; 6,000,000
shares authorized;
200,000 shares of 9.96% Cumulative
Preferred Stock issued and
outstanding in 1995 and 1994; $250
liquidation preference per share 200 200
260,000 shares of 5 1/4% Convertible
Preferred Stock issued and
outstanding in 1995 and 1994; $250
liquidation preference per share 260 260
Common Stock, $.25 par value; 30,000,000
shares authorized;11,603,263 and
10,508,729 shares issued and
outstanding in 1995 and 1994,
respectively 2,901 2,627
Capital surplus 191,490 138,499
Retained earnings 107,634 135,888
- -----------------------------------------------------------------------------
Total stockholders' equity 302,485 277,474
- -----------------------------------------------------------------------------
Total $ 915,451 $ 840,958
=============================================================================
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
TEJAS GAS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------
(in thousands, except for share amounts)
<S> <C> <C> <C>
Revenues $ 1,043,621 $ 1,031,967 $ 790,178
- -----------------------------------------------------------------------------------
Costs and Expenses:
Cost of sales 877,088 873,829 678,198
Operating expenses 38,081 36,153 19,504
Depreciation and amortization 32,324 30,398 23,314
General and administrative 20,407 20,264 17,870
- -----------------------------------------------------------------------------------
Total 967,900 960,644 738,886
- -----------------------------------------------------------------------------------
Earnings From Operations 75,721 71,323 51,292
- -----------------------------------------------------------------------------------
Other Income (Expense):
Equity in earnings (loss) of
unconsolidated entities (158) 1,057 2,043
Interest expense (26,130) (24,670) (18,053)
Other, net 2,357 295 698
- -----------------------------------------------------------------------------------
Total (23,931) (23,318) (15,312)
- -----------------------------------------------------------------------------------
Earnings Before Income Taxes 51,790 48,005 35,980
- -----------------------------------------------------------------------------------
Income Taxes:
Current 9,656 9,354 7,328
Deferred 9,197 8,105 6,583
- -----------------------------------------------------------------------------------
Total 18,853 17,459 13,911
- -----------------------------------------------------------------------------------
Net Earnings 32,937 30,546 22,069
- -----------------------------------------------------------------------------------
Preferred Stock Dividend Requirements 8,393 8,393 5,053
- -----------------------------------------------------------------------------------
Net Earnings Applicable to Common
Stock $ 24,544 $ 22,153 $ 17,016
===================================================================================
Weighted Average Number of Common
Shares Outstanding 11,568 11,825 11,825
===================================================================================
Earnings Per Common Share $ 2.12 $ 1.87 $ 1.44
===================================================================================
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
TEJAS GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except shares)
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock:
Par Value, $1 Per Share:
Authorized, 6,000,000 Shares:
9.96% Cumulative beginning
balance 200,000 $ 200 200,000 $ 200 - $ -
Shares issued - - - - 200,000 200
- ----------------------------------------------------------------------------------------------------------------------------------
Ending Balance 200,000 $ 200 200,000 $ 200 200,000 $ 200
==================================================================================================================================
5 1/4% Convertible beginning
balance 260,000 $ 260 260,000 $ 260 - $ -
Shares issued - - - - 260,000 260
- ----------------------------------------------------------------------------------------------------------------------------------
Ending Balance 260,000 $ 260 260,000 $ 260 260,000 $ 260
==================================================================================================================================
Common Stock:
Par Value, $0.25 Per Share:
Authorized, 30,000,000 Shares:
Beginning balance 10,508,729 $ 2,627 10,350,544 $ 2,588 10,279,597 $ 2,570
10% Stock dividend 1,053,330 263 - - - -
Purchase of fractional shares (422) - - - (247) -
Exercise of stock options, net 27,970 7 158,185 39 71,194 18
Other 13,656 4 - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Ending Balance 11,603,263 $ 2,901 10,508,729 $ 2,627 10,350,544 $ 2,588
==================================================================================================================================
Capital Surplus:
Beginning balance $ 138,499 $ 138,267 $ 28,681
10% Stock dividend 52,535 - -
Purchase of fractional shares (19) - (7)
Exercise of stock options, net (11) 253 291
Preferred shares issued - - 110,515
Preferred stock issuance cost - (21) (1,213)
Other 486 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Ending Balance $ 191,490 $ 138,499 $ 138,267
==================================================================================================================================
Retained Earnings:
Beginning balance $ 135,888 $ 113,735 $ 96,719
10% Stock dividend (52,798) - -
Net earnings 32,937 30,546 22,069
Preferred dividend requirements (8,393) (8,393) (5,053)
- ----------------------------------------------------------------------------------------------------------------------------------
Ending Balance $ 107,634 $ 135,888 $ 113,735
==================================================================================================================================
TOTAL $ 302,485 $ 277,474 $ 255,050
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
TEJAS GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 32,937 $ 30,546 $ 22,069
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 32,324 30,398 23,314
Amortization of deferred loan costs 928 1,360 899
Deferred income taxes 9,197 8,105 6,583
Equity in (earnings) loss of unconsolidated
entities 158 (1,057) (2,043)
Distributions from unconsolidated entities 1,467 2,673 2,520
Other, net (646) 1,103 185
- --------------------------------------------------------------------------------------------------
76,365 73,128 53,527
Net increase in working capital, net of
effects from acquisitions (27,683) (39,449) (6,215)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,682 33,679 47,312
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,101) (63,225) (10,066)
Acquisition from Exxon, net of cash acquired - - (237,262)
Other acquisitions, net of cash acquired (6,746) - (5,301)
Investments in unconsolidated entities (3,037) (304) (8,520)
Other, net 3,664 (605) 460
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,220) (64,134) (260,689)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line-of-credit
agreements (19,700) 26,700 4,000
Exercise of stock options, net 106 656 118
Proceeds from issuance of long-term debt 22,000 74,900 272,000
Retirement of long-term debt (74,100) (62,190) (161,500)
Debt issuance/amendment costs incurred (1,493) - (4,538)
Issuance of preferred stock, net of expenses - - 109,974
Preferred stock dividends (8,393) (8,326) (3,721)
Proceeds from sale of preferred membership units
of a subsidiary 55,000 - -
Other, net (20) (21) (7)
- --------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (26,600) 31,719 216,326
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,138) 1,264 2,949
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,954 6,690 3,741
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,816 $ 7,954 $ 6,690
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
TEJAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
1. ORGANIZATION
Tejas Gas Corporation ("Tejas") was organized in 1988 by Hamilton Oil
Corporation ("HOC") for the purpose of holding the capital stock of Tejas Gas
Corp. ("Tejas Gas"). Tejas Gas was incorporated in 1967 and had been an indirect
wholly owned subsidiary of HOC since 1979. On December 27, 1988, Tejas' stock
was distributed to the stockholders of HOC in the form of a spin-off and Tejas
became an independent, publicly traded company.
Tejas is a natural gas pipeline company engaged in purchasing,
gathering, processing, treating, transporting and marketing natural gas. Tejas
conducts operations through three subsidiaries of Tejas-Acadian Holding Company
("TAHC"): Tejas Gas, Acadian Gas Corporation ("Acadian") and Tejas Natural Gas
Company ("TNGC"). Tejas Gas conducts operations itself and through its
subsidiaries, Gulf Energy Pipeline Company, Gulf Energy Gathering & Processing
Corporation, Gulf Energy Marketing Company, Gulf Energy Liquids Company, Tejas
Hydrocarbons Company, East Texas Industrial Gas Company, Valley Gas
Transmission, Inc. and Tejas-Gulf Corporation. Acadian conducts operations
through Acadian Gas Pipeline System, Pontchartrain Natural Gas System, Pelican
Transmission System, Calcasieu Gas Gathering System, Spindletop Gas Distribution
System, Neches Pipeline System, LEDCO, Inc., Louisiana State Gas Corporation and
LEDCO Gas Gathering Inc. TNGC conducts operations through Tejas Gas Pipeline
Company, Tejas Gas Marketing Company, Tejas Gas Storage Company, Tejas Gas
Services Company, Cypress Gas Pipeline Company and Cypress Gas Marketing
Company. Tejas Alliance Holding Company ("TALHC"), through its subsidiaries,
owns a one-third interest in Coral Energy Resources, L.P. ("Coral"), a natural
gas marketing venture.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial
statements include the accounts of Tejas and its wholly owned subsidiaries.
Investments in companies in which Tejas' ownership interest ranges from 20 to 50
percent and Tejas exercises influence over operating and financial policies are
accounted for using the equity method. Other investments are accounted for using
the cost method. All significant intercompany balances and transactions have
been eliminated in consolidation. In connection with the preparation of these
financial statements, management was required to make estimates and assumptions
that effect the reported amount of assets, liabilities, revenues, expenses and
disclosure of contingent liabilities. Actual results could differ from such
estimates.
Certain immaterial amounts in the consolidated financial statements for
periods prior to 1995 have been reclassified to conform to the current
presentation.
Cash and Cash Equivalents - Cash and cash equivalents consist of all
cash balances and highly liquid investments which have an original maturity at
purchase of three months or less.
Exchange Gas - Exchange gas volumes receivable are valued at the lower
of cost or market at the end of each period. Exchange gas volumes payable are
recorded at market value at the end of each period.
Storage Gas Inventory - Storage gas inventory is valued at the lower of
cost or market at the end of each period. Natural gas is removed from inventory
at weighted average cost.
35
<PAGE>
Derivatives - Realized gains and losses on hedges of existing assets or
liabilities are deferred and are ultimately recognized in income as part of the
carrying amounts of the related assets or liabilities. Gains and losses related
to qualifying hedges of firm commitments or anticipated transactions also are
deferred and are recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs.
Property, Plant and Equipment - Property, plant and equipment is stated
at cost. Additions, improvements and major renewals are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred.
The cost of property sold or retired is credited to the asset account,
and the related depreciation is charged to the accumulated depreciation account.
Profit or loss resulting from the sale or retirement is included in earnings.
Depreciation of property, plant and equipment is provided on a
straight-line basis over the estimated useful lives of the assets as follows:
<TABLE>
--------------------------------------------------------------
<S> <C>
Buildings 7 - 30 years
Natural gas systems, storage, processing
plants and treating plants 10 - 35 years
Other equipment 3 - 7 years
--------------------------------------------------------------
</TABLE>
Capitalized Interest - Interest on funds used to finance construction
of significant assets is capitalized and amortized over the productive lives of
the related assets. All other interest is charged to expense as incurred. During
1994 and 1993, Tejas capitalized interest of $0.4 million and $0.1 million,
respectively. During 1995, no capital projects were of sufficient duration or
size to result in capitalized interest.
Goodwill - The excess of the acquisition costs over the fair value of
purchased assets, arising from the acquisition of Tejas Gas by HOC in 1978, is
recorded as goodwill and is being amortized $467,000 annually on a straight-line
basis over 40 years. At December 31, 1995 and 1994, the accumulated amortization
of goodwill was $8.4 million and $7.9 million, respectively. Tejas periodically
reviews the carrying value of goodwill in relation to the current and expected
operating results of Tejas Gas in order to assess whether there has been a
permanent impairment of goodwill.
Revenues - Customers are invoiced and the related revenue is recorded
as natural gas deliveries are made.
Income Taxes - Tejas accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income
taxes are recorded for the effects of temporary differences between financial
and taxable income.
Earnings Per Common Share - Earnings per common share are based upon
the weighted average number of shares of Common Stock and common stock
equivalents, if dilutive, outstanding during the year. Common stock equivalents
consist of shares issued assuming all stock options are exercised using the
treasury stock method. The difference between earnings per common share on a
primary and a fully diluted basis is not significant.
Earnings per common and common equivalent share amounts and average
shares entering into such computation for 1995 and prior periods reflect the
three-for-two stock split of Tejas' common stock effected in the form of a stock
dividend authorized in March 1993, and the stock dividend of one-tenth of one
share of common stock for each share of common stock outstanding authorized July
19, 1995.
36
<PAGE>
New Financial Accounting Standards
- ----------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Certain long-lived
assets and certain identifiable intangibles to be disposed of must be reported
at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 is
effective for the fiscal years beginning after December 15, 1995. Tejas is in
the process of evaluating the implications of SFAS No. 121, but does not, at
this time, expect the impact, if any, to be material.
In October, 1995, the FASB issued SFAS No. 123 Accounting for Stock
Based Compensation which defines a fair value method of accounting for employee
stock options and similar equity instruments. This statement is effective for
fiscal years beginning after December 15, 1995. As allowed by SFAS No. 123,
Tejas plans to continue to measure compensation cost for their plans using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees with pro forma
disclosure in the future of any difference between compensation cost determined
by using the intrinsic value method and the related cost measured by using the
fair value method.
3. ACQUISITION
In September 1993, Tejas, through a newly formed wholly owned
subsidiary, TNGC, acquired substantially all of Exxon Corporation's ("Exxon")
intrastate natural gas pipeline operations in Texas and Louisiana (the "Exxon
Transaction"). Significant assets acquired, either through cash purchase or
lease, included a 1,442-mile pipeline system in Texas (the "Tejas Gas Pipeline
System," formerly known as the EGSI System), a 565-mile pipeline system in
Louisiana (the "Cypress Gas Pipeline System," formerly known as the Monterey
System) and a 125 billion cubic feet ("BCF") natural gas storage facility
located near the Houston Ship Channel (the West Clear Lake Storage Facility (the
"WCLSF")). These pipeline systems have a combined throughput capacity of
approximately 3.2 BCF per day.
Approximately 508 miles of the Tejas Gas Pipeline System were purchased
from Exxon by an unrelated third party (the "Lessor") and leased to Tejas under
a five-year operating lease. Tejas has the option to purchase the leased portion
of the pipeline system (the "Leased System") during the term of the lease for
approximately $144.5 million or pay a termination fee at the end of the lease of
approximately $122.8 million.
The total consideration paid to Exxon for the Exxon Transaction at
closing was $380.0 million, of which $235.5 million was paid by Tejas and $144.5
million was paid by the Lessor. Tejas financed its cash requirements for the
Exxon Transaction, including transaction costs of approximately $12.0 million,
primarily with bank borrowings (see Note 5).
The acquisition by TNGC was accounted for as a purchase, and the
purchase price was allocated to the acquired assets and liabilities based upon
their estimated fair market value at September 15, 1993. The lease of the Leased
System is for a five-year term and is accounted for as an operating lease (see
Note 14). The results of operations for the assets acquired or leased as a
result of the Exxon Transaction are included in the accompanying financial
statements for the period subsequent to September 15, 1993.
The unaudited pro forma condensed statement of earnings which follows
represents consolidated results of operations as if the Exxon Transaction had
been consummated at the beginning of 1993. Pro
37
<PAGE>
forma adjustments have been made to the historical amounts for the entities and
operations acquired for operating expenses, depreciation and amortization,
general and administrative expenses, interest expense and related tax effects.
Such amounts do not include the pro forma effects of either issue of preferred
stock (see Note 11), which were integral to Tejas' financial condition prior to
and after the Exxon Transaction.
<TABLE>
<CAPTION>
Year Ended December 31, 1993
---------------------------------------
(in thousands, except per
share amount -unaudited)
<S> <C>
Revenues $ 1,060,397
=======================================
Net earnings $ 29,842
=======================================
Earnings per common share $ 2.10
=======================================
</TABLE>
The pro forma results do not purport to be indicative of the results of
operations that would actually have been obtained if the acquisition had
occurred at the beginning of 1993.
4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Buildings and land $ 4,505 $ 3,181
Natural gas systems, storage, processing
plants and treating plants 776,719 756,482
Other equipment 12,152 9,979
------------------------------------------------------------------------
Total $ 793,376 $ 769,642
========================================================================
</TABLE>
38
<PAGE>
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
-------------------------------------------------------------
(in thousands)
<S> <C> <C>
Revolving Credit Agreements $ 284,900 $ 337,000
Industrial Development Bonds 11,175 11,175
Money Market Lines of Credit 11,000 30,700
-------------------------------------------------------------
307,075 378,875
Less current installments 1,000 -
-------------------------------------------------------------
Total long-term debt $ 306,075 $ 378,875
=============================================================
</TABLE>
TAHC and TNGC Facilities
- ------------------------
Effective January 12, 1995, Tejas amended its credit facilities to
roll-up a majority of the existing bank debt of its three principal operating
subsidiaries into a single, $455.0 million, eight-year, revolving credit
facility at a newly formed subsidiary, TAHC. One of the subsidiaries, TNGC,
retained a $25.0 million working capital facility with terms and conditions
substantially similar to the rolled-up facility. The two facilities combined
provide Tejas with $480.0 million in borrowing capacity. Both the TAHC and TNGC
credit facilities bear interest rates, at Tejas' option, based on either the
prime rate or the London Interbank Offered Rate ("LIBOR"). The margins over the
LIBOR rate that TAHC and TNGC must pay vary depending on TAHC's funded debt to
capitalization ratio test which may range from a minimum of 0.5% to a maximum of
1.25%. Based on borrowings at December 31, 1995, of $284.9 million, and after
considering restrictions to provide for a $10.0 million letter of credit and
borrowings under its money market credit lines (offset by cash available
pursuant to the terms of such credit lines), approximately $178.9 million of
additional borrowings were available under these amended facilities.
Additionally, at year-end, based upon TAHC's funded debt to capitalization ratio
test, both the TAHC and TNGC credit facilities bore interest rates, at Tejas'
option, of prime or LIBOR plus 0.50%. Under the terms of the agreements, the
revolving credit facilities will convert to six-year reducing revolvers on
December 31, 1997, unless extended at the option of the lenders. Commitment
reductions of $15.0 million per quarter are scheduled to begin March 31, 1998
with the final remaining commitment reduction to occur on December 31, 2003.
Based upon the current terms of the credit agreements and the outstanding
principal balance at December 31, 1995, no principal payments are required until
early 2001.
Industrial Development Bonds
- ----------------------------
In 1990, a Tejas Gas subsidiary issued two notes in the aggregate
amount of approximately $11.2 million related to the issuance of Industrial
Development Refunding Revenue Bonds ("IDRRB's") by Lewis and Pleasants Counties,
West Virginia, and called for redemption of previously outstanding notes and
related Industrial Development Revenue Bonds ("IDRBs") of those counties in the
aggregate amount of approximately $11.2 million. As of December 31, 1995 the
notes and IDRRBs have a weighted average interest rate of 8.6%, including bank
fees, and require annual principal payments of $1.0 million in 1996,
39
<PAGE>
$2.0 million in each of the years 1997 through 2000, $1.6 million in 2001 and
$0.6 million in 2002. The notes are secured by bank letters of credit which in
turn are secured by mortgages on two natural gas processing plants located in
West Virgina. The notes are also subject to certain covenants and require that
Tejas Gas' subsidiaries, Gulf Energy Development Corporation and Gulf Energy
Gathering & Processing Corporation, maintain certain financial standards.
Money Market Credit Lines
- -------------------------
Tejas has uncommitted money market credit lines which allow Tejas to
borrow up to $40.0 million for periods of up to one month. Any such borrowings
are unsecured and may be extended for additional periods if agreed to by the
lender. At December 31, 1995, Tejas had an outstanding balance of $11.0 million
borrowed under the money market credit lines at an average interest rate of
6.4%. Tejas has agreed to maintain available funds under its revolving credit
facilities sufficient to repay borrowings under the money market credit lines
and accordingly, the $11.0 million outstanding is classified as long-term at
December 31, 1995.
Cash payments for interest in 1995, 1994 and 1993, net of amounts
capitalized, were $25.1 million, $22.7 million and $17.0 million, respectively.
Scheduled maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------------
<S> <C>
1996 $ 1,000
1997 2,000
1998 2,000
1999 2,000
2000 2,000
Thereafter 298,075
-----------------------------------------
Total $ 307,075
=========================================
</TABLE>
Interest Rate Swaps
- -------------------
Tejas has entered into various interest rate swap agreements as a
means of hedging interest rates on its floating rate debt and a floating rate
operating lease obligation. At December 31, 1995, Tejas had interest rate swap
agreements in a notional amount of $325.0 million (see Note 7). Of this amount,
$180.5 million converts a like amount of Tejas' debt to an effective interest
rate of 6.20%. Of the $180.5 million, $50.0 million of the agreements expire in
each of 1996 and 1997, $5.5 million expire in 1998 and the remaining $75.0
million expire in 1999. Although Tejas does not presently anticipate terminating
any of these agreements prior to their respective expiration dates, it monitors
options available to it given market conditions.
Subsequent to year-end, Tejas entered into additional delayed start
interest rate swap agreements in a notional amount of $125.0 million. These
agreements will convert a like amount of Tejas' debt to an effective interest
rate of 6.34%. Of this amount, $100.0 million of the agreements become effective
in
40
<PAGE>
December, 1996 and expire in December, 2000. The remaining $25.0 million become
effective in January, 1999 and expire in December, 2001.
Restrictive Covenants
- ---------------------
Under the terms of the TAHC and TNGC credit facilities (the "Credit
Agreements"), TAHC is required to maintain certain financial ratios. The Credit
Agreements also contain, among other things, limitations related to the transfer
of funds between TAHC and its subsidiaries, the transfer of funds between TAHC
and Tejas and the sale of assets in excess of specified amounts. Borrowings
under the Credit Agreements are secured by certain subsidiary guarantees, the
pledge of the capital stock and partnership interests of all material TAHC
subsidiaries and partnerships (excluding the capital stock of Acadian, but
including the pledge of the capital stock and partnership interests of the
material operating subsidiaries and partnerships of Acadian) and various
intercompany notes.
The amount of loans, advances and distributions (collectively
"Distributions") that may be made under the credit facilities is subject to
certain limitations. At year-end 1995, Distributions to Tejas of $231.5 were
permitted, of which $45.1 and $186.4 could be paid in dividends and loaned,
respectively. In general, dividend and loan allowances may be adjusted by a
percentage of consolidated quarterly net earnings or losses of TAHC, certain
investments and any cumulative aggregate Distributions.
6. INCOME TAXES
Provisions for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
U.S. federal statutory rate 35% 35% 35%
===============================================================================
Tax computed at the statutory rate
on earnings before income taxes $ 18,127 $ 16,802 $ 12,593
State income taxes 695 495 418
Retroactive effect of federal rate increase - - 773
Other 31 162 127
- -------------------------------------------------------------------------------
Total provision for income taxes $ 18,853 $ 17,459 $ 13,911
===============================================================================
Effective rate 36.4% 36.4% 38.7%
===============================================================================
</TABLE>
As a result of legislation enacted in August 1993, the maximum federal
tax rate for corporations was increased from 34% to 35%, effective January 1,
1993. During 1993, Tejas recorded a charge to deferred tax expense of
approximately $0.8 million for the cumulative effect of the rate increase on
prior periods. Effective January 1, 1993, Tejas adopted SFAS No. 109 Accounting
for Income Taxes which did not result in any adjustment for the cumulative
effect of adoption.
At December 31, 1995, Tejas had an alternative minimum tax credit
available of $16.3 million. The 1994 regular tax net operating loss carryforward
of $2.7 million was fully utilized in 1995.
41
<PAGE>
Deferred income taxes typically reflect (a) the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) alternative minimum tax, net operating loss and tax credit carryforwards.
Significant components of Tejas' net deferred income tax liability are as
follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation $ 67,481 $ 54,048
Other - 171
- ------------------------------------------------------------------------------
67,481 54,219
- ------------------------------------------------------------------------------
Deferred income tax assets:
Alternative minimum tax credit carryforward 16,336 11,789
Other 2,756 4,679
- ------------------------------------------------------------------------------
19,092 16,468
- ------------------------------------------------------------------------------
Net deferred income tax liability $ 48,389 $ 37,751
==============================================================================
</TABLE>
At December 31, 1995 and 1994, $2.0 million and $4.0 million,
respectively, of deferred income tax assets were classified as current assets on
the Consolidated Balance Sheets. No valuation allowances were required for
deferred income tax assets at either December 31, 1995 or 1994.
Tejas was obligated to pay HOC for utilization subsequent to the
spin-off of any of the investment tax credit ("ITC") carryforwards which existed
at the spin-off date. As of December 31, 1993, all such ITC carryforwards had
been utilized. Tejas made income tax payments in 1995, 1994 and 1993 of $7.4
million, $5.1 million and $5.5 million, respectively. Such amounts include
payments to HOC for investment tax credits utilized of $1.1 million for 1993.
7. FINANCIAL INSTRUMENTS
The estimated fair value amounts of Tejas' financial instruments have
been determined by Tejas using available market data and valuation
methodologies. Fair value represents the amount at which the instrument could be
exchanged in a current transaction between willing parties. Judgment is
necessarily required in interpreting market data and the use of different market
assumptions or estimation methodologies may affect the estimated fair value
amounts.
42
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Financial Instruments:
Long-Term Debt
(excluding current installments):
Revolving credit agreements $ 284,900 $ 284,900 $ 337,000 $ 337,000
Money market credit lines 11,000 11,000 30,700 30,700
Industrial development bonds 10,175 11,144 11,175 11,620
Other Financial Instruments:
Interest rate swap agreements - (2,906) - 23,507
Commodity swap agreements - 8,086 - 96
Commodity futures - (4,361) - 1,362
- -----------------------------------------------------------------------------------------------
</TABLE>
Long-Term Debt
- --------------
Tejas' revolving credit agreements and money market credit lines bear
floating interest rates at current market levels and therefore carrying values
in the financial statements approximate fair value. The estimated values of the
industrial development bonds are based on interest rates at December 31, 1995
for new issues with maturities which approximate the remaining life of the
existing bonds.
Interest Rate Swap Agreements
- -----------------------------
At December 31, 1995 and 1994, Tejas had entered into interest rate
swap agreements with a notional amount of $325.0 million, as a means of hedging
floating interest rate exposure related to its revolving credit facilities
($180.5 million in 1995 and 1994) and an operating lease obligation ($144.5
million in both years). The fair value of interest rate swap agreements is based
upon approximated termination values obtained from third parties. The negative
fair value at December 31,1995 is the estimated amount Tejas would pay if it
canceled the contracts or transferred them to other parties.
Commodity Futures and Swaps
- ---------------------------
Tejas uses derivative financial instruments (primarily futures, swaps
and other contracts) as an extension of its commercial natural gas purchases and
sales and to hedge price exposure, including location and pricing basis, of its
storage and exchange gas inventories, commitments, and certain anticipated
transactions. At December 31, 1995 Tejas had a realized but unrecognized loss of
$15.5 million and an unrealized loss of $4.4 million on futures contracts. Open
swap contracts where Tejas pays one price basis in exchange for another cover a
notional volume of 28.1 BCF and extend into December 1997. The fair value of
these swap contracts at December 31, 1995 was $8.1 million payable to Tejas
based upon estimated termination values. The realized but unrecognized futures
loss of $15.5 million, unrealized futures loss of $4.4 million and unrealized
swaps gain of $8.1 million have been incurred in conjunction with the Company's
storage arbitrage program and either have been offset or will be offset by
transactions involving the physical delivery of natural gas.
43
<PAGE>
Credit Risk
- -----------
While notional contract amounts are used to express the magnitude of
interest rate swap agreements, the amounts potentially subject to credit risk,
in the event of nonperformance by third parties, are substantially smaller.
Tejas does not anticipate any material impact to its results of operations as a
result of nonperformance by third parties as these agreements are with
established exchanges, energy companies, and major financial institutions. Under
certain circumstances, commodity swap agreements may require the parties to post
letters of credit issued by financial institutions acceptable to the
counterparty to satisfy margin requirements.
8. UNCONSOLIDATED ENTITIES
At December 31, 1995, Tejas owned an interest in several entities which
are accounted for under the equity method of accounting. Tejas' investments in
these entities are detailed as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Unconsolidated entities:
Evangeline Gas Pipeline Company, L.P. $ 7,950 $ 9,436
Evangeline Gas Corp. 1,268 1,230
Gulf Coast Natural Gas Company 19,054 19,849
Coral Entities 3,655 -
------------------------------------------------------------------
Total $ 31,927 $ 30,515
==================================================================
</TABLE>
Coral Entities
- --------------
On November 1, 1995, Coral, a new independently managed energy marketing
venture between Tejas and Shell, commenced operations. Coral is a Delaware
limited partnership formed in September 1995 to market natural gas and energy
for Tejas and Shell Oil Company ("Shell"). Coral is owned one-third by
subsidiaries of Tejas and two-thirds by certain subsidiaries of Shell. Tejas has
the option to acquire up to a 50% interest in Coral in either 1998 or 1999 based
on the attainment of certain earnings and/or volume levels. Coral's board of
directors consists of four members, two of whom are appointed by Tejas and two
by Shell.
Coral initially began marketing 3.7 BCF per day of Tejas and Shell
natural gas volumes. Tejas provides Coral access to Tejas' 5,488 miles of
natural gas pipeline. Coral was initially staffed with employees from Tejas and
Shell. In addition, Coral has entered into a contractual arrangement with a
financial institution to assist the new company in providing a variety of
specially tailored risk management services.
Pursuant to the Coral limited partnership agreement and related gas
sales contracts, Tejas has committed to Coral substantially all of its natural
gas supply, and Shell has committed to Coral substantially all of its natural
gas production in the United States (excluding Alaska and Hawaii). In addition,
Tejas provides intrastate marketing expertise, Shell provides interstate
marketing expertise, as well as treasury and administrative support services.
Coral conducts natural gas marketing activities for both Tejas and Shell.
44
<PAGE>
Tejas and Shell have each contributed cash and economic interests in
gas sales contracts to Coral for their respective interests. Each partner has
received equity credit for gas committed to the partnership that is subject to
long-term contracts, and gas volumes and margins are subject to make-up payments
by the responsible partner if actual volumes and margins fail to meet targeted
contract levels. If Coral is unable to take all of the gas tendered for delivery
by the parties, Coral is obligated to pay for such gas at the price that would
have otherwise been applicable, mitigated by the amount obtained from any sales
of such gas to third parties.
Summarized balance sheet and income statement information for Coral,
which Tejas accounts for using the equity method, as of and for the two months
ended December 31, 1995 is presented below.
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------
(in thousands)
<S> <C>
Balance Sheet:
Current assets $ 246,562
Property, plant and equipment, net 1,535
Other noncurrent assets 70,768
Current liabilities 236,359
Owners' equity 82,506
Statement of Earnings:
Revenues $ 335,020
====================================================
Gross profit $ 8,723
====================================================
Net earnings $ 2,189
====================================================
Tejas' share of net earnings $ 729
====================================================
</TABLE>
Evangeline Entities
- -------------------
In December 1991, Tejas and other parties formed Evangeline Gas
Pipeline Company, L.P., a limited partnership ("Evangeline") and Evangeline Gas
Corp. ("EGC"). Tejas owns a 45% limited partnership interest in Evangeline and
45% of the common stock of EGC. EGC is the general partner of Evangeline and
owns a 10% general partnership interest.
Although the December 1991 projections for Evangeline anticipated
losses during the first four years of operations, at no time during the
anticipated 20-year life of Evangeline did the projected cumulative losses
exceed the agreed Tejas sharing levels. By agreement, Tejas did not bear any
losses in the Evangeline entities until cumulative losses totaled $7.7 million.
Tejas' interests in the Evangeline entities bore 45% of all losses until
cumulative losses totaled $9.7 million, and bears 100% of all losses until
cumulative losses total $19.2 million. Evangeline is not permitted to make
distributions to its partners until its debt is extinguished. At December 31,
1995 and 1994, cumulative losses of the Evangeline entities totaled $11.2
million and $9.7 million, respectively. While Tejas has incurred losses during
1994 and 1995 from Evangeline at the net income level, Evangeline's cash flow
from operating activities during that time period has been sufficient to
service debt and meet other cash requirements.
45
<PAGE>
Gulf Coast Natural Gas Company
- ------------------------------
In January 1992, Tejas and another company formed a general
partnership, Gulf Coast Natural Gas Company ("Gulf Coast"). Tejas purchased a
50% capital interest in the partnership over a 12-month period at a total cost
of $19.4 million. Tejas invested $0.1 million in Gulf Coast for its share of
capital expenditures in both 1995 and 1994 and $0.2 million in 1994 for working
capital.
By agreement, Tejas receives 70% of the cash operating income of Gulf
Coast until December 31, 1998 and 50% thereafter. Depreciation expense is shared
evenly for substantially all of the assets.
Summarized Financial Information
- --------------------------------
Combined summarized financial information for all Tejas' unconsolidated
entities as of and for the twelve months ended December 31, 1995 and 1994 is
presented below. Amounts due from shareholders of EGC of $1.7 million for demand
notes are netted against equity.
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Balance Sheet:
Current assets $ 264,991 $ 16,501
Property, plant and equipment, net 53,738 54,648
Other noncurrent assets 139,232 72,129
Current liabilities 254,472 16,510
Noncurrent liabilities 73,191 76,083
Owners' equity 130,298 50,685
Statement of Earnings:
Revenues $ 477,375 $ 154,996
========================================================================
Gross profit $ 24,560 $ 16,686
========================================================================
Net earnings $ 940 $ 524
========================================================================
Tejas' share of net earnings (loss) $ (158) $ 1,057
========================================================================
</TABLE>
All noncurrent liabilities of the unconsolidated entities at December 31, 1995,
consisting of Evangeline's debt agreements, are nonrecourse to Tejas.
9. RELATED PARTIES
During 1995, Tejas had sales of $105.9 million, $16.7 million and $74.6
million to Coral, Gulf Coast, and Evangeline, respectively. Additionally, Tejas
received $1.5 million and $0.3 million from Gulf Coast and Evangeline,
respectively, for administrative and management services in 1995. At December
31, 1995, Tejas had current receivables from Coral, Evangeline and Gulf Coast of
$52.6 million, $6.3 million and $2.4 million, respectively. Tejas had amounts
payable to Coral and Gulf Coast of $8.8 million and $0.7 million, respectively
at December 31, 1995.
46
<PAGE>
10. PREFERRED MEMBERSHIP UNITS OF A SUBSIDIARY COMPANY
On December 29, 1995, a wholly owned subsidiary of Tejas,
Tejas-Magnolia Energy, L.L.C., issued preferred equity interests to a third
party in return for a capital investment of $55.0 million. Tejas-Magnolia is
required to make preferred distributions to the third party which constitute a
return on capital (at an effective fixed after tax cost to Tejas of 4.2%) and
return of capital over an eight-year term. Annual distributions of approximately
$8.7 million are payable from 1996 through 2001 and approximately $9.5 million
in each of 2002 and 2003. In connection with the issuance of the preferred
equity interests in Tejas-Magnolia, another subsidiary of Tejas has contributed
a portion of the proceeds from sales under certain long term natural gas sales
contracts to Tejas-Magnolia in exchange for common equity interests in
Tejas-Magnolia. This ongoing contribution supports the preferred distribution
obligations of Tejas-Magnolia during the eight-year term. Required
distributions for 1996 of $4.3 million are classified as maturities of
long-term obligations.
11. PREFERRED STOCK
At December 31, 1995 and 1994, Tejas has authorized 6,000,000 shares of
$1 par value preferred stock. The preferred stock may be issued in one or more
series and the Board of Directors will determine the specific terms and
conditions of each series in the event such shares are issued.
In February 1993, Tejas completed the sale of 2,000,000 depositary
shares, each such depositary share representing one-tenth of a share of Tejas'
9.96% Cumulative Preferred Stock (the "9.96% Preferred Stock"). Net proceeds
from the sale of the 9.96% Preferred Stock totaled $48.2 million and $48.0
million of the net proceeds was initially used to repay indebtedness under a
subsidiary's $120.0 million reducing revolving credit facility which existed at
such time. Dividends on the 9.96% Preferred Stock are cumulative from the date
of original issuance and are payable quarterly, commencing May 1, 1993, in an
amount equal to $2.49 per annum per depositary share. The 9.96% Preferred Stock
is redeemable at Tejas' option at any time after February 1, 1998 at a
redemption price equal to $250 per share.
In November 1993, Tejas completed the sale of 1,300,000 depositary
shares, each such depositary share representing one-fifth of a share of Tejas' 5
1/4% Convertible Preferred Stock (the "5 1/4% Preferred Stock"). Net proceeds
from the sale of the 5 1/4% Preferred Stock totaled $62.8 million and were used
to repay substantially all of a $65.0 million term loan incurred in conjunction
with the Exxon Transaction. Dividends on the 5 1/4% Preferred Stock are
cumulative from the date of original issuance and are payable quarterly,
commencing February 1, 1994, in an amount equal to $2.625 per annum per
depositary share. Each share of 5 1/4% Preferred Stock is convertible, in whole
or in part, at any time, at the option of the holders thereof, into shares of
common stock at a conversion price of $63.6364 per share of common stock
(equivalent to a conversion rate of .7857 shares of common stock for each
depositary share). The 5 1/4% Preferred Stock is redeemable, at Tejas' option
(i) at any time after November 10, 2003, at a redemption price of $250 per
share, or (ii) at any time between November 10, 1996 and November 10, 2003 at
redemption prices which range from $259.19 to $251.31 per share.
Both the 9.96% Preferred Stock and the 5 1/4% Preferred Stock rank, as
to dividends and liquidation, prior to Tejas' common stock. If the equivalent of
six quarterly dividends payable on either the 9.96% Preferred Stock or the 5
1/4% Preferred Stock is in arrears, then the number of directors of Tejas will
be increased by two and the holders of the classes of preferred stock with
dividends in arrears will be entitled to elect the two additional directors
until all dividends in arrears have been paid or declared and set apart for
payment. No arrearages currently exist.
47
<PAGE>
12. COMMON STOCK
On November 11, 1994, Tejas adopted a stockholders rights plan and
declared a dividend of one right (a "Right") for each share of Tejas' common
stock, par value $.25 per share (the "Common Stock"), outstanding as of the
close of business on November 22, 1994. The Rights, which under certain
circumstances entitle their holders to purchase one one-hundredth of a share of
Series C Junior Participating Preferred Stock, par value $1.00 per share, for an
exercise price of $200, will expire on November 11, 2004.
The Rights are not exercisable until the earlier to occur of (i) 10
days following the first date of public announcement that a person or group of
affiliated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock or such earlier date as a
majority of the Board of Directors shall become aware of the existence of an
Acquiring Person (the "Stock Acquisition Date") or (ii) 10 business days (or
such later date as may be determined by action of the Board of Directors prior
to such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the outstanding
shares of Common Stock.
In the event that any person becomes an Acquiring Person, each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereupon become void), will thereafter have the right to receive upon
exercise of a Right at the then current exercise price of the Right, that number
of shares of Common Stock having a market value of two times the exercise price
of the Right. In the event that, after a person or group has become an Acquiring
Person, Tejas is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold, each holder
of a Right other than Rights beneficially owned by an Acquiring Person (which
will have become void) will thereafter have the right to receive, upon the
exercise of the Right at the then current exercise price of the Right, that
number of shares of common stock of the person with whom Tejas has engaged in
the foregoing transaction which number of shares at the time of such transaction
will have a market value of two times the exercise price of the Right.
At any time until ten days following the Stock Acquisition Date
(subject to extension by the Board of Directors), Tejas may redeem the Rights in
whole, but not in part, at a price of $.01 per Right.
On July 19, 1995, Tejas' Board of Directors authorized a stock dividend
of one-tenth of one share of Common Stock for each share of Common Stock
outstanding payable to stockholders of record on July 27, 1995. All references
to average shares outstanding and earnings per share included in the financial
statements and accompanying notes for periods prior to the stock dividend have
been restated to give retroactive effect to the stock dividend. As a result of
the stock dividend, 1,052,908 shares (net of 422 fractional shares repurchased)
of common stock were added to the 10,533,303 common shares outstanding at June
30, 1995. The fair value of the additional shares at the declaration date, $52.8
million, was transferred from retained earnings to Common Stock and capital
surplus in the amount of $0.3 million and $52.5 million, respectively. As a
result of the stock dividend, the conversion price of Tejas' 5 1/4% Preferred
Stock was adjusted from $70 to $63.6364 (equivalent to an adjustment in the
conversion rate from .7143 to .7857 shares of Common Stock for each Depositary
Share representing a one-fifth interest in a share of the 5 1/4% Preferred
Stock). The adjustment to the conversion price (and conversion rate) was
effective as of July 28, 1995. Additionally, options to purchase Common Stock
under Tejas' Stock Option Plans as well as option prices were adjusted as a
result of the Common Stock dividend.
On March 5, 1993, Tejas' Board of Directors authorized a three-for-two
stock split of Tejas' common stock effected in the form of a stock dividend,
effective March 30, 1993, payable to stockholders
48
<PAGE>
of record at March 15, 1993. Such stock dividend was distributed in March 1993.
The restatement for the stock split at December 31, 1992 resulted in an
additional 3,426,532 shares being added to the shares issued at such date. The
par value of such additional shares was transferred from capital surplus to the
common stock account. All references to average shares outstanding, earnings per
share and stock option plan information included in the financial statements and
accompanying notes and schedules have been restated for periods prior to the
stock split to give retroactive effect to the stock split. In May 1993, Tejas
increased its authorized shares of common stock from 15,000,000 shares to
30,000,000 shares.
In 1988, Tejas adopted the Executive Officers Stock Option Plan (the
"Tejas Plan"), which provided for the granting of options for 1,101,101 shares
of Common Stock. During 1992, Tejas amended the Tejas Plan to include key
employees other than executive officers and to increase the number of shares
available for grant under the Tejas Plan by an additional 874,879 shares. During
1995, options to purchase 190,863 shares of Common Stock were granted under the
Tejas Plan to executive officers and key employees at option prices ranging from
$36.82 to $50.75 per share. In 1992, Tejas implemented the Directors Stock
Option Plan (the "DSOP"), which provided for the granting of options for 247,500
shares of Common Stock to directors of Tejas. Options to purchase 8,250 shares
of Common Stock were granted in 1995 under the DSOP at an option price of
$44.432 per share. Since inception, all stock options have been granted at the
market price in effect at the date of the grant.
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, January 1 492,227 689,482 720,994
Granted 199,113 118,523 98,570
Exercised (54,408) (309,726) (130,082)
Canceled (3,547) (6,052) -
- ---------------------------------------------------------------------------------------------
Options outstanding, December 31 633,385 492,227 689,482
- ---------------------------------------------------------------------------------------------
Options available for grant at December 31 522,396 717,962 830,436
Options exercisable at December 31 334,082 270,311 500,375
Range of option prices exercised
during the year $5.77-$37.27 $5.77-$35.00 $5.32-$28.86
Range of option prices outstanding,
December 31 $15.75-$50.75 $5.77-$50.46 $5.77-$39.54
- ---------------------------------------------------------------------------------------------
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Tejas is a defendant or party in various lawsuits that have arisen in
the ordinary course of Tejas' business. In particular, a subsidiary of Tejas is
a defendant in The Long Trust v. Tejas Gas Corp. et. al., 123rd Judicial
District Court, Panola County, Texas, filed March 1, 1989, in which plaintiffs
assert claims and allege damages for breach of contract and failure to
take-or-pay for natural gas pursuant to three natural gas purchase contracts.
Plaintiffs allege that, in addition to failing to take or pay for gas, Tejas
breached (a) one of the contracts by failing to take a minimum quantity of gas
and to install and maintain pipeline facilities sufficient to permit Tejas to
meet its quantity purchase obligations, and (b) all three contracts by failing
to take gas in quantities sufficient to enable plaintiffs to produce ratably
with other producers in a common reservoir. In plaintiffs' Sixth Amended
Original Petition filed June 6, 1995, the plaintiffs are seeking take-or-pay
damages for the ten year period 1984-1994 in excess of $36 million, plus
pre-judgment interest, post-judgment interest, attorneys' fees and court costs
and other unspecified actual damages. In
49
<PAGE>
connection with their depositions in this matter, certain expert witnesses
retained by The Long Trusts have presented damage models purporting to show
substantial additional damages related to the take-or-pay and ratability claims.
Management disputes The Long Trusts' claims and believes that The Long Trusts'
damage models are seriously flawed. On January 6, 1993, the court entered an
interlocutory summary judgment order granting in part and denying in part
plaintiffs' motions for summary judgment. The court found, among other things,
as a matter of law that (a) Tejas breached the minimum take obligations under
one of the contracts, (b) Tejas is not entitled to any credits or offsets for
natural gas purchased by third parties, and (c) the "availability" of natural
gas for take-or-pay purposes is established by the delivery capacity testing
procedures in the contracts. Damages, if any, have not been determined. The
effect of this order on Tejas' case is unclear and Tejas has sought
clarification and rehearing, but intends nevertheless to defend its position
aggressively.
Although Tejas has not obtained a formal opinion, based on discussions
with outside counsel and an internal examination of this lawsuit, management
believes that it has adequate defenses or recourse to third parties relating to
such lawsuit and does not believe this matter will have a material adverse
effect on Tejas' financial condition. Because of the relationship between The
Long Trust contracts and certain contracts between Tejas and Valero Transmission
Company ("VTC"), and in order to resolve existing and potential claims and
disputes, Tejas, VTC and Valero Transmission, L.P. ("VTLP") entered into an
agreement, pursuant to which, among other things, Tejas, VTC and VTLP would
cooperate in the conduct of The Long Trust litigation, and VTC and VTLP would
bear a substantial portion of the costs of any appeal and of the amount of any
nonappealable final judgment rendered against Tejas. On April 15, 1994, the
plaintiffs named VTC and VTLP (collectively "Valero") as additional defendants
to the lawsuit, alleging that Valero intentionally and maliciously interfered
with the plaintiffs' contracts with Tejas. In its Sixth Amended Original
Petition, plaintiffs are seeking damages against Valero in an amount in excess
of $36 million, and plaintiffs added a conspiracy claim against Tejas alleging
that Tejas conspired with Valero in interfering with the contracts. Plaintiffs
also have added a claim for exemplary damages treble the amount of the actual
damages, if any, found by the court for the interference and conspiracy claims.
Plaintiffs assert that Tejas should be jointly liable with Valero for the
damages plaintiffs have asserted against Valero.
Tejas is a member of a joint defense group comprised of twenty-seven
companies that have been threatened with claims by various cities in Texas that
the companies owe franchise type fees for commercial gas operations within their
city limits. Tejas and certain of its subsidiaries were named as defendants in
City of Baytown v. Tejas Gas Corporation, 11th Judicial District Court, Harris
County, Texas, filed August 31, 1995. Plaintiff alleged that the defendants
carried on their commercial gas operations within the city limits of Baytown
without the City of Baytown's permission and without payment of fees to the
City, and asserted a number of causes of action against defendants. Plaintiff
sought unspecified damages based on various theories of recovery, including a
percentage of gross receipts from gas sales inside the City of Baytown, and
other remedies, including injunctive relief and exemplary damages. On January
18, 1996, the City of Baytown filed a Notice of Nonsuit Without Prejudice,
thereby dismissing its claims against Tejas. Tejas has filed a counterclaim
against the plaintiff seeking injunctive and declaratory relief with respect to
certain issues raised in the plaintiff's suit, which counterclaim is pending.
The law firm that represented the City of Baytown announced that it would
continue its efforts to bring similar suits by other cities against pipeline
companies. It is possible that claims by other cities may be filed against Tejas
and other pipeline companies alleging similar causes of action. Management
believes that Tejas has adequate defenses relating to these types of claims, and
does not believe that these matters will have a material adverse effect on
Tejas' financial condition. However, there can be no assurance that additional
lawsuits will not be filed against Tejas or that Tejas will prevail in any
lawsuit that may be filed against it.
Tejas is also a party to various other claims and other pending and
possible legal actions arising in the ordinary course of business. There is
considerable uncertainty inherent in any litigation or
50
<PAGE>
governmental proceeding and the evaluation of individual matters is necessarily
dependent on the historical experience of Tejas and others in similar
circumstances and the stage of the litigation or proceeding. Tejas believes that
an adequate provision has been made for probable losses. In cases where losses
are possible but not probable, it is Tejas' belief that their ultimate
resolution will not have a materially adverse effect on Tejas' consolidated
financial position or the results of its consolidated operations.
In conjunction with the acquisition of the Acadian Gas Group on
December 28, 1990, Acadian is committed to pay contingent deferred payments
based upon certain future natural gas sales volumes and profit margins, if
achieved. Such payments in any one year are not expected to exceed 2% of the
cash purchase price of the Acadian Gas Group and cumulative deferred payments
are limited to a maximum of $25.0 million, of which $4.8 million had been paid
or accrued as of December 31, 1995. Such payments expire if unearned not later
than December 31, 2003. Tejas has guaranteed the performance of the deferred
payment agreement. At December 31, 1995, Tejas accrued $0.8 million for
contingent deferred payments paid in February, 1996. As such payments are
accrued, the cost is included in property, plant and equipment and amortized
over the remaining estimated lives thereof.
Tejas' West Clear Lake Storage Facility (the "WCLSF") requires the
maintenance of cushion gas in order to sustain anticipated operational
requirements. Such cushion gas requirements have been satisfied by a combination
of natural gas purchased by Tejas and third party natural gas stored in the
facility. At December 31, 1995, Tejas had purchased approximately 10.4 BCF of
cushion gas. In late 1994, Tejas entered into an agreement with a third party
whereby the third party agreed to purchase up to 35 BCF of natural gas at a cost
not to exceed $65.0 million and to store such gas in the WCLSF. The agreement
with the third party is currently scheduled to expire in September 2000. In
order to secure Tejas' ability to purchase the gas from the third party, the
agreement provides for the payment by Tejas of a reservation fee to the third
party which is adjusted quarterly based upon the third party's financing costs.
On certain option dates, Tejas may elect to purchase specified volumes of the
third party's gas at market prices. Should Tejas decline to purchase the gas,
the third party may instruct Tejas to sell such volumes on the third party's
behalf. In such case, it will be necessary for Tejas to obtain cushion gas
through other means in order to meet the anticipated operational requirements of
the WCLSF. At December 31, 1995, the third party had 34.6 BCF of natural gas in
storage at the WCLSF, which such party purchased for $ 62.4 million. Based upon
the volumes and rates in effect at December 31, 1995, Tejas estimates the net
annual cost related to the reservation fee on the 34.6 BCF of natural gas to be
approximately $ 1.9 million.
Tejas has an obligation to redeliver certain volumes of gas from the
WCLSF. In addition to the 34.6 BCF described above, Tejas has an obligation to
redeliver approximately 2.7 BCF of gas held in storage for other third parties.
Tejas bears the cost of physical loss, if any, incurred during storage.
Management estimates that physical losses will not be significant and has
insured against physical losses due to catastrophic events. Of the total 65.4
BCF of natural gas in the WCLSF at December 31, 1995, 37.3 BCF was owned by
third parties.
14. LEASES
Tejas leases certain property, facilities and equipment under various
operating leases. During 1993, as part of the Exxon Transaction, Tejas entered
into a five-year operating lease for the Leased System (see Note 3), and Tejas
is committed to pay a termination fee of $122.8 million in the event Tejas
elects not to exercise its purchase option for the Leased System in 1998. Lease
payments under the lease for the Leased System are adjusted quarterly based on
the Lessor's financing costs, and Tejas has entered into interest rate swap
agreements in a notional amount of $144.5 million to fully hedge the effects of
such adjustments on the required minimum lease payments. Such interest rate swap
agreements expire in 1998 and effectively
51
<PAGE>
fix Tejas' minimum lease payments for the Leased System, excluding the
termination fee, at $8.4 million per anum. Future minimum lease payments under
all leases, excluding the termination fee of the Leased System, as of December
31, 1995 are:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------
<S> <C>
1996 $ 10,070
1997 10,523
1998 9,068
1999 6,239
2000 290
Thereafter 580
-----------------------------------
Total $ 36,770
===================================
</TABLE>
Rental expense for all operating leases totaled $11.6 million, $13.3
million and $5.1 million for 1995, 1994 and 1993, respectively.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The "Net increase in working capital, net of effects from acquisitions"
amount included in the Consolidated Statements of Cash Flows is comprised of the
following:
<TABLE>
<CAPTION>
Year Ended December 1995 1994 1993
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Decrease (increase) in accounts receivable $ (67,379) $ 1,847 $ (5,321)
Increase in exchange gas receivable (1,355) (1,133) (3,124)
Increase in storage gas inventory (10,594) (17,975) (9,548)
Decrease (increase) in prepaids and other
current assets (4,171) (2,661) 903
Increase (decrease) in gas purchases payable 48,746 (15,908) 9,398
Increase (decrease) in exchange gas payable 975 (4,270) 6,882
Increase (decrease) in accounts payable 3,350 2,344 (2,965)
Increase (decrease) in accrued liabilities 878 (6,550) (2,398)
Increase (decrease) in income taxes payable 1,867 4,857 (42)
- ----------------------------------------------------------------------------------------------
Total $ (27,683) $ (39,449) $ (6,215)
==============================================================================================
</TABLE>
In 1995, 1994 and 1993, stock options exercised were paid for in part
by the tendering of shares previously held by the party exercising the stock
options. The value of tendered shares received and an equivalent value for
shares issued are regarded as noncash transactions for cash flow purposes.
Accordingly, Tejas' Consolidated Statements of Cash Flows include only actual
cash received as a result of the exercise of stock options.
The computation of changes in current assets and current liabilities as
reflected on Tejas' Consolidated Statements of Cash Flows for the year ended
December 31, 1993 excludes negative working
52
<PAGE>
capital related to the Exxon Transaction, as adjusted for the allocation of the
purchase price, of approximately $14.7 million.
16. SEGMENT INFORMATION AND MAJOR CUSTOMERS
Tejas predominantly operates in one industry segment, natural gas
pipeline operations.
During 1995, one customer accounted for approximately 10% of Tejas'
total revenues. No single customer accounted for 10% or more of total revenues
in 1994. During 1993, two customers accounted for approximately 13% and 10% of
Tejas' total revenues, respectively.
Tejas' natural gas pipeline operations have a concentration of
customers in the electric and natural gas utility industries, principally in
Texas and Louisiana. This concentration of customers in a regional geographic
area may impact Tejas' overall exposure to credit risk, either positively or
negatively, in that the customers may be similarly affected by changes in
economic or other conditions. Historically, Tejas has not incurred any
significant credit losses related to receivables from its customers. Receivables
are generally not collateralized.
17. EMPLOYEE BENEFITS
Effective January 1, 1989, Tejas adopted a noncontributory, defined
benefit pension plan. This plan covers all employees.
Under the plan, pension benefits are based on years of service and the
employee's average monthly compensation. Tejas funds pension expense as accrued,
subject to the minimum requirements of the Employee Retirement Income Security
Act of 1974, the Omnibus Budget Reconciliation Act of 1987 and the tax
deductibility of such contributions.
The components of pension expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service costs - costs during the period $ 735 $ 587 $ 581
Interest cost on projected benefit obligation 319 261 214
Actual return on plan assets (260) (219) (169)
Net amortization and deferral (23) (9) (4)
- -------------------------------------------------------------------------------
Net periodic pension costs $ 771 $ 620 $ 622
===============================================================================
</TABLE>
The following table sets forth the pension plan's funded status and the
amount of the net pension liability at December 31, 1995 and 1994. Plan assets
are comprised of investments in an equity fund maintained by the plan trustee
and a guaranteed deposit account with an insurance company.
53
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 1994
- ----------------------------------------------------------------------------
($ in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $3,297 and
$2,481, respectively $ 3,876 $ 2,850
============================================================================
Projected benefit obligation $ (5,731) $ (3,907)
Plan assets at fair value 3,838 3,150
- ----------------------------------------------------------------------------
Funded status (1,893) (757)
Unrecognized net (gain) loss 156 (333)
Unrecognized prior service cost (86) (93)
- ----------------------------------------------------------------------------
Accrued pension liability $ (1,823) $ (1,183)
============================================================================
</TABLE>
Assumptions used in determining pension expense and the status of
Tejas' plan for 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.25% 8.00%
Rates of increase in compensation levels 5.00% 5.00%
Rate of return on plan assets 8.00% 8.00%
-------------------------------------------------------------------
</TABLE>
Thrift Plan
- -----------
Tejas adopted a contributory, trusteed thrift plan covering all of its
employees, effective January 1, 1989. Tejas matches 100% of the employee
contributions to the plan, up to a maximum of three percent (3%) of the annual
salary paid to each participant. Tejas' share of contributions recognized in
1995, 1994 and 1993 was $0.5 million, $0.5 million and $0.3 million,
respectively.
54
<PAGE>
18. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
Quarters Ended March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1995:
Revenues $ 215,633 $ 238,122 $ 246,510 $ 343,356
Earnings from operations 19,250 15,975 18,734 21,762
Net earnings 8,179 7,110 7,646 10,002
Preferred stock dividend requirements 2,098 2,098 2,098 2,099
Net earnings applicable to common stock 6,081 5,012 5,548 7,903
Earnings per common share (1) .53 .43 .48 .68
1994:
Revenues $ 288,535 $ 273,274 $ 250,953 $ 219,205
Earnings from operations 16,472 16,441 17,609 20,801
Net earnings 6,940 7,056 7,307 9,243
Preferred stock dividend requirements 2,098 2,098 2,099 2,098
Net earnings applicable to common stock 4,842 4,958 5,208 7,145
Earnings per common share(1) .41 .42 .44 .61
------------------------------------------------------------------------------------------------
<FN>
(1) Earnings per common share have been adjusted to give retroactive effect
to a stock dividend of one-tenth of one share of Common Stock for each
share of Common Stock outstanding on July 27, 1995 as if the stock
dividend had occurred at the beginning of each period presented.
</FN>
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
55
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and 13 are
omitted because Tejas will file a definitive proxy statement pursuant to
Regulation 14A under the Securities Act of 1934 not later than 120 days after
the close of the fiscal year; the information required by such items is set
forth under the captions "Security Ownership of Certain Beneficial Owners and
Management," "Meetings of the Board of Directors and Committees," "Election of
Directors," "Executive Officers," "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation," "Certain Relationships and
Related Transactions" and "Compliance with Section 16(a) of the Exchange Act" in
Tejas' definitive proxy statement for its annual meeting of stockholders to be
held May 9, 1996 and such information (excluding the information required by
paragraphs (i), (k) and (l) of Item 402 of Regulation S-K) is hereby
incorporated by reference from such definitive proxy statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements -
All financial statements of Tejas are listed under Item 8 on
page 29 of this Form 10-K.
2. Financial Statement Schedules -
All financial statement schedules of Tejas are listed under
Item 8 on page 29 of this Form 10-K.
3. Exhibits -
See Exhibit Index on page 65 of this Form 10-K.
Executive Compensation Plans or Arrangements - the following listed
executive compensation plans or arrangements are included in the
Exhibit Index on page 65 of this Form 10-K.
10.1* Form of Tejas Gas Executive Incentive Agreement (filed as
Exhibit 10.12 to Tejas' Registration Statement on Form
S-1, No. 33-24697 (the "1988 Registration Statement")).
10.2* Tejas Gas Corporation Employee Stock Option Plan, as
amended and restated July 21, 1992 (filed as Exhibit
10(p) to Tejas' Registration Statement on Form S-2, No.
33-53862 (the "1993 Registration Statement").
10.3 Amendment to Director's Stock Option Plan and Employee
Stock Option Plan dated as of December 9, 1995.
10.4 Form of Tejas Gas Corporation Stock Option Agreement for
Employee Stock Option Plan.
10.5* Directors Stock Option Plan (filed as Annex A to Tejas'
1992 Proxy Statement).
56
<PAGE>
10.6* Amendment to Directors Stock Option Plan (filed as
Exhibit 10(z) to the 1993 Registration Statement).
10.7* Director Stock Award Plan, as approved on October 5, 1995
by the Board of Directors of Tejas (filed as Exhibit 4.6
to Tejas' Registration Statement on Form S-8, No.
33-64895).
10.8* First Amendment to the Director Stock Award Plan, as
approved on December 9, 1995 by the Board of Directors
(filed as Exhibit 4.7 to Tejas' Registration Statement on
Form S-8, No. 33-64895).
10.9* Tejas Gas Corporation Thrift Plan, as amended and
restated in July 1993 (effective August 6, 1993) (filed
as Exhibit 10.17 to Tejas' Form 10-K for the fiscal year
ended December 31, 1993).
10.10* First Amendment to the Tejas Gas Corporation Thrift Plan
dated October 7, 1993 (filed as Exhibit 10.18 to Tejas'
Form 10-K for the fiscal year ended December 31, 1993).
10.11* Second Amendment to the Tejas Gas Corporation Thrift Plan
dated March 23, 1994 (filed as Exhibit 10.16 to Tejas'
Form 10-K for the fiscal year ended December 31,1994).
10.12* Third Amendment to the Tejas Gas Corporation Thrift Plan
dated October 12, 1994 (filed as Exhibit 10.5 to Tejas'
Form 10-Q for the quarter ended September 30, 1994).
10.13* Fourth Amendment to the Tejas Gas Corporation Thrift Plan
dated April 12, 1995 (filed as Exhibit 10.1 to Tejas'
Form 10-Q for the quarter ended March 31, 1995).
10.14 Fifth Amendment to the Tejas Gas Corporation Thrift Plan
dated October 6, 1995.
10.15* Tejas Gas Corporation Thrift Benefit Restoration Plan,
effective as of August 9, 1994 (filed as Exhibit 10.1 to
Tejas' Form 10-Q for the quarter ended September 30,
1994).
10.16* First Amendment to the Tejas Corporation Thrift Benefit
Restoration Plan dated April 12, 1995 (filed as Exhibit
10.2 to Tejas' Form 10-Q for the quarter ended March 31,
1995).
10.17 Second Amendment to the Tejas Gas Corporation Thrift
Benefit Restoration Plan dated October 6, 1995.
10.18* Tejas Gas Corporation Thrift Benefit Restoration Trust
between Tejas and The First National Bank of Boston, as
trustee, dated September 16, 1994 (filed as Exhibit 10.2
to Tejas' Form 10-Q for the quarter ended September 30,
1994).
10.19* Tejas Gas Corporation Pension Benefit Restoration Plan,
effective as of August 9, 1994 (filed as Exhibit 10.3 to
Tejas' Form 10-Q for the quarter ended September 30,
1994).
57
<PAGE>
10.20* First Amendment to the Tejas Gas Corporation Pension
Benefit Restoration Plan dated April 12, 1995 (filed as
Exhibit 10.3 to Tejas' Form 10-Q for the quarter ended
March 31, 1995).
10.21* Tejas Gas Corporation Pension Benefit Restoration Trust
between Tejas and The First National Bank of Boston, as
trustee, dated September 16, 1994 (filed as Exhibit 10.4
to Tejas' Form 10-Q for the quarter ended September 30,
1994).
10.22* Description of the Tejas Gas Corporation Annual Incentive
Compensation Plan (filed as Exhibit 10(qq) to the 1993
Registration Statement).
10.23* Exchange Agreement dated July 24, 1995, among Tejas,
Tejas-Acadian Holding Company, Acadian Gas Corporation
and Rene R. Joyce (filed as Exhibit 10.4 to Tejas' Form
10-Q for the quarter ended September 30, 1995).
10.24* Termination and Grant Agreement dated October 5, 1995,
among Tejas, Acadian Gas Corporation and Rene R. Joyce
(filed as Exhibit 10.5 to Tejas' Form 10-Q for the
quarter ended September 30, 1995).
10.25* Split Dollar Agreement for Jay A. Precourt dated December
21, 1994 and related Collateral Agreement (filed as
Exhibit 10.4 to Tejas' Form 10-Q for the quarter ended
March 31, 1995).
(b) Reports on Form 8-K
A Current Report on Form 8-K dated November 2, 1995, as amended by a
Form 8-K/A dated January 31,1996, was filed during the quarter ended
December 31, 1995 with respect to Item 5 "Other Events," to report the
commencement of operations of Coral Energy Resources, L.P., a Delaware
limited partnership owned by subsidiaries of Tejas and Shell Oil
Company, on November 1, 1995.
- ----------------------------
* Incorporated by reference as indicated.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEJAS GAS CORPORATION
(Registrant)
By: /s/ JAY A. PRECOURT
---------------------------------
Jay A. Precourt
Chief Executive Officer
Date: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 25, 1996 by the following
persons on behalf of the Registrant and in the capacities indicated.
SIGNATURES TITLES
/s/ FREDERIC C. HAMILTON Chairman of the Board and
- --------------------------
(Frederic C. Hamilton) Director
/s/ JAY A. PRECOURT Chief Executive Officer and
- --------------------------
(Jay A. Precourt) Director
/s/ CHARLES R. CRISP President and Director
- --------------------------
(Charles R. Crisp)
/s/ JAMES W. WHALEN Executive Vice President -
- --------------------------
(James W. Whalen) Chief Financial Officer
(principal financial officer and
principal accounting officer)
/s/ CHARLES C. GATES Director
- --------------------------
(Charles C. Gates)
/s/ ARTHUR L. KELLY Director
- --------------------------
(Arthur L. Kelly)
/s/ A. J. MILLER Director
- --------------------------
(A. J. Miller)
/s/ ROBERT G. STONE, JR. Director
- --------------------------
(Robert G. Stone, Jr.)
/s/ RONALD F. WALKER Director
- --------------------------
(Ronald F. Walker)
59
<PAGE>
Schedule 1
TEJAS GAS CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------
(in thousands)
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 282 $ 202
Income taxes receivable 8,536 4,563
Notes receivable from subsidiaries - 24,483
Deferred income tax asset - 2,548
- --------------------------------------------------------------------------
Total current assets 8,818 31,796
- --------------------------------------------------------------------------
Investments in Consolidated Entities 296,173 266,038
- --------------------------------------------------------------------------
Notes Receivable from Subsidiaries 204,485 162,455
- --------------------------------------------------------------------------
Deferred Income Tax Asset 1,360 -
- --------------------------------------------------------------------------
Total $ 510,836 $ 460,289
==========================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable to subsidiaries $ 12,050 $ 11,383
Accrued liabilities 1,435 1,451
Notes payable to subsidiaries - 12,226
- --------------------------------------------------------------------------
Total current liabilities 13,485 25,060
- --------------------------------------------------------------------------
Notes Payable to Subsidiary 183,866 126,153
- --------------------------------------------------------------------------
Deferred Income Taxes - 902
- --------------------------------------------------------------------------
Long-Term Debt 11,000 30,700
- --------------------------------------------------------------------------
Stockholders' Equity:
Preferred Stock 460 460
Common Stock 2,901 2,627
Capital surplus 191,490 138,499
Retained earnings 107,634 135,888
- --------------------------------------------------------------------------
Total stockholders' equity 302,485 277,474
- --------------------------------------------------------------------------
Total $ 510,836 $ 460,289
==========================================================================
</TABLE>
See notes to condensed financial statements.
60
<PAGE>
Schedule 1
TEJAS GAS CORPORATION
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
(in thousands, except for share amounts)
<S> <C> <C> <C>
Equity in Earnings of Consolidated
Subsidiaries $ 30,134 $ 27,817 $ 20,722
General and Administrative Expense 153 107 176
- --------------------------------------------------------------------------------
Earnings from Operations 29,981 27,710 20,546
- --------------------------------------------------------------------------------
Other Income (Expense):
Interest income 30 1 140
Intercompany interest income 17,275 14,287 8,166
Interest expense (928) (788) -
Intercompany interest expense (12,159) (9,001) (6,059)
Other income (expense) (3) - 13
Income tax benefit (expense) (1,259) (1,663) (737)
- --------------------------------------------------------------------------------
Total 2,956 2,836 1,523
- --------------------------------------------------------------------------------
Net Earnings $ 32,937 $ 30,546 $ 22,069
================================================================================
</TABLE>
See notes to condensed financial statements.
61
<PAGE>
Schedule 1
TEJAS GAS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 32,937 $ 30,546 $ 22,069
Adjustments to reconcile net earnings to net cash
provided (used in) by operating activities:
Equity in earnings of consolidated subsidiaries (30,134) (27,817) (20,722)
Deferred income tax 286 (967) (57)
- -----------------------------------------------------------------------------------------------------
3,089 1,762 1,290
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable from subsidiaries - - 1,954
Income taxes receivable (3,170) 2,272 (962)
Increase (decrease) in:
Accounts payable to subsidiaries 1,106 9,147 421
Accrued liabilities (878) (4,847) 343
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 147 8,334 3,046
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in consolidated subsidiaries - - (75,000)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities - - (75,000)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line-of-credit
agreements (19,700) 26,700 4,000
Exercise of stock options, net 106 656 118
Issuance of preferred stock, net of expenses - - 109,974
Preferred stock dividends (8,393) (8,326) (3,721)
Advances to affiliates (17,547) (32,737) (93,929)
Advances from affiliates 45,487 5,531 55,473
Other (20) (33) (7)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (67) (8,209) 71,908
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 80 125 (46)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 202 77 123
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 282 $ 202 $ 77
=====================================================================================================
</TABLE>
See notes to condensed financial statements.
62
<PAGE>
TEJAS GAS CORPORATION
SCHEDULE I - NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
1. GENERAL
The accompanying condensed financial statements of Tejas Gas
Corporation ("Tejas") should be read in conjunction with the consolidated
financial statements and notes thereto included in Tejas' Annual Report on Form
10-K. For information regarding the components of and an analysis of the
activity in stockholders' equity, refer to the Consolidated Statements of
Stockholders' Equity therein.
2. LONG-TERM NOTES PAYABLE TO SUBSIDIARY
On January 12, 1995, a promissory note payable to Tejas Gas Corp., a
wholly owned subsidiary, in the original principal amount of $77.4 million was
amended and assigned to a newly formed, wholly owned subsidiary, TAHC. In
conjunction with the assignment of the promissory note to TAHC, Tejas entered
into an $89.0 million promissory note payable to TAHC. At December 31, 1995, the
balance under this promissory note including accrued interest thereon was $95.8
million. This note bears interest at varying rates beginning at 7.53% and
escalating ratably to 9.31% until maturity at December 31, 2009.
Additionally, on January 12, 1995 two promissory notes payable to Tejas
Gas Corp. in the amounts of $35.0 million and $15.0 million were combined with a
$15.0 million promissory note payable to Acadian Gas Corporation classified as a
current note payable into a single $212.0 million revolving promissory note
which was assigned to TAHC. At December 31, 1995, the balance under this
promissory note including accrued interest thereon was $88.1 million.
3. MONEY MARKET CREDIT LINES
Tejas has uncommitted money market credit lines which allow Tejas to
borrow up to $40.0 million for periods of up to one month. Any such borrowings
are unsecured and may be extended for additional periods if agreed to by the
lender. At December 31, 1995, Tejas had an outstanding balance of $11.0 million
borrowed under the money market credit lines at an average interest rate of
6.4%. Tejas has agreed to maintain available funds under its subsidiaries'
revolving credit facilities sufficient to repay borrowings under the money
market credit lines and accordingly, the $11.0 million outstanding is classified
as long-term at December 31, 1995.
4. GUARANTEES
Tejas has guaranteed the performance of Acadian Gas Corporation under a
deferred payment agreement related to the acquisition of the Acadian Gas Group.
Tejas has also guaranteed the performance of Tejas Natural Gas Company under
certain provisions of a five-year operating lease of a pipeline system. In
connection with the Exxon Transaction, Tejas has guaranteed the performance of
TNGC and its subsidiaries' obligations under certain purchase and transportation
agreements.
63
<PAGE>
Exhibits To
FORM 10-K
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-17389
TEJAS GAS CORPORATION
(See Index to Exhibits on Page 65)
64
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1* Stock and Asset Purchase Agreement dated as of September 13,
1993 among Exxon Corporation, Tejas, Exxon Gas System, Inc.,
Humble Gas Transmission Company, Monterey Pipeline Company,
Humble Gas System, Inc., Tejas Natural Gas Company, Tejas
Gas Pipeline Company, Tejas Gas Marketing Company, Tejas Gas
Storage Company, Tejas Pipeline Holding Company, 1993 TJ
Incorporated, Tejas South Pipeline Partnership, 1993 TX
Pipeline General Partnership and Tejas North Pipeline
Partnership (filed as Exhibit 2(a) to Tejas' Form 8-K dated
September 15, 1993, as amended by Forms 8-K/A filed on
October 25, 1993 and October 29, 1993) (certain portions of
Exhibit 2.1 have been omitted pursuant to a confidential
treatment request filed with the Securities and Exchange
Commission).
2.2* Participation Agreement dated as of September 15, 1993 among
Tejas North Pipeline Partnership, State Street Bank and
Trust Company of Connecticut, National Association as
Trustee, 1993 TX Pipeline I Inc., 1993 TX Pipeline II Inc.,
1993 TX Pipeline General Partnership, the Financial
Institutions named in Schedule I thereto, as Purchasers, and
Citibank, N.A., as Administrative Agent (filed as Exhibit
2(b) to Tejas' Form 8-K dated September 15, 1993, as amended
by Forms 8-K/A filed on October 25, 1993 and October 29,
1993).
2.3* Lease dated as of September 15, 1993 between 1993 TX
Pipeline General Partnership and Tejas North Pipeline
Partnership (filed as Exhibit 2(c) to Tejas' Form 8-K dated
September 15, 1993, as amended by Forms 8-K/A dated October
25, 1993 and October 29, 1993).
2.4* General Partnership Option Agreement dated as of September
15, 1993 among Tejas Natural Gas Company, 1993 TX Pipeline I
Inc., 1993 TX Pipeline II Inc. and State Street Bank and
Trust Company of Connecticut, National Association, as
Trustee (filed as Exhibit 2(d) to Tejas' Form 8-K dated
September 15, 1993, as amended by Forms 8-K/A filed on
October 25, 1993 and October 29, 1993).
2.5* Secured Credit Agreement dated as of September 8, 1993 among
Tejas Natural Gas Company, certain Financial Institutions as
the Lenders and Bank of Montreal, Canadian Imperial Bank of
Commerce and Citibank, N.A. as Co-Agents for the Lenders,
and Canadian Imperial Bank of Commerce as Administrative
Agent for the Lenders (filed as Exhibit 2(e) to Tejas' Form
8-K dated September 15, 1993, as amended by Forms 8-K/A
filed on October 25, 1993 and October 29, 1993) (see
Exhibits 10.30 and 10.31 to this Form 10-K which supercede
this Credit Agreement).
3.1* Certificate of Incorporation of Tejas (filed as Exhibit 3.1
to Tejas' Registration Statement on Form S-1, No. 33-24697
(the "1988 Registration Statement")).
3.2* By-Laws of Tejas (filed as Exhibit 3.2 to the 1988
Registration Statement).
3.3* Certificate of Amendment to Certificate of Incorporation of
Tejas dated May 12, 1993 (filed as Exhibit 4.3 to Tejas'
Form 10-Q for the quarter ended June 30, 1993).
3.4* Certificate of Designation of 9.96% Preferred Stock dated
January 26, 1993 (filed as Exhibit 2(c) to Amendment No. 1
to Tejas' Registration Statement on Form 8-A (filed on March
25, 1993) relating to Tejas' 9.96% Depositary Shares and
9.96% Preferred Stock).
65
<PAGE>
3.5* Certificate of Designation of 5 1/4% Convertible Preferred
Stock dated November 2, 1993 (filed as Exhibit 4.1 to Tejas'
Form 10-Q for the quarter ended September 30, 1993).
3.6* Rights Agreement, dated as of November 11, 1994, between
Tejas and Harris Trust and Savings Bank which includes the
Certificate of Designation for the Series C Junior
Participating Preferred Stock as Exhibit A, the form of
Right Certificate as Exhibit B, and the Summary of Rights to
Purchase Preferred Shares as Exhibit C (filed as Exhibit 1
to Tejas' Form 8-K dated November 11, 1994).
4.1* Certificate of Incorporation of Tejas (filed as Exhibit 3.1
to the 1988 Registration Statement).
4.2* By-Laws of Tejas (filed as Exhibit 3.2 to the 1988
Registration Statement).
4.3* Certificate of Designation of 9.96% Preferred Stock dated
January 26, 1993 (filed as Exhibit 2(c) to Amendment No. 1
to Tejas' Registration Statement on Form 8-A (filed on March
25, 1993) relating to Tejas' 9.96% Depositary Shares and
9.96% Preferred Stock).
4.4* Certificate of Amendment to Certificate of Incorporation of
Tejas dated May 12, 1993 (filed as Exhibit 4.3 to Tejas'
Form 10-Q for the quarter ended June 30, 1993).
4.5* Certificate of Designation of 5 1/4% Convertible Preferred
Stock dated November 2, 1993 (filed as Exhibit 4.1 to Tejas'
Form 10-Q for the quarter ended September 30, 1993).
4.6* Rights Agreement, dated as of November 11, 1994, between
Tejas and Harris Trust and Savings Bank which includes the
Certificate of Designation for the Series C Junior
Participating Preferred Stock as Exhibit A, the form of
Right Certificate as Exhibit B, and the Summary of Rights to
Purchase Preferred Shares as Exhibit C (filed as Exhibit 1
to Tejas' Form 8-K dated November 11, 1994).
4.7* Specimen Stock Certificate for Common Stock (filed as
Exhibit 4.4 to Tejas' Form 10-Q for the quarter ended
June 30, 1993).
4.8* Specimen Depositary Receipt Representing 9.96% Depositary
Shares (filed as Exhibit 4(d) to Tejas' Registration
Statement on Form S-2, No. 33-53862 (the "1993 Registration
Statement")).
4.9* Specimen Depositary Receipt Representing 5 1/4% Depositary
Shares (filed as Exhibit 4.8 to Tejas' Form 10-K for the
fiscal year ended December 31, 1993).
4.10* Specimen Stock Certificate for 9.96% Preferred Stock (filed
as Exhibit 4(e) to the 1993 Registration Statement).
4.11* Specimen Stock Certificate for 5 1/4% Convertible Preferred
Stock (filed as Exhibit 4.4 to Tejas' Form 10-Q for the
quarter ended September 30, 1993).
4.12* Deposit Agreement dated as of January 26, 1993 among Tejas,
Harris Trust and Savings Bank and all holders from time to
time of depositary receipts issued thereunder (filed as
Exhibit 2(d) to Amendment No. 1 to Tejas' Registration
Statement on Form 8-A (filed on March 25, 1993) relating to
Tejas' 9.96% Depositary Shares and 9.96% Preferred Stock).
4.13* Deposit Agreement dated as of November 2, 1993 among Tejas,
Harris Trust and Savings Bank and all holders from time to
time of depositary receipts issued thereunder (filed as
Exhibit 4.2 to Tejas' Form 10-Q for the quarter ended
September 30, 1993).
66
<PAGE>
4.14* Amended and Restated Secured Credit Agreement dated January
12, 1995 among Tejas Natural Gas Company, certain Financial
Institutions as the Lenders and Bank of Montreal, Canadian
Imperial Bank of Commerce and Citibank, N.A. as Co-Agents
for the Lenders and Canadian Imperial Bank of Commerce as
Administrative Agent for the Lenders (filed as Exhibit 10.29
to Tejas' Form 10-K for the fiscal year ended December 31,
1994).
4.15* Amended and Restated Secured Credit Agreement dated January
12, 1995 among Tejas-Acadian Holding company, certain
Financial Institutions as the Lenders and Bank of Montreal,
Canadian Imperial Bank of Commerce and Citibank, N.A. as
Co-Agents for the Lenders and Canadian Imperial Bank of
Commerce as Administrative Agent for the Lenders (filed as
Exhibit 10.30 to Tejas' Form 10-K for the fiscal year ended
December 31, 1994).
Pursuant to Item 601(b)(4)(iii) of Regulation S-K,
instruments with respect to long-term debt have been
omitted where the amount of authorized indebtedness
under such instruments does not exceed 10 percent of
the total consolidated assets of Tejas. Tejas hereby
agrees to furnish a copy of any such intrument to the
Securities and Exchange Commission upon request.
10.1* Form of Tejas Gas Executive Incentive Agreement (filed as
Exhibit 10.12 to the 1988 Registration Statement).
10.2* Tejas Gas Corporation Employee Stock Option Plan, as amended
and restated July 21, 1992 (filed as Exhibit 10(p) to the
1993 Registration Statement).
10.3 Amendment to Directors Stock Option Plan and Employee Stock
Option Plan dated as of December 9, 1995.
10.4 Form of Tejas Gas Corporation Stock Option Agreement for
Employee Stock Option Plan.
10.5* Directors Stock Option Plan (filed as Annex A to Tejas' 1992
Proxy Statement).
10.6* Amendment to Directors Stock Option Plan (filed as Exhibit
10(z) to the 1993 Registration Statement).
10.7* Director Stock Award Plan, as approved on October 5, 1995 by
the Board of Directors of Tejas (filed as Exhibit 4.6 to
Tejas' Registration Statement on Form S-8, No. 33-64895).
10.8* First Amendment to Director Stock Award Plan, as approved on
December 9, 1995 by the Board of Directors of Tejas (filed
as Exhibit 4.7 to Tejas' Registration Statement on Form S-8,
No. 33-64895).
10.9* Tejas Gas Corporation Thrift Plan, as amended and restated
in July 1993 (effective August 6, 1993) (filed as Exhibit
10.17 to Tejas' Form 10-K for the fiscal year ended December
31, 1993).
10.10* First Amendment to the Tejas Gas Corporation Thrift Plan
dated October 7, 1993 (filed as Exhibit 10.18 to Tejas
Report on Form 10-K for the fiscal year ended December 31,
1993).
10.11* Second Amendment to the Tejas Gas Corporation Thrift Plan
dated March 23, 1994 (filed as Exhibit 10.16 to Tejas' Form
10-K for the fiscal year ended December 31, 1994).
67
<PAGE>
10.12* Third Amendment to the Tejas Gas Corporation Thrift Plan
dated October 12, 1994 (filed as Exhibit 10.5 to Tejas' Form
10-Q for the quarter ended September 30, 1994).
10.13* Fourth Amendment to the Tejas Gas Corporation Thrift Plan
dated April 12, 1995 (filed as Exhibit 10.1 to Tejas' Form
10-Q for the quarter ended March 31, 1995).
10.14 Fifth Amendment to the Tejas Gas Corporation Thrift Plan
dated October 6, 1995.
10.15* Tejas Gas Corporation Thrift Benefit Restoration Plan,
effective as of August 9, 1994 (filed as Exhibit 10.1 to
Tejas' Form 10-Q for the quarter ended September 30, 1994).
10.16* First Amendment to the Tejas Gas Corporation Thrift Benefit
Restoration Plan dated April 12, 1995 (filed as Exhibit 10.2
to Tejas' Form 10-Q for the quarter ended March 31, 1995).
10.17 Second Amendment to the Tejas Gas Corporation Thrift Benefit
Restoration Plan dated October 6, 1995.
10.18* Tejas Gas Corporation Thrift Benefit Restoration Trust
between Tejas and The First National Bank of Boston, as
trustee, dated September 16, 1994 (filed as Exhibit 10.2 to
Tejas' Form 10-Q for the quarter ended September 30, 1994).
10.19* Tejas Gas Corporation Pension Benefit Restoration Plan,
effective as of August 9, 1994 (filed as Exhibit 10.3 to
Tejas' Form 10-Q for the quarter ended September 30, 1994).
10.20* First Amendment to the Tejas Gas Corporation Pension Benefit
Restoration Plan dated April 12, 1995 (filed as Exhibit 10.3
to Tejas' Form 10-Q for the quarter ended March 31, 1995).
10.21* Tejas Gas Corporation Pension Benefit Restoration Trust
between Tejas and The First National Bank of Boston, as
trustee, dated September 16, 1994 (filed as Exhibit 10.4 to
Tejas' Form 10-Q for the quarter ended September 30, 1994).
10.22* Description of the Tejas Gas Corporation Annual Incentive
Compensation Plan (filed as Exhibit 10(qq) to the 1993
Registration Statement).
10.23* Exchange Agreement dated July 24, 1995, among Tejas,
Tejas-Acadian Holding Company, Acadian Gas Corporation and
Rene R. Joyce (filed as Exhibit 10.4 to Tejas' Form 10-Q for
the quarter ended September 30, 1995).
10.24* Termination and Grant Agreement dated October 5, 1995, among
Tejas, Acadian Gas Corporation and Rene R. Joyce (filed as
Exhibit 10.5 to Tejas' Form 10-Q for the quarter ended
September 30, 1995).
10.25* Split Dollar Agreement for Jay A. Precourt dated December
21, 1994 and related Collateral Agreement (filed as Exhibit
10.4 to Tejas' Form 10-Q for the quarter ended March 31,
1995).
10.26* Master Natural Gas Purchase Agreement between Tejas Gas
Storage Company and Houston Gas Venture, L.L.C. effective as
of September 16, 1994 (filed as Exhibit 10.6 to Tejas' Form
10-Q for the quarter ended September 30, 1994).
10.27* Marketing Agreement between Tejas Gas Storage Company and
Houston Gas Venture, L.L.C. effective as of September 16,
1994 (filed as Exhibit 10.7 to Tejas' Form 10-Q for the
quarter ended September 30, 1994).
68
<PAGE>
10.28* Intrastate Gas Storage Agreement between Tejas Gas Storage
Company and Houston Gas Venture, L.L.C. effective as of
September 16, 1994 (filed as Exhibit 10.8 to Tejas' Form
10-Q for the quarter ended September 30, 1994).
10.29* Consultancy Agreement dated January 1, 1995 between F.C.H.
Operating Company and Tejas (filed as Exhibit 10.27 to
Tejas' Form 10-K for the fiscal year ended December 31,
1994).
10.30* Amended and Restated Secured Credit Agreement dated January
12, 1995 among Tejas Natural Gas Company, certain Financial
Institutions as the Lenders and Bank of Montreal, Canadian
Imperial Bank of Commerce and Citibank, N.A. as Co-Agents
for the Lenders, and Canadian Imperial Bank of Commerce as
Administrative Agent for the Lenders. (filed as Exhibit
10.29 to Tejas' Form 10-K for the fiscal year ended December
31, 1994).
10.31* Amended and Restated Secured Credit Agreement dated January
12, 1995 among Tejas-Acadian Holding Company, certain
Financial Institutions as the Lenders and Bank of Montreal,
Canadian Imperial Bank of Commerce and Citibank, N.A. as
Co-Agents for the Lenders, and Canadian Imperial Bank of
Commerce as Administrative Agent for the Lenders (filed as
Exhibit 10.30 to Tejas' Form 10-K for the fiscal year ended
December 31, 1994).
10.32* Loan Agreement and Trust Indenture with respect to
Industrial Development Revenue Bonds for Doddridge County,
West Virginia (filed as Exhibit 10.9 to the 1988
Registration Statement).
10.33* Loan Agreement and Trust Indenture with respect to
Industrial Development Refunding Revenue Bonds for Pleasants
County, West Virginia (filed as Exhibit 10.17 to Tejas' Form
10-Q for the quarter ended June 30, 1990).
10.34* Loan Agreement and Trust Indenture with respect to
Industrial Development Refunding Revenue Bonds for Lewis
County, West Virginia (filed as Exhibit 10.18 to Tejas' Form
10-Q for the quarter ended June 30, 1990).
10.35* Cavern Lease Agreement between Shell Oil Company and
Pontchartrain Natural Gas System dated as of June 17, 1992
(filed as Exhibit 10.21 to Tejas' Form 8-K dated June 29,
1992).
10.36* Sublease Agreement between Shell Oil Company and
Pontchartrain Natural Gas system dated as of June 17, 1992
(filed as Exhibit 10.22 to Tejas' Form 8-K dated June 29,
1992).
10.37* Operating Agreement between Shell Pipe Line Corporation,
acting on behalf of Shell Oil Company, and Pontchartrain
Natural Gas System dated as of June 17, 1992 (filed as
Exhibit 10.23 to Tejas' Form 8-K dated June 29, 1992).
10.38* Construction and Operating Agreement for the Austin Pipeline
between Intrastate Gathering Corporation and Houston Pipe
Line Company dated September 19, 1986 (filed as Exhibit
10(dd) to the 1993 Registration Statement).
10.39* Construction, Operating and Tax Agreement between Intrastate
Gathering Corporation and Houston Pipe Line Company dated
November 19, 1985 (filed as Exhibit 10(ee) to the 1993
Registration Statement).
10.40* Construction, Operating and Tax Agreement Amendment between
Houston Pipe Line Company and Gulf Energy Pipeline Company
amending the Construction, Operating and
69
<PAGE>
Tax Agreement dated November 19, 1985 (filed as Exhibit
10(ff) to the 1993 Registration Statement).
10.41* Letter of Intent dated September 12, 1991 regarding
Pontchartrain Natural Gas System, Acadian Gas Pipeline
System and LGS Natural Gas Company (filed as Exhibit 10(gg)
to the 1993 Registration Statement).
10.42* Agreement of Limited Partnership for Evangeline Gas Pipeline
Company, L.P. among Evangeline Gas Corp., Evangeline Gulf
Coast Gas Corporation and Evangeline Northwest Corp. dated
as of September 24, 1991 (filed as Exhibit 10(hh) to the
1993 Registration Statement).
10.43* Gulf Coast Natural Gas Company Partnership Agreement between
ENSERCH Corporation and Tejas Gas Transmission Company dated
as of October 1, 1991 but effective as of January 1, 1992
(filed as Exhibit 10(ii) to the 1993 Registration
Statement).
10.44* First Amendment to Partnership Agreement between ENSERCH
Corporation and Tejas Gas Transmission Company dated as of
October 1, 1991 but effective as of January 1, 1992 (filed
as Exhibit 10(jj) to the 1993 Registration Statement).
10.45* Partnership Contribution Agreement among ENSERCH
Corporation, Tejas Gas Transmission Company and Gulf Coast
Natural Gas Company dated as of October 1, 1991 but
effective as of January 1, 1992 (filed as Exhibit 10(kk) to
the 1993 Registration Statement).
10.46* Construction, Ownership, Operation and Maintenance Agreement
between Gulf Energy Pipeline Company and Houston Pipe Line
Company dated as of August 20, 1992 (("Big Cowboy System")
filed as Exhibit 10(ll) to the 1993 Registration
Statement)).
10.47* Deferred Payment Agreement dated December 28, 1990 among
Acadian Gas Corporation, Tejas, Texas Oil and Gas
Corporation and Occidental Petroleum Corporation (filed as
Exhibit 10(mm) to the 1993 Registration Statement).
10.48* Tax Allocation dated December 27, 1988 between Tejas and
Tejas Gas Corp. (filed as Exhibit 10(nn) to the 1993
Registration Statement).
10.49* Tax Allocation dated December 28, 1990 between Tejas and
Acadian Gas Corporation (filed as Exhibit 10(oo) to the 1993
Registration Statement).
10.50* Gas Sale and Purchase Contract Between Tejas, as Seller, and
Coral Energy Resources, L.P., as Buyer, dated November 1,
1995 (filed as Exhibit 10.1 to Tejas' Form 8-K dated
November 2, 1995, as amended by a Form 8-K/A dated January
31, 1996) (certain portions of Exhibit 10.50 were omitted
pursuant to a confidential treatment request filed with
with the Securities and Exchange Commission).
10.51* Gas Sale and Purchase Contract between Acadian Gas
Corporation, as Seller, and Coral Energy Resources, L.P., as
Buyer, dated November 1, 1995 (filed as Exhibit 10.2 to
Tejas' Form 8-K dated November 2, 1995, as amended by a Form
8-K/A dated January 31, 1996) (certain portions of Exhibit
10.51 were omitted pursuant to a confidential treatment
request filed with the Securities and Exchange Commission).
10.52* Limited Partnership Agreement of Coral Energy Resources,
L.P., dated September 1, 1995 (filed as Exhibit 10.3 to
Tejas' Current Report on Form 8-K dated November 2, 1995, as
amended by Form 8-K/A dated January 31, 1996) (certain
portions of Exhibit 10.52 were omitted pursuant to a
confidential treatment request filed with the Securities and
Exchange Commission).
70
<PAGE>
10.53 Amended and Restated Limited Liability Company Agreement of
Tejas-Magnolia Energy, L.L.C. dated as of December 18, 1995.
10.54 Class B Units Membership Subscription Agreement dated as of
December 18, 1995 between Tejas-Magnolia Energy, L.L.C. and
Magnolia Energy Venture Trust.
11.1 Computations of Earnings Per Common Share.
21.1 Subsidiaries of Tejas.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
<FN>
- -------------------------
* Incorporated by reference as indicated.
</FN>
</TABLE>
71
TEJAS GAS CORPORATION
DIRECTOR STOCK OPTION PLAN
and
EMPLOYEE STOCK OPTION PLAN
AMENDMENT
Tejas Gas Corporation, a Delaware corporation (the "Company"), having
established both the Tejas Gas Corporation Director Stock Option Plan effective
March 13, 1992, and subsequently amended (the "Director Option Plan"), and the
Tejas Gas Corporation Employee Stock Option Plan, as amended and restated
effective July 21, 1992 (the "Employee Option Plan") and having reserved the
right to amend the plans, does hereby approve, ratify, and adopt the following
amendments of the Director Option Plan and the Employee Option Plan:
1. In accordance with the prior actions taken by the Board of Directors of
the Company, prior to the date of this Amendment, the number of shares of Common
Stock subject to the Director Option Plan as set forth in Section 4 was
increased from 150,000 to 247,500, the number of shares of Common Stock subject
to Initial Options and other initial grants of options under Section 5.B. was
increased from 10,000 to 16,500, the number of shares of Common Stock subject to
all other annual awards of options under Section 5.B. was increased from 1,000
to 1,650 and the exercise prices of outstanding options were appropriately
adjusted, consistent with the provisions of paragraph 3 below.
<PAGE>
2. In accordance with the prior actions taken by the Board of Directors of
the Company and the Stock Option Committee of the Board of Directors of the
Company, prior to the date of this Amendment, the number of shares of Common
Stock subject to the Employee Option Plan as set forth in Section 4.1 was
increased from 1,197,564 to 1,975,980 and the exercise prices of outstanding
options were appropriately adjusted, consistent with the provisions of paragraph
3 below.
3. Section 8.B. of the Director Option Plan is amended in its entirety to read
as follows:
"In the event of any subdivision or consolidation of outstanding
shares of Common Stock or declaration of a dividend payable in shares
of Common Stock or capital reorganization or reclassification or other
transaction involving an increase or reduction in the number of
outstanding shares of Common Stock, then (i) the number of shares of
Common Stock reserved under this Plan, (ii) the number of shares of
Common Stock issuable pursuant to each option under this Plan granted
before such transaction, (iii) the number of shares of Common Stock
issuable pursuant to each option under this Plan granted after such
transaction, and (iv) the per share exercise price of previously
awarded options under this Plan shall be proportionately adjusted to
reflect such transaction. Such adjustment to the number of shares of
Common Stock shall reflect the proportional adjustment to the number
of shares of Common Stock (or such other capital stock as may be
issued in a reclassification) that a stockholder who owned an
equivalent number of shares immediately before the happening of any of
the events described in the preceding sentence would have owned or
been entitled to receive after the happening of any of such events,
and the adjustment to the exercise price of a previously awarded
option shall be determined by dividing the number of shares of Common
Stock (or other capital stock) subject to the option after the
adjustment by the aggregate exercise price for all shares that were
subject to the option immediately prior to the transaction. In the
event of any consolidation or merger of the Company with another
corporation or entity or the adoption by the Company of a plan of
exchange affecting the Common Stock or any distribution to holders of
Common Stock of securities or property (other than cash dividends or
dividends payable in Common Stock), the Board shall make such
-2-
<PAGE>
adjustments as it may deem equitable, including adjustments to avoid
fractional shares, to give proper effect to such event; provided that
such adjustments shall only be such as are necessary to maintain the
proportionate interest of the optionees and preserve, without
exceeding, the value of the options under this Plan. In the event of a
corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Board shall be
authorized to issue or assume stock options, regardless of whether in
a transaction to which Section 424(a) of the Code applies, by means of
substitution of new options for previously issued options or an
assumption of previously issued options."
4. Section 4.3 of the Employee Option Plan shall be amended in its entirety
to read as set forth in Paragraph 3 above, provided that (1) the paragraph shall
commence with the phrase "Subject to the provisions of Section 13 hereof," (2)
the terms "Stock," "Committee," "Option Price," "Option," and "Optionee" shall
be substituted for "Common Stock," "Board," "exercise price," "option," and
"optionee," respectively, and (3) clause (iii) of the first sentence shall be
deleted.
TEJAS GAS CORPORATION
By: /S/ JAMES WHALEN
Title: Executive Vice President
Date: 12/9/95
-3-
EXHIBIT A
TO
NOTICE OF GRANT OF STOCK OPTIONS
TEJAS GAS CORPORATION
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") is between Tejas Gas Corporation,
a Delaware corporation ("Tejas"), and the Optionee named in the Notice of Grant
of Stock Options to which this EXHIBIT A is attached, which attached Notice of
Grant of Stock Options is incorporated herein and is an integral part hereof.
WHEREAS, Optionee and Tejas have executed the attached Notice of Grant of
Stock Options which constitutes execution of this Agreement by reference thereto
and incorporation herein;
WHEREAS, Tejas desires, by affording the Optionee an opportunity to
purchase shares of its common stock ("Common Stock"), as hereinafter provided,
to carry out the purpose of the Tejas Employee Stock Option Plan, as it may be
amended from time to time and hereinafter referred to as the "Plan"; and
WHEREAS, the Stock Option Committee of Tejas has granted this stock option;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
1. GRANT OF OPTION. Tejas hereby grants to Optionee the option (the
"Option") to purchase, on terms and conditions hereinafter set forth, shares of
its Common Stock as indicated in the attached Notice of Grant of Stock Options.
2. TYPE OF OPTION. This option is granted as a Non-Qualified Stock Option
in accordance with the terms and conditions of the Plan.
3. TIME TO EXERCISE. Except as provided elsewhere herein, this Option shall
be exercisable in installments as indicated in the attached Notice of Grant of
Stock Options. To the extent not exercised, installments shall accumulate and be
exercisable, in whole or in part, in any subsequent period. No part of the
Option may be exercised after the date set forth in paragraph 5.
4. SUBJECT TO PLAN. This Option and the exercise hereof is subject to the
terms and conditions of the Plan which is incorporated herein by reference and
is made part hereof. If there is any inconsistency between this Agreement and
the Plan, the Plan will govern.
5. TERM. This Option shall terminate at 5:00 p.m., Houston time, on
_______.
-1-
<PAGE>
6. MANNER OF EXERCISE. To exercise this Option, Optionee shall give written
notice to Tejas of the number of shares being purchased and the purchase price
to be paid therefor accompanied by the following:
(a) full payment in cash or its equivalent (including the assignment of the
Common Stock of Tejas valued at its then fair market value) of the purchase
price for the shares of Common Stock being purchased;
(b) an amount required by the appropriate taxing authorities to be
collected for withholding taxes on the difference between the fair market value
of the shares on the date of exercise and the purchase price; provided if Tejas
shall be required to withhold any amounts by reason of any federal, state or
local tax rules or regulations in respect of the payment of cash or the issuance
of Common Stock pursuant to the exercise of an Option, then Tejas shall be
entitled to deduct and withhold such amounts from any cash payments to be made,
or Common Stock to be issued, to Optionee. In any event, Optionee shall make
available to Tejas, promptly when requested by Tejas, sufficient funds to meet
the requirements of such withholding, and Tejas shall be entitled to take and
authorize such steps as it may deem advisable in order to have such funds made
available to Tejas out of any funds or property (including, without limitation,
Common Stock) due or to become due to Optionee; and
(c) an undertaking to furnish or execute such documents as Tejas in its
reasonable discretion shall deem necessary, (1) to evidence the exercise, in
whole or in part, of the Option evidenced by this Agreement, (2) to determine
whether registration is then required under the Securities Act of 1933, as then
in effect, and (3) to comply with or satisfy the requirements of the Securities
Act of 1933, or any other law, as then in effect.
7. REGISTRATION. Tejas shall endeavor, but shall not be obligated, to
register the Common Stock to be issued upon exercise of the Option under the
Securities Act of 1933, as amended, as well as any applicable state statutes. In
the event that the Common Stock to be issued upon exercise of the Option is not
so registered, Tejas may, as a condition precedent to the exercise of the
Option, require from Optionee (or, in the event of his death, his legal heirs,
legatees or distributees) such written representations as, in the opinion of
counsel for Tejas, may be necessary to ensure that such exercise and subsequent
disposition will not involve a violation of the Securities Act of 1933, as
amended, or any other applicable federal or state statute as then in effect.
8. LAW GOVERNING. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the state of Delaware.
9. DEATH, DISABILITY, RETIREMENT, OF OR OTHER TERMINATION OF OPTIONEE. In
the event of the death, disability, resignation, termination for any reason
(with or without cause) or retirement of Optionee, Optionee or his heirs or
administrators shall be entitled to exercise any remaining vested options, as
follows:
(a) DEATH. If Optionee's employment by Tejas and its Subsidiaries (as
defined in Section 425 of the Internal Revenue Code of 1986, as amended)
terminates by reason of death, the Option shall be exercisable only to the
extent exercisable as of the date of death at any time prior to the expiration
date of the Option or within twelve (12) months after the date of death,
whichever
-2-
<PAGE>
period is shorter. Tejas may extend the exercise period beyond twelve (12)
months as it deems appropriate, but in no event shall the exercise period exceed
the expiration date of the Option. Options which were not exercisable as of the
date of death shall be forfeited and no longer subject to any right to exercise.
(b) DISABILITY. If Optionee's service to Tejas and its Subsidiaries
terminates by reason of disability (as defined under the Federal Social Security
Act of 1935, as amended), the Option shall be exercisable only to the extent
exercisable as of the date of such disability prior to the expiration date of
the Option or within three (3) months after the date of such disability,
whichever period is shorter. Options which were not exercisable as of the date
of disability shall be forfeited and no longer subject to any right to exercise.
(c) RETIREMENT. In the event the service of Optionee is terminated by
reason of normal or early retirement (as defined under the Tejas Pension Plan),
the Option shall be exercisable only to the extent exercisable as of the date of
such retirement prior to the expiration date of the Option or within thirty (30)
calendar days after the date of such retirement, whichever is shorter. Options
which were not exercisable as of the date of such retirement shall be forfeited
and no longer subject to any right to exercise.
(d) OTHER TERMINATION. If Optionee's employment shall terminate for any
reason (with or without cause) other than death, disability, or retirement (as
defined in Subsection 10 (a), (b) and (c) above), any Options which are
unexercised as of the date of such termination shall be forfeited and no longer
subject to any right to exercise.
10. PRIVILEGES. Optionee or any person entitled to exercise an Option
hereunder shall have no rights as a stockholder with respect to any shares
covered by this Option until the date of issuance of a certificate for such
shares.
11. NON-TRANSFERABILITY. The Option granted hereunder shall not be
transferable other than by laws of descent and distribution or by will.
12. EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of Tejas to terminate any Optionee's service at any time, nor
confer upon Optionee any right to continue in the employ of Tejas.
13. REQUIREMENTS OF LAW. The granting of the Option herein and the issuance
of shares of Common Stock upon the exercise of such Option shall be subject to
all applicable rules, laws, regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required. Tejas
shall make a good faith effort to take such reasonable actions as may be
necessary to comply with such rules, laws or regulations and to receive such
approvals as may be required.
END OF EXHIBIT A
-3-
FIFTH AMENDMENT TO THE
TEJAS GAS CORPORATION THRIFT PLAN
(Amended and Restated July, 1993)
- --------------------------------------------------------------------------------
WHEREAS, Tejas Gas Corporation (the "Company") has adopted and maintains
the Tejas Gas Corporation Thrift Plan, originally effective January 1, 1989,
amended and restated July 1993, and amended by the First, Second, Third and
Fourth Amendments on October 7, 1993, March 23, 1994, October 12, 1994 and April
12, 1995, respectively ("Thrift Plan") and the trust pursuant thereto; and
WHEREAS, the Company and Shell Oil Company are forming Coral Energy
Resources, L.P. and Coral Energy Resources Services Company, a service company
that will employ individuals providing services to Coral Energy Resources, L. P.
(either or both, as the case may be, referred to as "Coral"); and
WHEREAS, some employees of Company subsidiaries are being transferred to
Coral because of the ongoing business benefit that the Company and its
subsidiaries will receive from Coral, and the transferred employees will become
employees of Coral on January 1, 1996; and
WHEREAS, the Company does not want its employees who are transferred to
Coral to be treated as terminated employees for purposes of vesting,
withdrawals, loans, distributions, and investment direction under the Thrift
Plan; and
WHEREAS, pursuant to Section 11.4 of the Thrift Plan, the Company has
reserved the right to amend the Thrift Plan at any time.
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, Section 1.16 of the
Thrift Plan (Definition of Employee) is amended, effective January 1, 1996, to
read as follows:
"1.16 EMPLOYEE means any individual who receives
Compensation from the Company other than an independent
contractor and other than a leased employee within the
meaning of Section 414(n)(2) of the Code. In addition,
1
<PAGE>
an Employee whom an Employer transfers to employment with Coral
Energy Resources Services Company or Coral Energy Resources, L.P.
shall not be considered to have terminated employment or service
under Article VII (Special Employment Provisions) or Section
9.1(e) (Investments after Termination of Employment) during such
employment. During employment with Coral Energy Resources
Services Company or Coral Energy Resources, L.P., a Participant
shall continue to accrue vesting service under Section 5.5 (Years
of Service), and, if otherwise eligible, to be able to take out
loans (provided repayment is arranged through payroll deduction
by Coral Energy Resources Services Company) and make hardship
withdrawals. However, Employees shall not be considered to
receive Compensation for service as an employee of Coral Energy
Resources Services Company or Coral Energy Resources, L.P."
IN WITNESS WHEREOF, the Company has caused this Fifth Amendment to the
Tejas Gas Corporation Thrift Plan, as amended and restated July 1993, to be
executed by its duly authorized officer on this 6th day of October, 1995, to be
effective on January 1, 1996.
TEJAS GAS CORPORATION
/S/ JAMES W. WHALEN
-------------------------------
By: James W. Whalen
Its: Executive Vice President
ATTEST
/S/ SUSAN ROZMAN
- ---------------------------------
Susan Rozman, Assistant Secretary
2
SECOND AMENDMENT TO THE
TEJAS GAS CORPORATION THRIFT BENEFIT RESTORATION PLAN
- --------------------------------------------------------------------------------
WHEREAS, Tejas Gas Corporation (the "Company") has adopted and maintains
the Tejas Gas Corporation Thrift Benefit Restoration Plan, originally effective
August 9, 1994, and as amended by the First Amendment effective on its original
effective date ("Thrift Restoration Plan"); and
WHEREAS, the Company and Shell Oil Company are forming Coral Energy
Resources, L. P. and Coral Energy Resources Services Company, a service company
that will employ individuals providing services to Coral Energy Resources, L. P.
(either or both, as the case may be, referred to as "Coral"); and
WHEREAS, some employees of Company subsidiaries are being transferred to
Coral because of the ongoing business benefit that the Company and its
subsidiaries will receive from Coral, and the transferred employees will become
employees of Coral on January 1, 1996; and
WHEREAS, the Company does not want its employees who are transferred to
Coral to be treated as terminated employees for purposes of vesting, investment
direction, and distributions under the Thrift Restoration Plan; and
WHEREAS, pursuant to Section 8.1 of the Thrift Restoration Plan, the
Company has reserved the right to amend the Thrift Restoration Plan at any time.
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, Section 2.13 of the
Thrift Restoration Plan (Definition of Employee)is amended, effective January 1,
1996, to read as follows:
1
<PAGE>
"2.13 EMPLOYEE. "Employee" means a member of a select
group of management or highly compensated employees of
the Company or a designated Subsidiary, as determined
by the Compensation Committee from time to time. An
Employee who is a Participant and is transferred by
the Company or a Subsidiary to Coral Energy Resources
Services Company or Coral Energy Resources, L. P. will
not be considered to have terminated Employment during
such employment, and therefore will continue to accrue
vesting service under Section 4.8 (Vesting), will
continue to be eligible to direct investment of his or
her Accounts under Section 5.3 (Investment of Accounts),
and will not be eligible for a distribution under Article
Six (Distributions) during such employment."
IN WITNESS WHEREOF, the Company has caused this Second Amendment to the
Tejas Gas Corporation Thrift Benefit Restoration Plan to be executed by its duly
authorized officer on this 6th day of October, 1995, to be effective on January
1, 1996.
TEJAS GAS CORPORATION
/S/ JAMES W. WHALEN
-----------------------------
By: James W. Whalen
Its: Executive Vice President
ATTEST
/S/ SUSAN ROZMAN
- ---------------------------------
Susan Rozman, Assistant Secretary
THE MEMBERSHIP INTERESTS REPRESENTED HEREBY (OR BY CERTIFICATES IF ANY ARE
ISSUED) HAVE BEEN ACQUIRED FOR INVESTMENT AND WERE ISSUED WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THESE INTERESTS MAY NOT BE SOLD, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME EXCEPT IN ACCORDANCE WITH THE
RESTRICTIONS CONTAINED IN THIS AGREEMENT AND PURSUANT TO AN EFFECTIVE REGISTRA
TION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW
OR IN THE EVENT THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO IT THAT SUCH TRANSFER DOES NOT REQUIRE REGISTRATION
UNDER ANY APPLICABLE LAWS.
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
TEJAS-MAGNOLIA ENERGY, L.L.C.
A Delaware Limited Liability Company
This Amended and Restated Limited Liability Company Agreement of
TEJAS-MAGNOLIA ENERGY, L.L.C. (the "Agreement") dated as of December 18, 1995,
is (a) adopted by the Managers (as defined below), (b) executed and agreed to,
for good and valuable consideration, by the Members identified on the signature
pages hereof, and (c) amends and restates in its entirety that certain Limited
Liability Company Agreement of the Company dated as of September 29, 1995 (the
"Prior Agreement").
ARTICLE I
DEFINITIONS
The following terms, when used in this Agreement, shall have the respective
meanings assigned to them in this Article unless the context otherwise requires:
ACT means the Delaware Limited Liability Company Act, Chapter 18, Title 6
of the Delaware Code, and any successor statute, as amended from time to time.
ADDITIONAL CONTRIBUTION shall have the meaning set forth in Section 5.2.
ADJUSTED CAPITAL ACCOUNT means the Capital Account maintained for each
Member as of the end of each taxable year of the Company (a) increased by any
amounts which such Member is obligated to restore under the standards set by IRS
Regulations Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to restore
under IRS Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5)) and (b)
decreased by (i) the amount of all losses and deductions that, as of
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the end of such taxable year, are reasonably expected to be allocated to such
Member in subsequent years under Sections 704(e)(2) and 706(d) of the Code and
IRS Regulations Section 1.751- 1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such taxable year, are reasonably expected
to be made to such Member in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting increases to
such Member's Capital Account that are reasonably expected to occur during (or
prior to) the year in which such distributions are reasonably expected to be
made. The foregoing definition of Adjusted Capital Account is intended to comply
with the provisions of IRS Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
ADJUSTED PROPERTY means any property the Carrying Value of which has been
adjusted pursuant to IRS Regulations Section 1.704-1(b)(2)(iv)(f). Once an
Adjusted Property is deemed distributed by, and recontributed to, the Company
for federal income tax purposes upon a termination thereof pursuant to Section
708 of the Code, such property shall thereafter constitute a Contributed
Property until the Carrying Value of such property is further adjusted pursuant
to IRS Regulations Section 1.704- 1(b)(2)(iv)(f).
AFFILIATE means (i) with regard to PNG and MCN, any entity that, directly
or indirectly, through one or more intermediaries, controls, or is controlled
by, or is under common control with Tejas Gas Corporation, and (ii) with regard
to any other Person, any Person or entity that, directly or indirectly, through
one or more intermediaries, controls, or is controlled by, or is under common
control with, such Person. The term "control" as used in the immediately
preceding sentence means, with respect to a corporation, the right to the
exercise, directly or indirectly, of ten percent (10%) or more of the voting
rights attributable to the shares of the controlled corporation and, with
respect to a person or entity other than a corporation, the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of the controlled person or entity.
AGREED VALUE of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the Managers and approved by the Required Interests using such reasonable
method of valuation as they may adopt. The Managers shall, in their sole
discretion, use such method as they mutually deem reasonable and appropriate to
allocate the aggregate Agreed Value of Contributed Properties contributed to the
Company in a single or integrated transaction among such properties on a basis
proportional to their fair market values.
BANKRUPT MEMBER means any Member (a) that (i) makes a general assignment
for the benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii)
becomes the subject of an order for relief or is declared insolvent in any
federal or state bankruptcy or insolvency proceedings; (iv) files a petition or
answer seeking for the Member a reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any Law; (v)
files an answer or other pleading admitting or failing to contest the material
allegations of a petition filed against the Member in a proceeding of the type
described in subclauses (i) through (iv) of this clause (a); or (vi) seeks,
consents to, or acquiesces in the appointment of a
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trustee, receiver, or liquidator of the Member's or all or any substantial part
of the Member's properties; or (b) against which a proceeding seeking
reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under any Law has been commenced and 90 days have
expired without dismissal thereof or with respect to which, without the Member's
consent or acquiescence, a trustee, receiver, or liquidator of the Member or of
all or any substantial part of the Member's properties has been appointed and 60
days have expired without the appointment having been vacated or stayed, or 60
days have expired after the date of expiration of a stay, if the appointment has
not previously been vacated.
BASE INTEREST RATE means a rate per annum equal to the lesser of (a) a
varying rate per annum then most recently announced by Citibank, N.A. at New
York, New York, from time to time as its base rate for dollar loans in the
United States, which base rate may not be the lowest rate charged by Citibank,
N.A. on loans to any of its customers, with adjustments in that varying rate to
be made on the same date as any change in that rate, and (b) the maximum rate
permitted by applicable Law.
BOOK-TAX DISPARITY means, with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Member's share of the Company's Book-Tax Disparities in all of its Contributed
Properties and Adjusted Properties will be reflected by the difference between
such Member's Capital Account balance as maintained pursuant to Section 5.8 of
this Agreement and the hypothetical balance of such Member's Capital Account
computed as if it had been maintained strictly in accordance with federal income
tax accounting principles.
BUSINESS DAY means any day other than a Saturday, Sunday or any other day
on which banking institutions in New York City, New York; Boston, Massachusetts;
or Houston, Texas, are required or authorized by Law to suspend operations.
CAPITAL ACCOUNT means, with respect to any Member, that Capital Account
determined and maintained in accordance with the rules of IRS Regulations
Section 1.704-1(b)(2)(iv).
CAPITAL CONTRIBUTION means any contribution by a Member to the capital of
the Company.
CARRYING VALUE means (a) with respect to a Contributed Property, the Agreed
Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Members' Capital
Accounts and (b) with respect to any other Company property, the adjusted basis
of such property for federal income tax purposes, all as of the time of
determination. The Carrying Value of any property shall be adjusted from time to
time in accordance with IRS Regulations Section 1.704-1(b)(2)(iv)(f), and to
reflect changes, additions or other adjustments to the Carrying Value for
dispositions and acquisitions of
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Company properties, as deemed appropriate by the Managers and approved by the
Required Interests.
CERTIFICATE means the Certificate of Formation of the Company filed with
the Secretary of State of Delaware on September 28, 1995.
CLASS A MEMBER means a Member who is a holder of Class A Units.
CLASS A UNITS means the Class A Units of Membership Interest described in
Section 2.6.
CLASS B GUARANTEED PAYMENT DISTRIBUTIONS means those distributions
described in Section 6.4 hereof and payable to Class B Members in accordance
with the Distribution Schedule (the "Distribution Schedule") agreed upon by all
the Class A Members and the Class B Members at the time of the issuance of the
Class B Units.
CLASS B LIQUIDATING DISTRIBUTIONS means those distributions described in
Section 6.6 hereof and payable to Class B Members.
CLASS B MANDATORY DISTRIBUTIONS means those distributions described in
Section 6.5 hereof and payable to Class B Members in accordance with the
mandatory distribution schedule (the "Mandatory Distribution Schedule") agreed
upon by all the Class A Members and the Class B Members at the time of the
issuance of the Class B Units.
CLASS B MEMBER means a Member who is a holder of Class B Units.
CLASS B OBLIGATIONS mean Class B Guaranteed Payment Distributions and Class
B Mandatory Distributions.
CLASS B UNITS means the Class B Units of Membership Interest described in
Section 2.6.
CODE means the Internal Revenue Code of 1986, and any successor statute, as
amended from time to time.
COMMITMENT means the total contribution to the capital of the Company for
which a Member is legally bound and obligated and which for the initial Members
shall be in the amount set forth for such Member on EXHIBIT A hereto.
COMPANY means Tejas-Magnolia Energy, L.L.C., the limited liability company
formed pursuant to the Certificate.
COMPANY MINIMUM GAIN means that amount determined in accordance with the
principles of IRS Regulations Section 1.704-2(d).
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CONTRACT YEAR shall have the meaning ascribed to such term in the
Pontchartrain-Evangeline Contract or the Standby Contract, as applicable.
CONTRIBUTED PROPERTY means each property or other asset, but excluding
cash, contributed to the Company (or deemed contributed to the Company on
termination and reconstitution thereof pursuant to Section 708 of the Code).
Once the Carrying Value of a Contributed Property is adjusted pursuant to IRS
Regulations Section 1.704-1(b)(2)(iv)(f), such property shall no longer
constitute a Contributed Property for purposes of Section 6.2(b) hereof, but
shall be deemed an Adjusted Property for such purposes.
DGCL means the Delaware General Corporation Law and any successor statute,
as amended from time to time.
DEFAULT INTEREST RATE means a rate per annum equal to the lesser of (a) two
percent (2%) plus a varying rate per annum that is equal to the interest rate
publicly quoted by Citibank, N.A. in New York, New York, from time to time as
its base rate, with adjustments in that varying rate to be made on the same date
as any change in that rate, and (b) the maximum rate permitted by applicable
Law.
DISTRIBUTION PERIOD means the period from the date of any purchase of the
Class B Units through and including the Retirement Date.
ECONOMIC RISK OF LOSS shall have the meaning set forth in IRS Regulations
Section 1.752-2.
ERISA shall have the meaning ascribed to such term in the Participation
Agreement.
$55,000,000 INTERCOMPANY NOTE shall mean the $55,000,000 intercompany note
described in Section 5.1 hereof, as amended or replaced from time to time.
GUARANTOR'S CREDIT AGREEMENT shall mean the Secured Credit Agreement dated
as of January 12, 1995, among Tejas-Acadian Holding Company, as the Borrower,
the lenders from time to time parties thereto and Canadian Imperial Bank of
Commerce, as Administrative Agent, as the same may be amended from time to time.
INDEBTEDNESS shall have the meaning ascribed to such term in the
Participation Agreement.
IRS REGULATIONS means the Income Tax Regulations promulgated under the
Code, and any successor IRS Regulations as amended from time to time.
LAW shall have the meaning ascribed to such term in the Participation
Agreement.
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LIEN shall have the meaning ascribed to such term in the Participation
Agreement.
LP&L means Louisiana Power & Light Company, a Louisiana corporation, and
any of its successors or assigns.
MANAGER means any Person designated as a manager of the Company as provided
in this Agreement, but does not include any Person who has ceased to be a
manager of the Company.
MCN means MCN Pelican Interstate Gas Corp., a Delaware corporation.
MEMBER means the Persons identified as members on the signature pages of
this Agreement and any other Persons hereafter admitted to the Company as a
member as provided in this Agreement, but does not include any Person who has
ceased to be a member in the Company.
MEMBER NONRECOURSE DEBT shall have the meaning set forth in IRS Regulations
Section 1.704-2(b)(4).
MEMBER NONRECOURSE DEDUCTIONS means any and all items of loss, deduction or
expenditure (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of IRS Regulations Section 1.704-2(i)(2), are attributable
to a Member Nonrecourse Debt.
MEMBERSHIP INTEREST means the entire ownership interests and rights of a
Member in the Company represented by the total of all Units of Membership
Interest held by such Member, including, without limitation, rights to
distributions (liquidating or otherwise), redemptions, exchange rights,
allocations and information, and to consent to or approve of actions.
MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT means that amount
determined in accordance with the principles of IRS Regulations Section
1.704-2(i)(3).
MONTHLY DEFICIENT QUANTITY shall have the meaning ascribed to such term in
the Pontchartrain-Evangeline Contract or the Standby Contract, as applicable.
NET AGREED VALUE means (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Company upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Member by the
Company, the Company's Carrying Value of such property at the time such property
is distributed, reduced by any indebtedness either assumed by such Member upon
such distribution or to which such property is subject at the time of
distribution as determined under Section 752 of the Code.
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NONRECOURSE BUILT-IN GAIN means, with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or negative pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Members pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) or
6.2(b)(iii) hereof if such properties were disposed of in a taxable transaction
in full satisfaction of such liabilities and for no other consideration.
NONRECOURSE DEDUCTIONS means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of IRS Regulations Section 1.704-2(b)(1), are attributable
to a Nonrecourse Liability.
NONRECOURSE LIABILITY shall have the meaning set forth in IRS Regulations
Section 1.704-2(b)(3).
OPERATIVE DOCUMENTS shall have the meaning ascribed to such term in the
Participation Agreement.
PARTICIPATION AGREEMENT means the Amended and Restated Participation
Agreement dated as of December 18, 1995, by and among the Seller, PNG, the Trust
and Citibank, N.A. as Agent, and the other financial institutions from time to
time parties thereto, as it may be amended from time to time.
PERCENTAGE INTEREST means, with respect to any Member, a fraction
(expressed as a percentage), the numerator of which is the aggregate number of
Class A or Class B Units of Membership Interest, as applicable, owned by such
Member and the denominator of which is the total number of all then issued and
outstanding Class A or Class B Units of Membership Interest, as applicable.
PERSON has the meaning given that term in Section 18-101 of the Act.
PNG means Pontchartrain Natural Gas System, a Texas general partnership
whose general partners are TXO-Acadian Gas Pipeline Corp. and MCN Acadian Gas
Pipeline Corp.
PONTCHARTRAIN-EVANGELINE CONTRACT means that certain Gas Sales Contract by
and between PNG as Seller and Evangeline Gas Pipeline Company, L.P. as Buyer
dated as of December 31, 1991, as amended from time to time.
RECAPTURE INCOME means any gain recognized by the Company (computed without
regard to any adjustment required by Sections 734 or 743 of the Code) upon the
disposition of any property or asset of the Company, which gain is characterized
as ordinary income because it represents the recapture of deductions previously
taken with respect to such property or asset.
REDUCTION OPTION AMOUNT shall have the meaning ascribed to such term in the
Evangeline-LP&L Contract.
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REQUIRED CLASS A INTERESTS means at any time those Members who, in the
aggregate, own fifty percent (50%) or more of the issued and outstanding Class A
Units.
REQUIRED CLASS B INTERESTS means at any time those Members who, in the
aggregate, own all of the issued and outstanding Class B Units.
RETIREMENT DATE shall have the meaning ascribed to such term in the
Participation Agreement (excluding the A-Notes and the A-Certificates).
SELLER'S MARGIN shall have the meaning ascribed to such term in the
Pontchartrain-Evangeline Contract or the Standby Contract, as applicable.
STANDBY CONTRACT means that certain Standby Gas Sales Contract by and
between PNG as Seller and LP&L as Buyer dated as of December 31, 1991, as
amended from time to time.
TRANCHE A ASSIGNMENT means the Amended and Restated Assignment of Tranche A
Economic Interest dated as of December 18, 1995, but effective as of September
29, 1995, from PNG to Magnolia.
TRANCHE A ECONOMIC INTEREST shall have the meaning ascribed to such term in
the Tranche A Assignment.
TRANCHE B ASSIGNMENT means the Assignment of Tranche B Economic Interest
described in Section 5.1 hereof.
TRANCHE B ECONOMIC INTEREST shall have the meaning ascribed to such term in
the Tranche B Assignment.
TRUST means Magnolia Energy Venture Trust, a trust organized under the laws
of the State of Massachusetts.
$20,000,000 INTERCOMPANY NOTE shall mean the $20,000,000 intercompany note
described in Section 5.1 hereof, as amended or replaced from time to time.
UNIT OF MEMBERSHIP INTEREST means each share or portion (or the aggregate
thereof, as applicable) of Membership Interest in the Company issued to a Member
pursuant to this Agreement, whether now or hereafter, but does not include any
interest held by a Person who has ceased to be a Member in the Company. Units of
Membership Interest may be either Class A Units or Class B Units.
UNREALIZED GAIN attributable to any item of Company property means, as of
any date of determination, the excess, if any, of (a) the fair market value of
such property as of such date, over (b) the Carrying Value of such property as
of such date (prior to any adjustment to
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be made pursuant to IRS Regulations Section 1.704-1(b)(2)(iv)(f)). In
determining such Unrealized Gain, the aggregate cash amount and fair market
value of all Company assets (including cash or cash equivalents) shall be
determined by the Managers and approved by the Required Interests using such
reasonable method of valuation as they may adopt. The Managers shall allocate
such aggregate value among the assets of the Company (in such manner as they
determine in their sole discretion to be reasonable) to arrive at a fair market
value for individual properties.
UNREALIZED LOSS attributable to any item of Company property means, as of
any date of determination, the excess, if any, of (a) the Carrying Value of such
property as of such date (prior to any adjustment to be made pursuant to IRS
Regulation Section 1.704-1(b)(2)(iv)(f)), over (b) the fair market value of such
property as of such date. In determining such Unrealized Loss, the aggregate
cash amount and fair market value of all Company assets (including cash or cash
equivalents) shall be determined by the Managers and approved by the Required
Interests using such reasonable method of valuation as they may adopt. The
Managers shall allocate such aggregate value among the assets of the Company (in
such manner as they determine in their sole discretion to be reasonable) to
arrive at a fair market value for individual properties.
ARTICLE II
ORGANIZATION
2.1 FORMATION.
(a) The Company has been organized as a Delaware limited liability company
by the filing of the Certificate under and pursuant to the Act and the execution
and delivery of this Agreement.
(b) The rights and liabilities of the Members shall be as provided in the
Act, except as may be expressly provided otherwise herein. Prior to transacting
business in any jurisdiction other than the State of Delaware, the Company shall
qualify to do business in such other jurisdiction if such a procedure is
provided by statute or regulation in such other jurisdiction.
(c) A Member's Membership Interest in the Company shall be personal
property for all purposes. All real and other property owned by the Company
shall be deemed owned by the Company as an entity and no Member, individually,
shall have any ownership of such property.
2.2 NAME. The name of the Company is "Tejas-Magnolia Energy, L.L.C." and
all Company business must be conducted in that name or such other names that
comply with applicable Law as the Managers may select from time to time.
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2.3 OFFICES. The registered office of the Company in the State of Delaware
shall be the office of the initial registered agent named in the Certificate or
such other office (which need not be a place of business of the Company) as the
Managers may designate from time to time in the manner provided by Law. The
registered agent of the Company in the State of Delaware shall be the initial
registered agent named in the Certificate or such other Person or Persons as the
Managers may designate from time to time in the manner provided by Law. The
principal office of the Company shall be at 1301 McKinney, Suite 700, Houston,
Texas 77002, or such other place as the Managers shall designate from time to
time, and the Company shall maintain records there as required by Section 18-
305 of the Act. The Company may have such other offices as the Managers may
designate from time to time.
2.4 TERM. The Company commenced on the date of the filing of the
Certificate with the Secretary of State of the State of Delaware and shall
continue in existence until terminated in accordance with Article XIII of this
Agreement.
2.5 MERGERS AND EXCHANGES. The Company may be a party to (a) a merger, or
(b) an exchange or acquisition of the type described in Section 18-209 of the
Act, each subject to the requirements of Section 2.8(a) hereof.
2.6 AUTHORIZED NUMBER OF UNITS OF MEMBERSHIP INTEREST.
(a) The aggregate number of Units of Membership Interest that the
Company is authorized to issue is 20,000, in the following classes:
(i) the Company shall be authorized to issue 10,000 Class A Units of
Membership Interest ("Class A Units"); and
(ii) the Company shall be authorized to issue 10,000 Class B Units of
Membership Interest ("Class B Units").
2.7 CLASS A UNITS VOTING RIGHTS. Each holder of Class A Units admitted to
the Company as a Member shall have the right to cast one vote for each Class A
Unit held by such holder on all matters upon which Members of the Company are
entitled to vote.
2.8 CLASS B CONSENT RIGHTS.
(a) So long as any Class B Units are outstanding or there are any
unpaid Class B Obligations, the Company shall not, without the consent of
the Required Class B Interests, (i) amend, alter or repeal any of the
provisions of this Agreement so as to affect adversely the preferences,
special rights, privileges or powers of the holders of the Class B Units,
(ii) repurchase, redeem or otherwise acquire any Membership Units except
Class B Units, (iii) sell, otherwise transfer or materially impair the
Tranche B Economic Interest or sell or otherwise transfer any intercompany
promissory note evidencing the loan by the Company of the proceeds of the
Class B Units to any Affiliate
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of the Company or amend any such note so as to reduce the interest rate per
annum or change the amortization, each except pursuant to Section 6.6
hereof, (iv) authorize, create or issue any additional units or any class
of units, (v) merge or consolidate the Company with or into any other
Person; (vi) liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution); (vii) except as permitted by the Operative
Documents, convey, sell, lease, sublease, transfer or otherwise dispose of,
in one transaction or a series of transactions, any part of its business or
assets, or grant any Person an option to acquire any such business or
assets; or (viii) generally not pay its debts as such debts become due, or
admit in writing its inability to pay its debts generally, or make a
general assignment for the benefit of creditors, or take any action to file
any voluntary bankruptcy petition or consent to any involuntary bankruptcy
petition. Each Class B Member shall have only those rights, preferences,
privileges and immunities expressly provided for in this Agreement or as
otherwise provided by Law.
(b) Notwithstanding anything stated herein to the contrary, to the
maximum extent permitted by Law, except as expressly set forth in Section
2.8(a) hereof or otherwise herein, the Class B Members hereby waive and
release any and all rights under the Act, any other statute, Law,
regulation, rule or common Law to vote as a Member holding Class B Units on
any matter concerning or relating to the Company, including, without
limitation, any action, omission or transaction of the Company, or any
matter relating to the internal affairs of the company, or relating to the
continued existence or structure of the Company.
2.9 EXCHANGE RIGHTS. In the event (a) the Company fails to pay or satisfy
any of its Class B Obligations when due, or an Event of Default shall have
occurred and be continuing under Sections 12.1.1 or 12.1.2 of Guarantor's Credit
Agreement (or any similar provision of any replacement credit facility), or a
default or Event of Default shall have occurred and be continuing under any of
the Operative Documents which would reasonably be expected to have a Material
Adverse Effect (as defined in the Participation Agreement), or an Event of
Default shall have occurred and be continuing under Section 12.1.4 of
Guarantor's Credit Agreement (or any similar provision of any replacement credit
facility) with respect to Guarantor, PNG or the Company only, or a Default shall
have occurred under Sections 9.4.1, 9.4.2., or 9.4.3. of Guarantor's Credit
Agreement (or any financial covenants of any replacement credit facility) and
such Default shall have continued for ten (10) days, or an acceleration shall
occur of the loans under Guarantor's Credit Agreement or any replacement credit
facility, then the Required Class B Interests may, by written notice to the
Company, require that the Company exchange their Class B Units for an ownership
interest of the Tranche B Economic Interest. Any such exchange shall be
automatically effective on the third Business Day following the delivery of such
written notice unless prior to such time, a final Liquidating Distribution shall
have been paid, and without limiting the automatic exchange specified herein,
the Company agrees to execute and deliver to the Class B Members an assignment
to evidence such exchange. On delivery of such assignment to the Class B
Members, the Class B Members shall deliver the Class B Units to the Company.
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2.10 CANCELLATION OF CLASS B UNITS. Class B Units that have been issued and
repurchased, exchanged or reacquired in any manner by the Company shall be
cancelled and shall not be reissued.
ARTICLE III
PURPOSES AND POWERS
3.1 PURPOSES OF THE COMPANY. (a) The purposes for which the Company is
organized are to obtain and sell the Tranche A Economic Interest and to obtain
and realize the Tranche B Economic Interest, and, except as provided in Section
2.8(a) and in Section 3.1(b), to engage in any lawful business activity that now
or hereafter may be necessary, incidental, proper, advisable, or convenient to
accomplish the foregoing purposes (including, without limitation, obtaining
financing therefor) and that is not forbidden by the Law of the jurisdiction in
which the Company engages in that business.
(b) It shall not be within the Company's purposes and powers to do any
of the following:
(i) to incur any Indebtedness or enter into any contracts other
than (A) under the Operative Documents, (B) guaranties and an
intercompany note by Magnolia as required by the Guarantor's Credit
Agreement or any replacement credit facility, and (C) Indebtedness
incurred in the ordinary course of business evidencing accruals and
payables (including intercompany payables in respect thereof and
taxes, assessments and other governmental charges) or the entering
into of contracts in the ordinary course of business including tax
sharing, insurance or similar agreements, in either case for which any
Member shall have agreed to be liable or for which sufficient Company
funds shall be available not attributable to the Tranche B Economic
Interest;
(ii) to have any employees or to create or suffer to exist any
ERISA liabilities;
(iii) to make any loans, advances or investments except for
Permitted Investments as defined in the Guarantor's Credit Agreement
and the $55,000,000 Intercompany Note (as defined in the Participation
Agreement) and the $20,000,000 Intercompany Note from the Guarantor to
the Company;
(iv) to acquire by purchase or otherwise any part of the business
or assets of, or stock or other evidence of beneficial ownership of,
any Person except for any repurchase of the Tranche A Economic
Interest; or
(v) create, incur, assume or suffer to exist any Lien upon any of
its assets, property or revenues whether now owned or hereafter
acquired except for
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Liens for taxes, assessments or other governmental charges or levies
not at the time delinquent or thereafter payable without penalty or
being contested in good faith by appropriate proceedings and for which
adequate reserves in accordance with GAAP shall have been set aside on
its books and except for negative pledges.
3.2 POWERS OF THE COMPANY. The Company purposes set forth in Section 3.1
hereof may be accomplished by taking any action which is permitted under the Act
and which is customary, directly related or incidental thereto.
ARTICLE IV
MEMBERSHIP
4.1 INITIAL MEMBERS. The initial Members of the Company were the Persons
executing the Prior Agreement as Members, each of which was admitted to the
Company as a Member effective contemporaneously with the execution by such
Person of the Prior Agreement. On the Tranche B Financing Funding Date (as
defined in the Participation Agreement) and upon the payment of its initial
Capital Contribution of $55,000,000, the Class B Units will be issued to the
Trust.
4.2 ADDITIONAL MEMBERS. Additional Persons may be admitted to the Company
as Class A Members and Class A Units may be issued to those Persons and to
existing Members on such terms and conditions as may be determined at the time
of admission, upon approval by the Required Class A Interests; provided,
however, PNG or an Affiliate of PNG shall own fifty percent (50%) or more of
Class A Units. The terms of admission or issuance must specify the Percentage
Interests and the Commitments applicable thereto. Any admission will only be
effective after the new Member has executed and delivered to the Managers a
document including the new Member's notice address and an agreement to be bound
by this Agreement. There shall be no additional classes of Members created.
4.3 REPRESENTATIONS AND WARRANTIES. Each Member hereby represents and
warrants to the Company and each other Member that (a) if that Member is a
corporation, it is duly organized, validly existing, and in good standing under
the Law of the state of its incorporation and is duly qualified and in good
standing in such other states and jurisdictions as may be required by its
business, except for any states wherein the failure to be so qualified would not
materially adversely affect the financial condition of such corporation; (b) if
that Member is a limited liability company, it is duly organized, validly
existing, and (if applicable) in good standing under the Law of the state of its
organization and is duly qualified and (if applicable) in good standing as a
foreign limited liability company in the jurisdiction of its principal place of
business (if not organized therein); (c) if that Member is a partnership, trust,
or other entity, it is duly formed, validly existing, and (if applicable) in
good standing under the Law of the state of its formation, and if required by
Law is duly qualified to do business and (if applicable) in good standing in the
jurisdiction of its principal place of business (if not formed therein), and
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the representations and warranties in clause (a), (b) or (c), as applicable, are
true and correct with respect to each partner (other than limited partners),
trustee, or other member thereof that is a corporation, limited liability
company, partnership, trust or other business entity or association; (d) it has
full corporate, limited liability company, partnership, trust,or other
applicable power and authority to execute and agree to this Agreement and to
perform its obligations hereunder and all necessary actions by the board of
directors, shareholders, managers, members, partners, trustees, beneficiaries,
or other Persons necessary for the due authorization, execution, delivery, and
performance of this Agreement by that Member have been duly taken; (e) it has
duly executed and delivered this Agreement; and (f) its authorization,
execution, delivery, and performance of this Agreement do not conflict with any
other agreement or arrangement to which it is a party or by which it is bound or
any judgment, decree or order by which it is bound.
4.4 INTERESTS IN A MEMBER. A Member that is not a natural person may not
cause or permit an interest, direct or indirect, in itself to be transferred or
assigned, such that after the transfer or assignment the Company would be
considered to have terminated within the meaning of Section 708 of the Code.
4.5 LIABILITY TO THIRD PARTIES. Except as may be expressly provided in a
separate, written guaranty or other agreement executed by a Member or Manager,
no Member or Manager shall be liable for the debts, obligations or liabilities
of the Company, including under a judgment, decree or order of a court or
arbitrator.
4.6 WITHDRAWAL. Except as otherwise provided herein, no Member shall have
the right to resign or withdraw from the Company as a Member.
4.7 LACK OF AUTHORITY. Except as otherwise provided herein, no Member
(other than a Member acting as a Manager or an officer) has the authority or
power to act for or on behalf of the Company, to do any act that would be
binding on the Company, or to incur any expenditures on behalf of the Company.
4.8 NO STATE LAW PARTNERSHIP. The Members intend that the Company not be a
partnership (including, without limitation, a limited partnership) or joint
venture, and intend that no Member or Manager be a partner or joint venturer of
any other Member or Manager for any purposes other than federal and state tax
purposes, and this Agreement may not be construed to suggest otherwise.
ARTICLE V
CONTRIBUTIONS
5.1 INITIAL CONTRIBUTIONS. Each Class A Member has contributed to the
Company the amount in cash and/or property of its initial Capital Contribution
reflected on EXHIBIT A. Each Class B Member shall contribute to the Company the
amount in cash of its initial Capital
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Contribution reflected on EXHIBIT A on the Tranche B Financing Funding Date. In
exchange for their respective initial Capital Contributions reflected on EXHIBIT
A, the Members shall own, hold and be entitled to the Units of Membership
Interest reflected on EXHIBIT A, such Membership Interest to be subject to all
of the terms, provisions and conditions of this Agreement. The Commitment shall
constitute the full obligation of the Members to furnish funds or property to
the Company and, except as otherwise provided for by the Act or pursuant to
Section 5.2, no additional funds or other property shall be required of any
Member. The Capital Contributions may be used by the Managers for any Company
purpose; provided, however, the initial Capital Contribution of $55,000,000 of
the Class B Members shall be loaned by the Company to an Affiliate of PNG
pursuant to an intercompany promissory note as approved by the Managers and the
Trust (the "Intercompany Note"). PNG shall contribute to the Company the Tranche
B Economic Interest pursuant to the Assignment of Tranche B Economic Interest in
the form of Exhibit B hereto on the Tranche B Financing Funding Date (the
"Tranche B Assignment").
5.2 ADDITIONAL CONTRIBUTIONS. No Class A Member, except as provided below,
and no Class B Member shall be obligated to make any additional contribution of
cash or property to the capital of the Company. In the event the Company is (a)
characterized as an association taxable as a corporation for federal or state
income tax purposes, and the Company incurs an income tax liability to any
taxing authority (including any type of tax measured by income, such as a
franchise tax computed with reference to the income of the taxpayer), or (b)
required to make any payments or reimbursements provided in Article VII or
Article X, the Class A Members agree to make mandatory additional capital
contributions (the "Mandatory Additional Contributions") equal to the amount of
such income taxes and such payments and reimbursements to the extent the Company
has insufficient funds to pay such items (excluding any funds attributable to
the Tranche B Economic Interest or the Intercompany Note). In such event, any
Manager shall give written notice to the Class A Members stating (i) the
aggregate amount of the Mandatory Additional Contribution required, (ii) the
portion of such Mandatory Additional Contribution that is required by each Class
A Member, and (iii) the date on which the Mandatory Additional Contribution must
be made. Such contribution shall be due five days prior to the time such tax is
due, including estimated taxes, or such payment or reimbursement is required, as
the case may be. The Mandatory Additional Contributions shall be a joint and
several liability of all the Class A Members.
All other additional capital contributions of the Class A Members shall be
made after the expenditure or commitment of all funds of the Company and upon
the election of the Required Class A Interests ("Additional Contribution"). Such
election to make additional capital contributions shall not create any rights in
favor of third parties. Upon the election of the Required Class A Interests,
each Class A Member agrees to contribute from time to time, its pro rata share,
determined in accordance with its respective Class A Units of Membership, of the
Additional Contribution as necessary to enable the Company to cause the business
of the Company to be properly operated and maintained and to discharge its
costs, expenses, obligations and liabilities. In such event, any Manager shall
give written notice to the Class A Members stating (i) the aggregate amount of
the Additional Contribution required, (ii) the purpose or purposes for which
such Additional Contribution is proposed to be used, (iii) the portion of such
Additional Contribution that is required to be contributed by each Class A
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Member, and (iv) the date on which the Additional Contribution must be made,
which shall be not less than thirty (30) days from the giving of such notice,
unless waived by the Class A Members.
5.3 FAILURE TO PAY CERTAIN AMOUNTS. In the event a Class A Member fails to
timely pay any Additional Contribution, such Class A Member shall be deemed a
defaulting Class A Member and any Manager of the Company shall give written
notice to the non-defaulting Class A Members who shall then have the option, at
their discretion (by decision of a majority of the Units of Membership Interest
held by the non-defaulting Class A Members), to exercise any one or more of the
following rights or remedies:
(a) Take such action (including, without limitation, the filing of a
lawsuit) as the non-defaulting Class A Members deem appropriate to obtain
payment by the defaulting Member of that portion of the Additional
Contribution which is in default, together with interest thereon at the
Base Interest Rate from the date that such contribution or loan was due, at
the cost and expense of the defaulting Class A Member;
(b) Permit the non-defaulting Class A Members to advance pro rata (or
in such other percentages as they may agree) that portion of the Additional
Contribution that is in default, with the following result:
(i) the sums thus advanced shall be deemed to be loans from the
non-defaulting Class A Members ("Lending Members") making such
payments to the defaulting Class A Member and a contribution of such
sum to the Company by the defaulting Class A Member pursuant to this
Agreement;
(ii) the principal balance of such loans and all accrued unpaid
interest thereon shall be due and payable in whole within ten (10)
days after written demand therefor has been given to the defaulting
Class A Member by the Lending Members;
(iii) the loans shall bear interest at the Default Interest Rate
from the date that the loan was made until the date that such loan,
together with all interest accrued thereon, is repaid to the Lending
Members;
(iv) all distributions from the Company that would otherwise be
made to the defaulting Class A Member (whether before or after
dissolution of the Company) shall, instead, be paid to the Lending
Members until the loans and all interest accrued thereon have been
repaid in full to the Lending Members (with all such payments being
applied first to interest earned and unpaid and then to principal);
and
(v) the repayment of the loans and all interest accrued thereon
shall be secured by a security interest in the defaulting Class A
Member's Membership Interest;
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(c) Permit one or more of the non-defaulting Class A Members to make
an additional Capital Contribution to the Company of that portion of the
Additional Contribution of the defaulting Member that is in default,
whereupon the Company shall issue (in the same class or series as owned by
such non-defaulting Member) additional Class A Units to the non-defaulting
Class A Members making such additional Capital Contributions such that the
Percentage Interests of each of the Class A Members shall be adjusted in
proportion to the aggregate Capital Accounts of all Class A Members after
such additional Capital Contributions have been made; provided, however,
that no fractional Class A Units shall be issued, and, therefore, in
connection with the above, all calculations of additional Class A Units to
be issued shall be rounded up to the nearest whole number, the aggregate of
all Class A Units not to exceed 100%; and provided further that, in the
event that compliance with this Section 5.3(c) requires the Company to
issue Class A Units for any particular class or series in excess of that
which the Company is expressly authorized to issue under the terms hereof,
the number of Units of Membership Interest for such class or series shall
automatically be amended and increased, without further action by or notice
to any party, to the number necessary to allow the Percentage Interests of
the non-defaulting Members making such additional Capital Contributions to
be increased in accordance with this Section 5.3(c);
(d) Exercise the rights of a secured party under the Uniform
Commercial Code as in effect in the State of Texas ("UCC"); or
(e) Exercise any other rights and remedies available at Law or in
equity.
5.4 LOANS BY A MEMBER. If any additional funds are required for additional
working capital to operate the Company and without regard to the ability of the
Managers to call for additional contributions, then, in lieu of borrowing funds
from unaffiliated lenders, one or more Members may make one or more loans to the
Company in such amounts as may reasonably be required and as are necessary to
operate the Company as shall be determined by the Managers with the approval of
the Required Class A Interests; provided, however, any such loans by a Member
shall be repaid only after all Class B Units shall have been fully liquidated or
otherwise are no longer outstanding and the loan documents evidencing any such
loan shall contain subordination provisions satisfactory to the Managers.
Nothing herein shall obligate any Member to make any such loans to the Company.
5.5 RETURN OF CAPITAL. No Member shall be entitled to have any Capital
Contribution returned to it or to receive any distributions from the Company
upon withdrawal or otherwise, except in accordance with the express provisions
of this Agreement. No interest shall be paid by the Company on any Capital
Contributions by the Members. No unrepaid Capital Contribution shall be deemed
or considered to be a liability of the Company, any Manager or any Member. No
Member shall be required to contribute any cash or property to the Company to
enable the Company to return any Member's Capital Contribution.
5.6 CAPITAL ACCOUNTS.
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(a) A Capital Account shall be established and maintained for each Member
in accordance with the rules of IRS Regulations Section 1.704-a(b)(a)(iv). Each
Member's Capital Account (i) shall be increased by (A) the amount of money
contributed by that Member to the Company, (B) the Net Agreed Value of property
contributed by that Member to the Company, and (C) allocations to that Member of
Company income and gain (or items thereof) computed in accordance with Section
5.6(b), including income and gain exempt from tax, and (ii) shall be decreased
by (A) the amount of money distributed to that Member by the Company, (B) the
Net Agreed Value of property distributed to that Member by the Company, and (C)
allocations of Company loss and deduction (or items thereof), computed in
accordance with Section 5.6(b). A Member that has more than one Unit of
Membership Interest shall have a single Capital Account that reflects all its
Membership Interests, regardless of the class of Units of Membership Interest
owned by that Member and regardless of the time or manner in which those
Membership Interests were acquired.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction to be reflected in the Members' Capital Accounts, the
determination, recognition and classification of any such item shall be the same
as its determination, recognition and classification for federal income tax
purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) All fees and other expenses incurred by the Company to
promote the sale of (or to sell) Membership Interests, if any, that
can neither be deducted nor amortized under Section 709 of the Code,
shall, for purposes of Capital Account maintenance, be treated as an
item of deduction at the time such fees and other expenses are
incurred and shall be allocated among the Members pursuant to the
provisions of Article VI.
(ii) Except as otherwise provided in IRS Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain,
loss and deduction shall be made without regard to any election under
Section 754 of the Code which may be made by the Company and, as to
those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the
Code, without regard to the fact that such items are not includable in
gross income or are neither currently deductible nor capitalized for
federal income tax purposes.
(iii) Any income, gain or loss attributable to the taxable
disposition of any Company property shall be determined as if the
adjusted basis of such property as of such date of disposition were
equal in amount to the Company's Carrying Value with respect to such
property as of such date.
(iv) In accordance with the requirements of Section 704(b) of the
Code, any deductions for depreciation, cost recovery or amortization
attributable to any Contributed Property shall be determined as if the
adjusted basis of such property
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on the date it was acquired by the Company were equal to the Agreed
Value of such property. Upon an adjustment pursuant to IRS Regulations
Section 1.704-1(b)(a)(iv)(f) to the Carrying Value of any Company
property subject to depreciation, cost recovery or amortization, any
further deductions for such depreciation, cost recovery or
amortization attributable to such property shall be determined (A) as
if the adjusted basis of such property were equal to the Carrying
Value of such property immediately following such adjustment and (B)
using a rate of depreciation cost recovery or amortization derived
from the same method and useful life (or, if applicable, the remaining
useful life) as is applied for federal income tax purposes; provided
however, that if the asset has a zero adjusted basis for federal
income tax purposes, depreciation, cost recovery or amortization
deductions shall be determined using any reasonable method that the
Managers may adopt.
(c) A transferee of a Membership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Membership
Interest so transferred; provided, however, that if the transfer causes a
termination of the Company under Section 708(b)(1)(B) of the Code, the
Company's properties shall be deemed to have been distributed in
liquidation of the Company to the Members (including any transferee of a
Membership Interest that is a party to the transfer causing such
termination) pursuant to Section 13.3 and recontributed by such Members in
reconstitution of the Company. Any such deemed distribution shall be
treated as an actual distribution for purposes of this Section 5.6. In such
event the Carrying Values of the Company properties shall be adjusted
immediately prior to such deemed distribution pursuant to IRS Regulations
Section 1.704-1(b)(a)(iv)(f) and such Carrying Values shall then constitute
the Agreed Values of such properties upon such deemed contribution to the
reconstituted Company. The Capital Accounts of such reconstituted Company
shall be maintained in accordance with the principles of this Section 5.6.
5.7 NEGATIVE CAPITAL ACCOUNT. No Member with a negative balance in its
Capital Account shall have any obligation to provide funds to the Company or the
other Members to restore the negative balance, and any such deficit in the
Capital Account of any Member shall not constitute an obligation of such Member
to the Company or the other Members.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 ALLOCATIONS. Except as otherwise provided herein, all items of income,
gain, loss, deduction, and credit of the Company shall be allocated among the
holders of Class A Units in accordance with their Percentage Interests.
6.2 SPECIAL ALLOCATIONS. The following special allocations shall be made in
the following order:
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(a) COMPANY MINIMUM GAIN CHARGEBACK. Notwithstanding the other
provisions of this Article VI, except as provided in Treasury Regulation
Section 1.704-2(f)(2), if there is a net decrease in Company Minimum Gain
during any Company taxable period, each Member shall be allocated items of
Company income and gain for such period (and, if necessary subsequent
periods) in the manner and in the amounts provided in Treasury Regulation
Sections 1.704-2(i)(4), 1.704-2(j)(2)(ii), 1.704- 2(g) and in the manner
provided in Treasury Regulation Section 1.704-2(f)(6) or any successor
provisions. For purposes of this Article VI, each Member's Adjusted Capital
Account balance shall be determined, and the allocation of income or gain
required hereunder shall be effected, prior to the application of any other
allocations pursuant to this Article VI with respect to such taxable period
(other than an allocation pursuant to Sections 6.2(e) or 6.2(f).
(b) CHARGEBACK OF MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE
DEBT. Notwithstanding the other provisions of this Section 6.2, except as
provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net
decrease in Minimum Gain Attributable to Member Nonrecourse Debt determined
in accordance with Treasury Regulation Section 1.704-2(i)(5) at the
beginning of such taxable period during any Company taxable period, any
Member with a share of Minimum Gain Attributable to Member Nonrecourse Debt
at the beginning of such taxable period shall be allocated items of Company
income and gain for such period (and, if necessary, subsequent periods) in
the manner and in the amounts provided in Treasury Regulation Sections
1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions. For
purposes of this Section 6.2, each Member's Adjusted Capital Account
balance shall be determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any other
allocations pursuant to this Section 6.2 with respect to such taxable
period (other than an allocation pursuant to Sections 6.2(e) or 6.2(f).
(c) QUALIFIED INCOME OFFSET. In the event any Member unexpectedly
receives adjustments, allocations or distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or
1.704-1(b)(2)(ii)(d)(6), items of Company income and gain shall be
specifically allocated to such Member in an amount and manner sufficient to
eliminate, to the extent required by the Treasury regulations promulgated
under Section 704(b) of the Code, the deficit balance, if any, in its
Adjusted Capital Account created by such adjustments, allocations or
distributions as quickly as possible unless such deficit balance is
otherwise eliminated pursuant to Section 6.2(a) or 6.2(b) hereof.
(d) GROSS INCOME ALLOCATIONS. In the event any Member has a deficit
balance in its Adjusted Capital Account at the end of any Company taxable
period, such Member shall be specially allocated items of Company gross
income and gain in the amount of such excess as quickly as possible;
PROVIDED, HOWEVER THAT an allocation pursuant to this Section 6.2(d) shall
be made only if and to the extent that such Member would have a deficit
balance in its Adjusted Capital Account after all other allocations
provided in this Section 6.2 have been tentatively made as if this Section
6.2(d) was not in effect.
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(e) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any taxable
period shall be allocated in accordance with Section 6.1. If all of the
Members unanimously determine in their good faith discretion that the
Company's Nonrecourse Deductions must be allocated in a different ratio to
satisfy the safe harbor requirements of the Treasury regulations
promulgated under Section 704(b) of the Code, then the Members by vote as
provided hereunder are authorized to revise the prescribed ratio to the
numerically closest ratio which satisfies such requirements.
(f) MEMBER NONRECOURSE DEDUCTIONS. Member Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Member that bears the
Economic Risk of Loss for such Company Nonrecourse Debt to which such
Member Nonrecourse Deductions are attributable in accordance with IRS
Regulation Section 1.704-2(i). If more than one Member bears the Economic
Risk of Loss with respect to a Member Nonrecourse Debt, such Member
Nonrecourse Deductions attributable thereto shall be allocated between or
among such Members in accordance with the ratios in which they share such
Economic Risk of Loss.
(g) SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code Section 734 (b) or
Code Section 743 (b) is required, pursuant to Regulations Section 1.704-1
(b)(2)(iv)(m)(2) or (4), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis) and such gain or
loss shall be specially allocated to the Members in accordance with their
Member Interests in the Company in the event IRS Regulation Section
1.704-1(b)(2)(iv)(m)(2) applies, or to the Members to whom such
distribution was made in the event IRS Regulation Section
1.704-1(b)(2)(iv)(m)(4) applies.
(h) CURATIVE ALLOCATIONS. The allocations set forth in Section 6.2
hereof (the "Special Allocations") are intended to comply with certain
requirements of the Code and the IRS Regulations promulgated thereunder. It
is the intent of the Members that, to the extent possible, all Special
Allocations will be offset either with other Special Allocations or with
special allocations of other items of Company income, gain, loss or
deduction pursuant to this Section 6.2(h). Therefore, notwithstanding any
other provision of this Section 6.2 (other than the Special Allocations),
the Members shall make such offsetting special allocations in whatever
manner they deem appropriate so that, after such offsetting allocations are
made, each Member's capital account balance is, to the extent possible,
equal to the capital account balance such Member would have had if the
Special Allocations provisions of this Agreement did not apply and all
Company items were allocated pursuant to Section 6.1 above.
6.3 ALLOCATIONS FOR TAX PURPOSES.
(a) Except as otherwise provided herein, for federal income tax
purposes, each item of income, gain, loss and deduction which is recognized
by the Company, for
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federal income tax purposes, shall be allocated among the holders of Class
A Units in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Sections 6.1 and 6.2 hereof.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, each item of income, gain, loss,
depreciation, depletion and cost recovery deduction which is recognized by
the Company, for federal income tax purposes, shall be allocated for
federal income tax purposes among the Members as follows:
(i) (A) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Members in the
manner provided under Section 704(c) of the Code that takes into
account the variation between the Agreed Value of such property and
its adjusted basis at the time of contribution; and (B) except as
otherwise provided in Section 6.3(b)(iii) hereof, any item of Residual
Gain or Residual Loss attributable to a Contributed Property shall be
allocated among the Members in the same manner as its correlative item
of "book" gain or loss is allocated pursuant to Article VI hereof.
(ii) (A) In the case of an Adjusted Property, such items shall
(1) first, be allocated among the Members in a manner consistent with
the principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and
the allocations thereof pursuant to IRS Regulations Section
1.704-1(b)(2)(iv)(f), and (2) second, in the event such property was
originally a Contributed Property, be allocated among the Members in a
manner consistent with Section 6.3(b)(i)(A) hereof; and (B) except as
otherwise provided in Section 6.3(b)(iii) hereof, any item of Residual
Gain or Residual Loss attributable to an Adjusted Property shall be
allocated among the Members in the same manner as its correlative item
of "book" gain or loss is allocated pursuant to Article VI hereof.
Any items of income, gain, loss or deduction otherwise allocable
under Section 6.3(b)(i)(B) or 6.3(b)(ii)(B) hereof shall be subject to
allocation by the Managers in a manner designed to eliminate, to the
maximum extent possible, Book-Tax Disparities in a Contributed
Property or Adjusted Property otherwise resulting from the application
of the "ceiling" limitation (under Section 704(c) of the Code or
Section 704(c) principles) to the allocations provided under Section
6.3(b)(i)(A) or 6.3(b)(ii)(A) hereof.
(c) Any gain allocated to the Members upon the sale or other taxable
disposition of any Company asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this
Section 6.3 be characterized as Recapture Income in the same proportions
and to the same extent as such Members have been allocated any deductions
directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
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(d) All items of income, gain, loss, deduction and credit recognized
by the Company for federal income tax purposes and allocated to the Members
in accordance with the provisions hereof shall be determined without regard
to any election under Section 754 of the Code which may be made by the
Company; provided, however, that such allocations, once made, shall be
adjusted as necessary or appropriate to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(e) Each item of income, gain, expense, loss, deduction or credit
allocable to any Membership Interest which may have been transferred during
any year shall, if permitted by Law, be allocated during such year, in
proportion to the number of calendar days for which each such holder was
recognized as the owner of the Membership Interest during such year,
without regard to the results of Company operations during the period in
which such holders were recognized as the owner thereof and without regard
to the date, amount or recipient of any distributions which may have been
made with respect to such Membership Interest.
6.4 CLASS B GUARANTEED PAYMENT DISTRIBUTIONS.
(a) On the dates set forth on the Distribution Schedule attached
hereto and made a part hereof, through and including the Retirement Date,
each holder of Class B Units shall be entitled to receive, cumulative
quarterly cash distributions, in accordance with the Class B Guaranteed
Payment Distribution column on such Distribution Schedule (the "Class B
Guaranteed Payment Distributions"). To the extent any Class B Guaranteed
Payment Distribution is not paid to the Class B Members when due, such
unpaid Class B Guaranteed Payment Distribution, or the portion thereof,
shall bear interest from the date of such scheduled payment to the date of
payment thereof at the Default Rate (as defined in the Participation
Agreement). Any payment of Class B Guaranteed Payment Distributions shall
be to the record holders on the date of payment. Amounts paid pursuant to
this Section 6.4 are intended to constitute guaranteed payments within the
meaning of Section 707(c) of the Code and shall not be treated as
distributions for purposes of computing the Class B Members Capital
Accounts. Class B Guaranteed Payment Distributions shall be timely paid if
the Company has funds legally available therefor. Such distribution rate
shall be appropriately adjusted to reflect any unit distribution, split-up
or reverse unit split with respect to the Class B Units.
(b) Class B Guaranteed Payment Distributions on all issued and
outstanding Class B Units shall accrue from day to day, whether or not the
Company has earned or declared such Class B Guaranteed Payment
Distributions. Such Class B Guaranteed Payment Distributions shall be paid
in full for such quarter before any distributions whatsoever (whether in
cash, stock or otherwise) shall be declared, paid or set apart for any
junior units as provided in Section 6.8, and shall be cumulative, so that
if in any quarter(s) or year(s) the Class B Guaranteed Payment
Distributions upon the outstanding Class B Units shall not have been
declared, paid or set apart, the amount of the deficiency, but without
interest, shall be fully declared, paid and set apart for payment before
any distribution shall be declared, paid or set apart for any class of
junior units
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as provided in Section 6.8. The term "junior units" as used herein shall
mean the Class A Units and all other interests in and units issued by the
Company other than the Class B Units.
(c) If payment in full of any Class B Guaranteed Payment Distributions
to be paid under Section 6.4(a) in any given quarter are not made by the
Company, then the Company will make demand under the $55,000,000
Intercompany Note for the difference between the amount necessary to make
payment in full of such Class B Guaranteed Payment Distributions in
accordance with the Amortization Schedule and the amount available to pay
the Class B Guaranteed Payment Distributions in any given quarter.
6.5 CLASS B MANDATORY DISTRIBUTIONS. On the dates set forth on the
Distribution Schedule through and including the Retirement Date, each holder of
Class B Units shall be entitled to receive cash distributions in accordance with
the Class B Mandatory Distribution column on such Distribution Schedule (the
"Class B Mandatory Distributions"). Class B Mandatory Distributions shall be
made from the proceeds received by the Company of the Tranche B Economic
Interest, and to the extent necessary, the Intercompany Note. To the extent any
Class B Mandatory Distribution amount is not paid to the Class B Members when
due, such unpaid Class B Mandatory Distribution amount, or the portion thereof,
shall bear interest from the date of such scheduled payment to the date of
payment thereof at the Default Rate (as defined in the Participation Agreement).
6.6 CLASS B LIQUIDATING DISTRIBUTIONS. The Company may liquidate all or any
portion of the Class B Units earlier than or in excess of the Class B Mandatory
Distributions (the "Class B Liquidating Distributions") at any time upon at
least three (3) Business Days' written notice (the "Liquidation Notice") to each
holder of record of Class B Units at such holder's address as the same may
appear on the books of the Company and provided no Class B Liquidating
Distribution shall be less than $1,000,000 other than a final Class B
Liquidating Distribution. The liquidation price to be paid by the Company for
any Class B Liquidating Distribution is (a) $5,500 per Unit (or any pro rata
portion thereof), plus (b) any accrued and unpaid Class B Guaranteed Payment
Distributions (or any pro rata portion thereof) to the date of such Class B
Liquidating Distribution, plus (c) an early liquidation fee equal to any loss,
cost or expense incurred by the Class B Members as a result of any prepayment of
any loan to the Class B Members made pursuant to the Trust Credit Agreement, as
adjusted by any benefit or liability received or incurred by the Class B Members
under any interest rate hedging obligations with respect thereto at such time
(the "Liquidation Price").
6.7 RIGHTS SUBSEQUENT TO LIQUIDATION. If on each liquidation date, the
Liquidation Price payable upon liquidation of the Class B Units to be liquidated
on such date is paid, then notwithstanding that certificates evidencing any of
the Class B Units, the Class B Guaranteed Payment Distributions and the Class B
Mandatory Distributions with respect to such Class B Units shall cease to accrue
after the liquidation date to the extent so paid and all rights with respect to
such Class B Units shall terminate except as to any remaining scheduled Class B
Guaranteed Payment Distributions and Class B Mandatory Distributions and except
for the right to receive any remaining Liquidation Price.
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6.8 OTHER DISTRIBUTIONS. Provided that all current Class B Obligations have
been satisfied, the Managers (a) shall cause the Company to loan to an Affiliate
of PNG any remaining funds available for distribution to Class A Members during
the course of any calendar year commencing the calendar year 1996 (excluding any
Capital Contributions of any Class A Members) until at least the last Business
Day of the January following such calendar year pursuant to the $20,000,000
Intercompany Note which shall provide any such funds advanced shall be repaid to
the Company to the extent necessary to pay any current Class B Obligations, and
(b) may cause the Company to make a distribution to the Members with Class A
Units, in accordance with their Percentage Interests subject to clause (a)
above.
6.9 RECORD OWNERSHIP. The Company and the Managers shall be entitled to
treat the record owner of a Membership Interest as the absolute owner thereof in
all respects and shall incur no liability for distributions of cash or other
property made in good faith to such record owner until such time as the
assignment of such Membership Interest has become effective on the books of the
Company. From the date of the receipt of any instrument relating to transfer of
a Membership Interest or at any time if the Company is in doubt as to the person
entitled to receive distributions in respect of such Membership Interest, the
Company may withhold any such distributions until the transfer is completed or
abandoned or the dispute is resolved.
6.10 ACCOUNTING MATTERS.
(a) The fiscal year of the Company shall be the calendar year, with
the first fiscal year of the Company ending on December 31, 1995. The books
and records of account of the Company shall be, at the expense of the
Company, (i) kept, or caused to be kept, by the Company at the principal
place of business of the Company, (ii) on a basis consistent with the
method of accounting used for federal income tax purposes, and (iii)
appropriate and adequate for conducting the Company business.
(b) Company books and records (including all files, documents and
computer records/programs), as well as any tangible assets of the Company,
will be available for inspection by any Member or such Member's duly
authorized representative (at the expense of such Member) during normal
business hours upon reasonable notice and upon reasonable frequency at (in
the case of books and records) the principal office of the Company or (in
the case of tangible assets) the place where such assets are physically
located. Any Member may reasonably request an audit of the Company books
and records, provided that an audit requested by a Member shall be at such
Member's expense.
(c) Within a reasonable time after the end of each Company fiscal year
during the existence of the Company and in any event no later than the
fifteenth day of the fourth month after the commencement of the next
succeeding fiscal year (unless an extension request has been filed with the
Internal Revenue Service), the Managers will prepare (or cause to be
prepared) and file for the Company appropriate tax returns and send all
Members a copy thereof. The tax matters partner (or the Company) shall
submit
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to each Member for review a copy of the filed return within a reasonable
time after the filing thereof.
6.11 MAINTENANCE OF BOOKS. The Company shall keep minutes of the
proceedings of its Members, its Managers and each committee, if any, of the
Managers.
6.12 INVESTMENTS. The Managers may establish and maintain one or more bank
and investment accounts and arrangements for Company funds with financial
institutions and firms that the Managers determine. Company funds may be
invested in a manner the same as or similar to the Managers' investment of their
own funds or investments by any Affiliates of the Company.
ARTICLE VII
MANAGERS AND OFFICERS
7.1 MANAGEMENT BY MANAGERS. Except for situations in which the approval of
the Members or any portion of the Members is required by this Agreement or by
non-waivable provisions of applicable Law, and subject to the provisions of
Section 7.2, (a) the powers of the Company shall be exercised by or under the
authority of, and the business and affairs of the Company shall be managed under
the direction of, the Managers; and (b) the Managers may make all decisions and
take all actions for the Company not otherwise provided for in this Agreement,
including, without limitation, the following:
(i) entering into, making, and performing contracts, agreements,
and other undertakings binding the Company that may be necessary,
appropriate, or advisable in furtherance of the purposes of the
Company and making all decisions and waivers thereunder;
(ii) opening and maintaining bank and investment accounts and
arrangements, drawing checks and other orders for the payment of
money, and designating individuals with authority to sign or give
instructions with respect to those accounts and arrangements;
(iii) maintaining the assets of the Company in good order;
(iv) collecting sums due the Company;
(v) to the extent that funds of the Company are available
therefor, paying debts and obligations of the Company;
(vi) acquiring, utilizing for Company purposes, and disposing of
any asset of the Company;
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(vii) borrowing money or otherwise committing the credit of the
Company for Company activities and voluntary prepayments or extensions
of debt except as may be restricted herein;
(viii) selecting, removing, and changing the authority and
responsibility of lawyers, accountants, and other advisers and
consultants;
(ix) obtaining insurance for the Company;
(x) determining distributions of Company cash and other property
as provided herein; and
(xi) taking any and all other action that may be necessary,
appropriate or advisable in furtherance of the purposes of the
Company;
provided, however, that nothing contained in this Agreement shall obligate any
Manager to take any action on behalf of the Company that the Manager deems (i)
not in the best interests of the Company, or (ii) not reasonably necessary to
accomplish the intended business of the Company.
7.2 ACTIONS BY MANAGERS; COMMITTEES; DELEGATION OF AUTHORITY
AND DUTIES.
(a) In managing the business and affairs of the Company and exercising its
powers, the Managers shall act (i) collectively through meetings and written
consents pursuant to Sections 7.5 and 7.7; (ii) through committees pursuant to
Section 7.2(b); and (iii) through Managers to whom authority and duties have
been delegated pursuant to Section 7.2(c).
(b) The Managers may, from time to time, designate one or more committees,
each of which shall be composed of one or more Managers. Any such committee, to
the extent provided in the resolutions establishing such committee or in the
Certificate or this Agreement, shall have and may exercise all of the authority
of the Managers, subject to the limitations set forth in the Act. At every
meeting of any such committee, the presence of a majority of all the committee
members shall constitute a quorum, and the affirmative vote of a majority of the
committee members present shall be necessary for the adoption of any resolution.
The Managers may dissolve any committee at any time.
(c) The Managers may, from time to time, delegate to one or more of the
Managers such authority and duties as the Managers may deem advisable. Unless
this Agreement otherwise provides or the Managers otherwise decide, if the
Managers assign a title to a Manager and the title is one commonly used for
officers of a business corporation formed under the DGCL, the assignment of such
title shall constitute the delegation to such Manager of the authority and
duties normally associated with that office, subject to any specific delegation
of authority and duties made pursuant to the first sentence of this Section
7.2(c).
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(d) Any Person dealing with the Company, other than a Member, may rely on
the authority of any Manager or officer in taking any action in the name of the
Company without inquiry into the provisions of this Agreement or compliance
herewith, regardless of whether that action actually is taken in accordance with
the provisions of this Agreement.
7.3 NUMBER AND TERM OF OFFICE OF MANAGERS.
(a) The number of Managers of the Company shall be determined from
time to time by the Required Class A Interests; provided, however, that no
decrease in the number of Managers that would have the effect of shortening
the term of an incumbent Manager may be made by the Members. Each Manager
shall hold office for a period as elected by the Managers, and thereafter
until his successor shall have been elected, or until his earlier death,
resignation or removal in accordance with the Act and this Agreement.
Managers need not be Members or residents of the State of Delaware.
(b) Initially, there shall be four (4) Managers of the Company. Two
(2) of the Managers shall be designated by PNG (collectively, "PNG
Managers", and individually, a "PNG Manager"), and two (2) of the Managers
(collectively, "MCN Managers" and individually, a "MCN Manager") shall be
designated by MCN. The PNG Managers and the MCN Managers shall be referred
to herein collectively as the "Managers."
(c) The PNG Managers shall be any officers or directors of PNG or any
Affiliate thereof. The initial PNG Managers shall be:
Jay A. Precourt; and
Charles R. Crisp
(d) The MCN Managers shall be any officers or directors of MCN or any
Affiliate thereof. The initial MCN Managers shall be:
James W. Whalen; and
Rene R. Joyce
(e) Only PNG shall be entitled to make determinations relating to the
election of, removal of or the filling of any vacancy attributable to any
PNG Manager. Only MCN shall be entitled to make determinations relating to
the election of, removal of or the filling of any vacancies relating to any
MCN Manager. A Manager elected to fill a vacancy occurring other than by
reason of an increase in the number of Managers shall be elected for the
unexpired term of his predecessor in office. At any meeting of the Members
at which a quorum of Members is present called expressly for that purpose,
or upon a written consent adopted by the Members entitled to make such
determination, any Manager may be removed, with or without cause, by the
Member(s) entitled to appoint the same under this Agreement.
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7.4 RESIGNATION OF MANAGERS. Any Manager may resign at any time. Such
resignation shall be made in writing and shall take effect at the time specified
therein, or if no time be specified, at the time of its receipt by the remaining
Managers. The acceptance of a resignation shall not be necessary to make it
effective, unless expressly so provided in the resignation.
7.5 MEETINGS.
(a) Unless otherwise required by Law, a majority of the number of
Managers set by the Required Class A Interests pursuant to Section 7.3(a)
hereof shall constitute a quorum for the transaction of business of the
Managers, and the act of a majority or more of the Managers present at a
meeting at which a quorum is present shall be the act of the Managers
(unless the Act requires the approval of a greater number of the Managers
for such action).
(b) Meetings of the Managers shall be held at the Company's principal
place of business or at such other place or places as shall be determined
from time to time by resolution of the Managers. At all meetings of the
Managers, business shall be transacted in such order as shall be determined
by resolution of the Managers. Attendance of a Manager at a meeting shall
constitute a waiver of notice of such meeting, except where a Manager
attends a meeting for the express purpose of objecting to the transaction
of any business on the ground that the meeting is not lawfully called or
convened.
(c) In connection with any annual meeting of Members at which Managers
were elected, the Managers may, if a quorum is present, hold their first
meeting for the transaction of business immediately after and at the same
place as such annual meeting of the Members. Notice of such meeting at such
time and place shall not be required.
(d) Regular (or annual) meetings of the Managers shall be held at such
times as shall be designated from time to time by resolution of the
Managers. Notice of regular meetings shall not be required.
(e) Special meetings of the Managers may be called by any Manager on
at least two (2) Business Days' notice to each other Manager. Such notice
need not state the purpose or purposes of, nor the business to be
transacted at, such meeting, except as may otherwise be required by Law or
provided for by the Certificate or this Agreement.
7.6 APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS BY MEMBERS. The Managers
in their discretion may submit any act or contract for approval or ratification
at any annual meeting of the Members, or at any special meeting of the Members
called for the purpose of considering any such act or contract, and any act or
contract that shall be approved or be ratified by the Required Class A Interests
shall be as valid and as binding upon the Company and upon all the Members as if
it shall have been approved or ratified by every Member of the Company except to
the extent the consent of the Required Class B Interests is required hereunder.
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7.7 ACTION BY WRITTEN CONSENT OR TELEPHONE CONFERENCE. Any action permitted
or required by the Act, this Agreement to be taken at a meeting of the Managers
or any committee designated by the Managers may be taken without a meeting if a
consent in writing, setting forth the action to be taken, is signed by all of
the Managers or committee members, as the case may be. Such consent shall have
the same force and effect as a unanimous vote at a meeting and may be stated as
such in any document or instrument filed with the Secretary of State of
Delaware, and the execution of such consent shall constitute attendance or
presence in person at a meeting of the Managers or any such committee, as the
case may be. Subject to the requirements of the Act or this Agreement for notice
of meetings, Managers, or members of any committee designated by the Managers,
may participate in and hold a meeting of the Managers or any committee of
Managers, as the case may be, by means of a conference telephone or similar
communications equipment by means of which all Persons participating in the
meeting can hear each other, and participation in such meeting shall constitute
attendance and presence in person at such meeting, except where a Person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
7.8 COMPENSATION. Managers as such shall not receive any salary for their
service in the capacity of Managers, but by resolution of the Managers, a fixed
sum and reimbursement for reasonable expenses of attendance, if any, may be
allowed for attendance at each regular or special meeting of the Managers or at
any meeting of a committee of Managers, if any, to which such Manager may be
elected; but nothing herein shall preclude any Manager from serving the Company
in any other capacity or receiving compensation therefor.
7.9 OFFICERS.
(a) GENERAL. The officers of the Company shall be chosen by the
Managers and shall be a President, a Secretary and a Treasurer.
Additionally, the Managers, in their discretion may choose a Chairman of
the Managers (who must be a Manager), a Vice-Chairman of the Managers (who
must be a Manager), a Chief Executive Officer, an Executive Vice President
and one or more Vice Presidents, Assistant Vice Presidents, Assistant
Secretaries, Assistant Treasurers and such other officers as the Managers
may from time to time designate. Any number of offices may be held by the
same person, unless otherwise prohibited by Law, the Certificate or this
Agreement. The officers of the Company need not be Members of the Company
or, except in the case of the Chairman of the Managers, Managers of the
Company. The salaries of all officers of the Company shall be fixed by the
Managers and may be altered by the Managers from time to time except as
otherwise provided by contract. All officers shall be entitled to be paid
or reimbursed for all costs and expenditures incurred in the Company's
business.
(b) ELECTION AND RESIGNATION. The Managers at their first meeting held
after each annual meeting of Members shall elect the officers of the
Company, who shall hold their offices for such terms and shall exercise
such powers and perform such duties as described in the Agreement and as
shall be determined from time to time by the
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Managers; and all officers of the Company shall hold office until their
successors are chosen and qualified or until their earlier resignation or
removal.
(c) VACANCIES. Whenever any vacancies shall occur in any office by
death, resignation, removal, increase in the number of officers of the
Company, or otherwise, the same shall be filled by the Managers, and the
officer so elected shall hold office until his successor is chosen and
qualified.
(d) REMOVAL. Any officer or agent elected or appointed by the Managers
may be removed by the Managers. Such removal may be with or without
prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
(e) CHAIRMAN OF THE MANAGERS. The Chairman of the Managers shall
preside, if present, at all meetings of the Managers and shall perform such
additional functions and duties as the Managers may prescribe from time to
time. The Chairman of the Managers may sign certificates representing units
of the Company.
(f) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, who may be
the Chairman or Vice Chairman of the Managers and/or the President, shall
have general and active management of the business of the Company and shall
see that all orders and resolutions of the Managers are carried into
effect. The Chief Executive Officer may sign deeds, mortgages, bonds,
contracts or other instruments, except in cases where the signing and
execution thereof shall be expressly delegated by the Managers or by the
Agreement to some other officer or agent of the Company, or shall be
required by Law to be otherwise signed and executed. The Chief Executive
Officer shall also perform such other duties and may exercise such other
powers as may be assigned by the Agreement or prescribed by the Managers
from time to time.
(g) PRESIDENT. The President shall, subject to the control of the
Managers and the Chief Executive Officer, in general, supervise and control
all of the business and affairs of the Company. In the absence of the
Chairman of the Managers, or if there is none, the President shall preside
at all meetings of the Members and, if the President is a director, of the
Managers. The President may sign certificates for units of the Company, any
deeds, mortgages, bonds, contracts or other instruments, except in cases
where the signing and execution thereof shall be expressly delegated by the
Managers or by the Agreement to some other officer or agent of the Company,
or shall be required by Law to be otherwise signed and executed. The
President shall also perform all duties incident to the office of President
and such other duties as may be prescribed by the Managers from time to
time.
(h) VICE PRESIDENT. Any Vice President, in the order of seniority,
unless otherwise determined by the Managers, shall, in the absence or
disability of the President, perform the duties and exercise the powers of
the President. They shall also perform the usual and customary duties that
pertain to such office and generally assist
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the President by executing contracts and agreements and exercising such
other powers and performing such other duties as are delegated to them by
the President and as the Managers may further prescribe. In addition to
exercising such powers and performing such duties as are conferred upon the
Vice President(s) by the Certificate of Formation, the Agreement or
applicable statutes, any Executive Vice President(s) or Senior Vice
President(s) shall have such further power and perform such other duties as
may be prescribed by the Managers from time to time.
(i) SECRETARY. The Secretary shall attend, to the extent possible, all
meetings of the Managers and all meetings of Members and record all the
proceedings thereat in a book or books to be kept for that purpose. The
Secretary shall give, or cause to be given, notice of all meetings of the
Members and special meetings of the Managers, and shall perform such other
duties as may be prescribed by the Managers or President, under whose
supervision he or she shall be. If the Secretary shall be unable or shall
refuse to cause to be given notice of all meetings of the Members and
special meetings of the Managers, and if there is no Assistant Secretary,
then the Managers may choose another officer to cause such notice to be
given. The Secretary shall have custody of the seal of the Company and the
Secretary shall have authority to affix the same to any instrument
requiring it, and when so affixed, it may be attested by the signature of
the Secretary. The Managers may give general authority to any other officer
to affix the seal of the Company and to attest the affixing by his or her
signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by Law to be kept or
filed are properly kept or filed, as the case may be. The duties of the
Secretary may be performed by any Assistant Secretary.
(j) TREASURER. The Treasurer shall have custody of the funds of the
Company as may be entrusted to his or her keeping and account for the same.
The Treasurer shall be prepared at all times to give information as to the
condition of the Company and shall make an annual report of the entire
business and financial condition of the Company. The Treasurer shall also
perform, under the direction and subject to the control of the Managers,
such other duties as may be assigned to him or her. The duties of the
Treasurer may also be performed by any Assistant Treasurer.
(k) ASSISTANT VICE PRESIDENTS. The Assistant Vice President(s) shall
generally assist the President and Vice President(s) and exercise such
other powers and perform such other duties as may be prescribed by the
Managers from time to time.
(l) ASSISTANT SECRETARIES. Except as may be otherwise provided in the
Agreement, any Assistant Secretary shall perform such duties and have such
powers as from time to time may be assigned to him or her by the Managers,
the President or the Secretary and, in the absence of the Secretary, or in
the event of his or her disability or refusal to act, shall perform the
duties of the Secretary, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the Secretary.
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(m) ASSISTANT TREASURERS. Except as may be otherwise provided in the
Agreement, any Assistant Treasurer shall perform such duties and have such
powers as from time to time may be assigned to him or her by the Managers,
the President or the Treasurer, if there is one, and, in the absence of the
Treasurer or in the event of his or her disability or refusal to act, shall
perform the duties of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer.
(n) OTHER OFFICERS. Such other officers as the Managers may choose
shall perform such duties and have such powers as from time to time may be
assigned to them by the Managers. The Managers may delegate to any other
officer of the Company the power to choose such other officers and to
prescribe their respective duties and powers.
(o) DELEGATION OF AUTHORITY. In the case of any absence of any officer
of the Company or for any other reason that the Managers may deem
sufficient, the Managers may delegate some or all of the powers or duties
of such officer to any other officer or to any director, employee,
unitholder or agent for whatever period of time seems desirable.
(p) VOTING SECURITIES OWNED BY THE COMPANY. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Company may be executed in the name and
on behalf of the Company by the Chief Executive Officer, President or any
Vice President and any such officer may, in the name of and on behalf of
the Company, take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any
corporation in which the Company may own securities and at any such meeting
shall possess and may exercise any and all rights and powers incident to
the ownership of such securities and which, as the owner thereof, the
Company might have exercised and possessed if present. The Managers may, by
resolution, from time to time, confer like powers upon any other person or
persons.
ARTICLE VIII
MEMBERS
8.1 MEETINGS.
(a) A quorum shall be present at a meeting of Members if the holders
of a majority of the outstanding Class A Units are represented at the
meeting in person or by proxy. Notwithstanding the other provisions of this
Agreement, Class B Members shall only be entitled to notice of, and to
attend, any annual meetings of the Members, but not any special meetings
thereof unless there is a vote upon any matter which requires the consent
of the Required Class B Interests. With respect to any matter, other than a
matter for which the consent of the holders of the Required Class B
Interests is required
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by this Agreement, the affirmative vote of the Required Class A Interests
at a meeting of Members at which a quorum is present shall be the act of
the Members.
(b) All meetings of the Members shall be held at the principal place
of business of the Company or at such other place within or without the
State of Delaware as shall be specified or fixed in the notices or waivers
of notice thereof; provided that any or all Members may participate in any
such meeting by means of conference telephone or similar communications
equipment pursuant to Section 8.5.
(c) Notwithstanding the other provisions of the Certificate or this
Agreement, the chairman of the meeting or the holders of the Required Class
A Interests shall have the power to adjourn such meeting from time to time,
without any notice other than announcement at the meeting of the time and
place of the holding of the adjourned meeting. If such meeting is adjourned
by the Members, such time and place shall be determined by a vote of the
holders of the Required Class A Interests. Upon the resumption of such
adjourned meeting, any business may be transacted that might have been
transacted at the meeting as originally called.
(d) An annual meeting of the Members, for the election of the Managers
and for the transaction of such other business as may properly come before
the meeting, shall be held at such place, within or without the State of
Delaware, on such date and at such time as the Managers shall fix and set
forth in the notice of the meeting, which date shall be within 13 months
subsequent to the date of organization of the Company or the last annual
meeting of Members, whichever most recently occurred.
(e) Special meetings of the Members for any proper purpose or purposes
may be called at any time by the Managers or the holders of the Required
Class A Interests.
(f) Written or printed notice stating the place, day and hour of the
meeting and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than two (2) nor
more than sixty (60) days before the date of the meeting, either personally
or by mail, by or at the direction of the Managers or Person calling the
meeting, to each Member entitled to vote at such meeting.
(g) The date on which notice of a meeting of Members is mailed or the
date on which the resolution of the Managers declaring a distribution is
adopted, as the case may be, shall be the record date for the determination
of the Members entitled to notice of or to vote at such meeting, including
any adjournment thereof, or the Members entitled to receive such
distribution.
(h) The right of Members to cumulative voting in the election of
Managers is expressly denied.
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8.2 ACTION BY WRITTEN CONSENT OR TELEPHONE CONFERENCE.
(a) Any action required or permitted to be taken at any annual or
special meeting of Members may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting
forth the action so taken, shall be signed by the holder or holders of not
less than the minimum Units of Membership Interests that would be necessary
to take the action that is the subject of the consent.
(b) Members may participate in and hold a meeting by means of
conference telephone or similar communications equipment by means of which
all Persons participating in the meeting can hear each other, and
participation in such meeting shall constitute attendance and presence in
person at such meeting, except where a Person participates in the meeting
for the express purpose of objecting to the transaction of any business on
the ground that the meeting is not lawfully called or convened.
ARTICLE IX
MEMBERSHIP INTERESTS
9.1 CERTIFICATES REPRESENTING MEMBERSHIP INTERESTS. Units of Membership
Interest of the Company may be represented by certificates in such form or forms
as the Managers may approve, provided that such form or forms shall comply with
all applicable requirements of Law or of the Certificate. Such certificates
shall be signed by the president or a vice president, and by the secretary or an
assistant secretary, of the Company (or by at least two Managers, if the Company
has not appointed such officers) and may be sealed with the seal of the Company
or imprinted or otherwise marked with a facsimile of such seal. The signature of
any or all of the foregoing officers of the Company may be represented by a
printed facsimile thereof. If any officer whose signature, or a facsimile
thereof, shall have been set upon any certificate shall cease, prior to the
issuance of such certificate, to occupy the position in right of which his
signature, or facsimile thereof, was so set upon such certificate, the Company
may nevertheless adopt and issue such certificate with the same effect as if
such officer occupied such position as of such date of issuance; and issuance
and delivery of such certificate by the Company shall constitute adoption
thereof by the Company. The certificates shall be consecutively numbered, and as
they are issued, a record of such issuance shall be entered in the books of the
Company. Certificates merely evidence ownership of Membership Interests and
shall not be deemed to create ownership in and of themselves, which ownership
shall exist without regard to the issuance of a certificate.
9.2 CERTIFICATE TRANSFER BOOK AND MEMBERS OF RECORD. The secretary of the
Company (or, if none, the Managers) shall maintain, among other records, a stock
transfer book containing certificates evidencing the Units of Membership
Interest, the stubs in which shall set forth the names and addresses of the
holders of all issued Units of Membership Interest of the Company, the number of
Units of Membership Interest held by each such holder, the number of
certificates representing such Membership Interest, the date of issue of such
certificates, and
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whether or not such Membership Interest originates from original issue or
transfer. The names and addresses of Members as they appear on the certificate
transfer book shall be the official list of Members of record of the Company for
all purposes except as otherwise provided herein. The Company shall keep this
record of Members at its registered office or principal place of business, or at
the office of its transfer agent or registrar. The Company shall be entitled to
treat the holder of record of any Membership Interests as the owner thereof for
all purposes, and shall not be bound to recognize any equitable or other claim
to, or interest in, such Membership Interests or any rights deriving from such
Membership Interests on the part of any other person, including, but without
limitation, a purchaser, assignee, or transferee, unless and until such other
person becomes the holder of record of such Membership Interests, whether or not
the Company shall have either actual or constructive notice of the interest of
such other person.
9.3 MEMBER'S CHANGE OF NAME OR ADDRESS. Each Member shall promptly notify
the Managers of the Company, at its principal business office, by written notice
sent by certified mail, return receipt requested, of any change in name or
address of the Member from that as it appears upon the official list of Members
of record of the Company. The Managers of the Company shall then enter such
changes into all affected Company records, including, but not limited to, the
official list of Members of record.
9.4 TRANSFER OF MEMBERSHIP INTERESTS. The Membership Interests represented
by any certificate of the Company are transferable only on the books of the
Company by the holder of record thereof or by its duly authorized attorney or
legal representative upon surrender of the certificate for such Membership
Interest, properly endorsed or assigned. The Managers may make such rules and
regulations concerning the issue, transfer, registration and replacement of
certificates as they deem desirable or necessary.
9.5 LOST, STOLEN OR DESTROYED CERTIFICATES. The Company may issue a new
certificate for Membership Interests in the place of any certificate theretofore
issued and alleged to have been lost, stolen or destroyed, but the Managers may
require the owner of such lost, stolen or destroyed certificate, or his legal
representative, to furnish an affidavit as to such loss, theft, or destruction
and to give a bond in such form and substance, and with such surety or sureties,
with fixed or open penalty, as the board may direct, in order to indemnify the
Company and its transfer agents and registrars, if any, against any claim that
may be made on account of the alleged loss, theft or destruction of such
certificate.
9.6 PREEMPTIVE RIGHTS. Except as provided by Law or the Certificate, the
Members shall not have a preemptive right to acquire additional, unissued or
treasury Units of Membership Interest of the Company, convertible into or
carrying a right to subscribe to acquire Units of Membership Interest.
ARTICLE X
INDEMNIFICATION
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10.1 RIGHT TO INDEMNIFICATION. Subject to the limitations and conditions as
provided in this Article X, each Person who was or is made a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative (hereinafter a "Proceeding"), or any appeal in
such a Proceeding or any inquiry or investigation that could lead to such a
Proceeding, by reason of the fact that he or she, or a Person of whom he or she
is the legal representative, is or was a Manager of the Company or while a
Manager of the Company is or was serving at the request of the Company as a
Manager, director, officer, partner, venturer, proprietor, trustee, employee,
agent, or similar functionary of another foreign or domestic limited liability
company, corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan or other enterprise that is an Affiliate of the Company
shall be indemnified, defended and held harmless by the Company to the fullest
extent permitted by the Act and the DGCL, as the same exist or may hereinafter
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said Law permitted the Company to provide prior to such amendment) against
judgments, penalties (including excise and similar taxes and punitive damages),
fines, settlements and reasonable expenses (including, without limitation,
attorneys' fees) actually incurred by such Person in connection with such
Proceeding, and indemnification under this Article X shall continue as to a
Person who has ceased to serve in the capacity which initially entitled such
Person to indemnity hereunder. The rights granted pursuant to this Article X
shall be deemed contract rights, and no amendment, modification or repeal of
this Article X shall have the effect of limiting or denying any such rights with
respect to actions taken or Proceedings arising prior to any such amendment,
modification or repeal. It is expressly acknowledged that the indemnification
provided in this Article X could involve indemnification for negligence of any
Person indemnified or under theories of strict liability.
10.2 ADVANCE PAYMENT. To the fullest extent permitted by applicable Law,
the right to indemnification conferred in this Article X shall include the right
to be paid or reimbursed by the Company the reasonable expenses incurred by a
Person of the type entitled to be indemnified under Article X who was, is or is
threatened to be made a named defendant or respondent in a Proceeding in advance
of the final disposition of the Proceeding and without any determination as to
the Person's ultimate entitlement to indemnification; provided, however, that
the payment of such expenses incurred by any such Person in advance of the final
disposition of a Proceeding, shall be made only upon delivery to the Company of
a written affirmation by such Manager of his or her good faith belief that he
has met the standard of conduct necessary for indemnification under this Article
X and a written undertaking, by or on behalf of such Person, to repay all
amounts so advanced if it shall ultimately be determined that such indemnified
Person is not entitled to be indemnified under this Article X or otherwise.
10.3 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS. The Company shall
indemnify, defend, hold harmless and advance expenses to an officer, employee or
agent of the Company to the same extent and subject to the same conditions under
which it may indemnify, defend, hold harmless and advance expenses to Managers
under this Article X; and, the Company shall indemnify and advance expenses to
Persons who are not or were not Managers, officers, employees or agents of the
Company but who are or were serving at the request of the
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Company as a Manager, director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic limited
liability company, corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise against any liability asserted
against him and incurred by him in such a capacity or arising out of his status
as such a Person to the same extent that it may indemnify and advance expenses
to Managers under this Article X.
10.4 APPEARANCE AS A WITNESS. Notwithstanding any other provision of this
Article X, the Company may pay or reimburse expenses incurred by a Manager or
any other indemnified Person under Section 10.3 hereof, whether or not such
Person is still serving in such capacity at such time, in connection with his
appearance as a witness or other participation in a Proceeding at a time when he
is not a named defendant or respondent in the Proceeding.
10.5 REQUEST FOR INDEMNIFICATION. To obtain indemnification, a Person shall
submit to the secretary of the Company a written request with such information
as is reasonably available to such Person regarding the basis for such claim for
indemnification. The secretary of the Company shall promptly advise the Managers
of such request. Such Person shall be advanced all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a witness in
a Proceeding, within ten days after requesting them, to the fullest extent
permitted by the Act or the DGCL ("Expenses").
10.6 DETERMINATION OF INDEMNIFICATION. A Person's entitlement to
indemnification shall be determined in accordance with the Act and the DGCL. If
entitlement to indemnification is to be determined by a law firm, or member of a
law firm, that is experienced in matters of business organization Law and
neither presently is, nor in the five years previous to his selection or
appointment has been, retained to represent: (i) the Company or an indemnified
Person in any matter material to either such party; or (ii) any other party to
the Proceeding giving rise to a claim for indemnification hereunder
("Independent Counsel"), the Company shall furnish notice to such Person within
ten days after receipt of the request for indemnification, specifying the
identity and address of the Independent Counsel. Such Person may, within
fourteen days after receipt of such written notice of selection, deliver to the
Company a written objection to such selection. Such objection may be asserted
only on the ground that the Independent Counsel so selected does not meet the
requirements of Independent Counsel and the objection shall set forth with
particularity the factual basis of such assertion. If there is an objection to
the selection of Independent Counsel, either the Company or such Person may
petition the Court of Chancery of the State of Delaware or any other court of
competent jurisdiction for a determination that the objection is without a
reasonable basis and/or for the appointment of Independent Counsel selected by
the Court.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under this Section to determine entitlement to indemnification shall
not have made and furnished to the Person in
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writing a determination of whether such Person is entitled to indemnification
within thirty days after receipt by the Company of the Person's request
therefor, a determination of entitlement to indemnification shall be deemed to
have been made, and the Person shall be entitled to such indemnification unless
such Person knowingly misrepresented a material fact in connection with the
request for indemnification or such indemnification is prohibited by Law. The
termination of any Proceeding or of any matter therein, by judgment, order,
settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not (except as otherwise expressly provided in this Article) of itself
adversely affect the right of such Person to indemnification or create a
presumption such Person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, or with respect to any criminal Proceeding, that such Person had
reasonable cause to believe that his conduct was unlawful.
10.7 PAYMENTS TO INDEPENDENT COUNSEL. The Company shall pay any and all
reasonable fees and expenses of Independent Counsel incurred acting pursuant to
this Article X and in any proceeding to which it is a party or witness in
respect of its investigation and written report and shall pay all reasonable
fees and expenses incident to the procedures in which such Independent Counsel
was selected or appointed. No Independent Counsel may serve if a timely
objection has been made to his selection until a court has determined that such
objection is without a reasonable basis.
10.8 RIGHT TO BRING SUIT. In the event that (i) a determination is made
pursuant to Section 10.6 hereof that a Person is not entitled to indemnification
under this Article, (ii) advancement of Expenses is not timely made pursuant to
Section 10.5 hereof, (iii) Independent Counsel has not made and delivered a
written opinion determining the request for indemnification (a) within ninety
days after being appointed by the court, or (b) within ninety days after
objections to his selection have been overruled by the court, or (c) within
ninety days after the time for the Company or such Person to object to his
selection, or (iv) payment of indemnification is not made within five days after
a determination of entitlement to indemnification, such Person shall be entitled
to an adjudication in an appropriate court of the State of Delaware, or in any
other court of competent jurisdiction, of his entitlement to such
indemnification or advancement of Expenses. In the event that a determination
shall have been made that a Person is not entitled to indemnification, any
judicial proceeding or arbitration commenced pursuant to this Section 10.8 shall
be conducted in all respects as a DE NOVO trial on the merits and such Person
shall not be prejudiced by reason of that adverse determination. If a
determination shall have been made or deemed to have been made that a Person is
entitled to indemnification, the Company shall be bound by such determination in
any judicial proceeding commenced pursuant to this Section 10.8, or otherwise,
unless such Person knowingly misrepresented a material fact in connection with
the request for indemnification, or such indemnification is prohibited by Law.
The Company shall be precluded from asserting in any judicial proceeding
commenced pursuant to this Section 10.8 that the procedures and presumptions of
this Article are not valid, binding and enforceable and shall stipulate in any
such court that the Company is bound by all provisions of this Article. In the
event that a Person, pursuant to this Section 10.8,
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seeks a judicial adjudication to enforce his rights under, or to recover damages
for breach of, this Article, such Person shall be entitled to recover from the
Company, and shall be indemnified by the Company against, any and all Expenses
actually and reasonably incurred by him in such judicial adjudication, but only
if he prevails therein. If it shall be determined in such judicial adjudication
that a Person is entitled to receive part but not all of the indemnification or
advancement of Expenses sought, the Expenses incurred by such Person in
connection with such judicial adjudication or arbitration shall be appropriately
prorated.
10.9 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
advancement and payment of expenses conferred in this Article X shall not be
exclusive of any other right which a Manager or other Person indemnified
pursuant to Section 10.2 may have or hereafter acquire under any Law (common or
statutory), provision of the Certificate or this Agreement, agreement, vote of
Members or disinterested Managers or otherwise.
10.10 SAVINGS CLAUSE. If this Article X or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify and hold harmless each Manager or any other
Person indemnified pursuant to this Article X as to Expenses to the full extent
permitted by any applicable portion of this Article X that shall not have been
invalidated and to the fullest extent permitted by applicable Law. The Company
shall be precluded from asserting in any judicial proceeding commenced pursuant
to this Article X that the procedures and presumptions of this Article X are not
valid, binding and enforceable and shall stipulate in any such court that the
Company is bound by all provisions of this Article X.
10.11 SURVIVAL OF RIGHTS. The provisions of this Article shall continue as
to any Person whose status has ceased and shall inure to the benefit of his
heirs, executors and administrators.
10.12 INSURANCE. The Company may maintaininsurance, at its expense, to
protect itself and any manager, officer, employee or agent of the Company or
another limited liability company, corporation, partnership, joint venture,
trust or other enterprise against any such expense, liability or loss, whether
or not the Company would have the power to indemnify such Person against such
expense, liability or loss under Delaware Law.
10.13 INDEMNITY AGREEMENTS. The Company may enter into indemnity agreements
with Persons who are Managers from time to time, and with such officers,
employees and agents as the Managers may designate.
10.14 RESTRICTIONS ON PAYMENT. Notwithstanding any other provision of
Article VII and Article X, no payments provided in Article X or reimbursements
provided in Article VII shall be made unless and only to the extent that the
Company shall have received either (a) Additional Contributions from the Class A
Members in accordance with Section 5.2, (b) shall have received repayments from
the $20,000,000 Intercompany Note or (c) shall have received repayments from the
$55,000,000 Intercompany Note, provided that the principal amount of the
[$55,000,000] Intercompany Note shall not be less than the aggregate principal
amounts and face amounts of
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the Instruments (as defined in the Participation Agreement) and further provided
no payments or reimbursements shall be made from the Tranche B Economic
Interest.
ARTICLE XI
TAXES
11.1 TAX RETURNS. The Managers shall cause to be prepared and filed all
necessary federal and state income tax returns and all other necessary tax
returns for the Company, including making the elections described in Section
11.2. Each Member shall furnish to the Managers all pertinent information in its
possession relating to Company operations that is necessary to enable the
Company's income tax returns to be prepared and filed.
11.2 TAX ELECTIONS. The Company shall make the following elections on the
appropriate tax returns:
(a) to adopt the calendar year as the Company's taxable year;
(b) to adopt the cash method (or accrual method, as appropriate) of
accounting and to keep the Company's books and records on the income-tax
method;
(c) if a distribution of Company property as described in Section 734
of the Code occurs or if a transfer of a Membership Interest as described
in Section 743 of the Code occurs, on written request of any Member, to
elect, pursuant to Section 754 of the Code, to adjust the basis of Company
properties;
(d) to elect to amortize the organization expenses of the Company and
the startup expenditures of the Company under Section 195 of the Code
ratably over a period of 60 months as permitted by Section 709(b) of the
Code;
(e) any other election the Managers may deem appropriate and in the
best interests of the Members; and
(f) to use the maximum allowable accelerated tax method and shortest
permissible tax life for depreciation purposes.
Neither the Company nor any Manager or Member may make an election for the
Company to be excluded from the application of the provisions of subchapter K of
chapter 1 of subtitle A of the Code or any similar provisions of applicable
state Law, and no provision of this Agreement shall be construed to sanction or
approve such an election.
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11.3 TAX MATTERS PARTNER.
(a) A majority of the Managers shall designate one Member to be the
"tax matters partner" of the Company pursuant to Section 6231(a)(7) of the
Code; or, if there is no Manager that is a Member, the "tax matters
partner" ("TMP") shall be a Member that is designated as such by the
Required Class A Interests. Any Member who is designated TMP shall inform
each other Member of all significant matters that may come to its attention
in its capacity as TMP as may be reasonably necessary. Any Member who is
designated TMP may not take any action contemplated by Sections 6222
through 6233 of the Code without the consent of the Required Class A
Interests, but this sentence does not authorize such Manager (or any other
Manager) to take any action left to the determination of an individual
Member under Sections 6222 through 6233 of the Code.
(b) PNG is designated as the initial TMP.
(c) COMPLIANCE. The TMP and other Members shall use reasonable
commercial effort to comply with responsibilities outlined in this Section
and Code Sections 6222 through 6233 and 6050K (and the IRS Regulations
thereunder) and in doing so shall incur no liability to any other Member.
Notwithstanding the TMP's obligation to use its reasonable efforts in the
fulfillment of its responsibilities, the TMP shall not be required to incur
any expenses for the preparation for, or pursuance of, administrative or
judicial proceedings, unless the Members agree on a method for sharing such
expenses.
(d) INFORMATION REQUESTED BY THE TMP. The Members and Managers shall
furnish the TMP, within two weeks from the receipt of the request, the
information (including information specified in Code Sections 6230(e) and
6050K) the TMP may reasonably request to comply with the requirements on
furnishing information to the Internal Revenue Service.
(e) TMP AGREEMENTS WITH THE IRS. (1) The TMP shall not agree to any
extension of the statute of limitations for making assessments on behalf of
the Company without first obtaining the written consent of all Members. The
TMP shall not bind any other Member to a settlement agreement in tax audits
without obtaining the written concurrence of any such Member. (2) Any other
Member who enters in a settlement agreement with the Secretary of the
Treasury with respect to any Company (partnership) items, as defined in
Code Section 6231(a)(3), shall notify the other parties of such items
within ninety (90) days from the date of such settlement.
(f) INCONSISTENT TREATMENT OF COMPANY ITEMS. If any Member intends to
file a notice of inconsistent treatment under Code Section 6222(b), such
Member shall, prior to the filing of such notice, notify the TMP of the
(actual or potential) inconsistency of the Member's intended treatment of
the Company (partnership) item with the treatment of that item by the
Company. The TMP shall remit copies of such notification to the other
Members. If an inconsistency notice is filed solely because a Member has
not
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received a Schedule K-1 in time for filing of its income tax return, the
TMP need not be notified.
(g) REQUEST FOR ADMINISTRATIVE ADJUSTMENT. No Member shall file
pursuant to Code Section 6227 a request for an administrative adjustment of
Company (partnership) items without first notifying all other Members. If
all Members agree with the requested adjustment, the TMP shall file the
request on behalf of the Company. If unanimous consent is not obtained
within thirty (30) days from such notice, or within the period required to
timely file the request, if shorter, any Member, including the TMP, may
file a request for administrative adjustment on its own behalf.
(h) JUDICIAL PROCEEDINGS. Any Member intending to file a petition
under Code Sections 6226, 6228, or any other Code section with respect to
any Company (partnership) item, or other tax matters involving the Company,
shall notify the other Members prior to such filing of the nature of the
contemplated proceeding. In the case where the TMP is the Member intending
to file such petition, such notice shall be given within a reasonable time
to allow the other Members to participate in the choice of the forum for
such petition. If the Members do not agree on the appropriate forum, then
the forum shall be chosen by majority vote. Each Member shall have a vote
in accordance with its Percentage Interest in the Company for the year
under audit. If a majority cannot agree, the TMP shall choose the forum. If
a Member intends to seek review of any court decision rendered as a result
of such proceeding, the Member shall notify the other Members prior to
seeking such review.
ARTICLE XII
RESTRICTIONS ON TRANSFERS
12.1 RESTRICTIONS ON TRANSFER. Class A Units, or any portion thereof, may
be sold, assigned or transferred to any other Person subject to the consent of
the Required Class A Interests; provided, however, PNG or an Affiliate retains
ownership of fifty percent (50%) or more of the Class A Units. Class A Units may
be pledged to the Collateral Agent pursuant to the terms and provisions of that
certain Amended and Restated Secured Credit Agreement dated as of January 12,
1995, by and among Tejas-Acadian Holding Company, certain financial
institutions, Canadian Imperial Bank of Commerce, as Co-Agent, Administrative
Agent and Collateral Agent, Bank of Montreal, as Co-Agent, and Citibank, N.A.,
as Co-Agent, or in connection with any subsequent or replacement financing of an
Affiliate of the Company. Class B Units may not be sold, assigned or transferred
without the consent of the Required Class A Interests. Class B Units may be
pledged to the Collateral Agent pursuant to the terms of the Trust Credit
Agreement.
12.2 WITHDRAWAL; DISSOLUTION; BANKRUPT MEMBERS. No Member shall be
permitted to resign or withdraw from the Company. Except as set forth in Section
13.1(d) below, the withdrawal or dissolution of any Member shall not terminate
the Company nor shall a Member
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becoming a Bankrupt Member. Subject to Section 13.1(d), upon the withdrawal or
dissolution of any Member, or if any Member becomes a Bankrupt Member, the
Company or any Class A Member shall have the option, exercisable by notice from
another Member to the withdrawing, dissolving or Bankrupt Member (or its
representative), as applicable, at any time prior to the 180th day after such
other Member's receiving notice of the withdrawal or dissolution or the
occurrence of the event causing the Bankrupt Member to become such, to buy, and
on the exercise of this option the withdrawing or dissolving Member or the
Bankrupt Member or its representative shall sell, its Membership Interest. The
purchase price of Class A Units shall be an amount equal to the fair market
value thereof determined by agreement by the withdrawing or dissolving Member or
the Bankrupt Member (or its representative) and the other Members; however, if
those Persons do not agree on the fair market value on or before the 30th day
following the exercise of the option, either such Person, by notice to the
other, may require the determination of fair market value to be made by an
independent appraiser specified in that notice. If the Person receiving that
notice objects on or before the tenth day following receipt to the independent
appraiser designated in that notice, and those Persons otherwise fail to agree
on an independent appraiser, either such Person may petition the United States
District Judge for the Southern District of Texas (Houston Division) then senior
in service to designate an independent appraiser. The determination of the
independent appraiser, however designated, is final and binding on all parties.
The withdrawing or dissolving Member or the Bankrupt Member, as applicable, and
the Company each shall pay one-half of the costs of the appraisal. The purchase
price of Class B Units shall be the Liquidation Price. The Company or the Class
A Member shall pay the fair market value of the Class A Units or the Class B
Liquidating Distributions as the case may be, in cash at the time of the
purchase. The payment to be made to the withdrawing or dissolving Member or the
Bankrupt Member, or its representative, as applicable, pursuant hereto shall be
in complete liquidation and satisfaction of all the rights and interest of the
withdrawing or dissolving Member or the Bankrupt Member and its representative
(and all Persons claiming by, through, or under the withdrawing or dissolving
Member or the Bankrupt Member and its representative) in and in respect of the
Company, including, without limitation, any Membership Interest, any rights in
specific Company property, and any rights against the Company and (insofar as
the affairs of the Company are concerned) against the Members, and constitutes a
compromise to which all Members have agreed pursuant to Section 5.02(D) of the
Act.
12.3 LEGEND AND APPLICATION. The Members shall cause any certificates
representing the ownership of the Membership Interests owned by them to be
conspicuously endorsed on the front or the back thereof with the following
legend (or such equivalent legends as counsel for the Company may approve) in
addition to any legend imposed pursuant to any other agreement or required to
comply with any applicable Law:
"The Membership Interests represented by this certificate are
subject to certain provisions found in the Limited Liability
Company Agreement of the Company, which in part restrict the
transfer of the Membership Interest. A copy of the Limited
Liability Company Agreement has been filed with the Company at
its principal place of business and its registered office and
will be
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furnished by the Company to the holder of this certificate
without charge upon written request to the Company at its
principal place of business or registered office."
12.4 EFFECTIVE DATE OF TRANSFERS. In the event a transfer of a Membership
Interest is consummated in accordance with this Article, such transfer will be
recognized for the purpose of distributions and allocations as of the date on
which such transfer became effective, provided that the Company shall have been
given a copy of all documents or instruments executed in connection with such
transfer. A transferee shall be an assignee under the Act and shall not become a
substituted Member unless such admission is approved by all of the other
Members. Notwithstanding any assumption of liabilities by a transferee, the
transferring Member shall not be released from its obligations under this
Agreement or otherwise with respect to the Company unless such a release is
approved by the Members (exclusive of the transferor).
12.5 COMPLIANCE WITH SECURITIES LAWS. In addition to the restrictions on
transfer of the Membership Interests contained in this Agreement, no transfer of
any Membership Interest shall be made by or on behalf of any Member unless the
Membership Interests are registered under the Securities Act of 1933, as
amended, pursuant to an effective registration statement which contemplates the
proposed transfers and complies with the then-applicable regulations, rules and
administrative procedures and practices of the Securities and Exchange
Commission, and are registered or qualified in accordance with any applicable
state securities Laws, regulations, rules and administrative procedures and
practices, or unless the Company has received the written opinion of or
satisfactory to its legal counsel that the proposed transfer is exempt from
registration under applicable securities Laws. The Managers may waive the
requirements of this Section.
12.6 TAX TERMINATION. For the right of a Member to dispose of a Membership
Interest or any part thereof or of any Person to be admitted to the Company in
connection therewith to exist or be exercised, the Company must receive a
favorable opinion of the Company's legal counsel or of other legal counsel
acceptable to the Managers to the effect that the disposition or admission, when
added to the total of all other sales, assignments, or other dispositions within
the preceding 12 months, would not result in the Company's being considered to
have "terminated" within the meaning of the Code. The Managers may waive the
requirements of this Section.
12.7 INTERESTS IN A MEMBER. A Member that is not a natural person may not
cause or permit an interest, direct or indirect, in itself to be transferred or
assigned such that after the transfer or assignment the Company would be
considered to have terminated within the meaning of Section 708 of the Code.
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ARTICLE XIII
DISSOLUTION AND LIQUIDATION
13.1 DISSOLUTION OF THE COMPANY. The Company shall be dissolved upon the
occurrence of any of the following events:
(a) The written consent of the Required Class A Interests and the
Required Class B Interests;
(b) The sale or other disposition of all or substantially all of the
Company assets and the receipt of all payments therefor in cash;
(c) October 1, 2025;
(d) The death, insanity, retirement, resignation or expulsion of a
Member, the occurrence of an event which causes a Member to become a
Bankrupt Member or the occurrence of any other event which terminates the
continued membership of a Member in the Company (other than as described in
Section 4.6 or 4.7), unless the business of the Company is continued by the
written consent of the remaining Members holding Class A Units and Class B
Units within 90 days after written notice thereof is provided to the
Members by the Company and there are at least two remaining Members; or
(e) Entry of a decree of judicial dissolution of the Company under
Section 18-802 of the Act.
13.2 LIQUIDATION AND TERMINATION. On dissolution of the Company, until all
Class B Guaranteed Payment Distributions and all Class B Mandatory Distributions
required to be made under the terms of this Agreement have been made, the
Required Class B Interests shall appoint the liquidator. After all Class B
Guaranteed Payment Distributions and all Class B Mandatory Distributions
required to be made under the terms of this Agreement have been made, the
Managers shall act as liquidator or may appoint one or more Members as
liquidator. The liquidator shall proceed diligently to wind up the affairs of
the Company and make final distributions as provided herein and in the Act. The
costs of liquidation shall be borne as a Company expense. Until final
distribution, the liquidator shall continue to operate the Company with all of
the power and authority of the Managers. Maintenance of property and borrowings
and expenditures of Company funds for legitimate Company purposes to effectuate
or facilitate the winding up or the liquidation of the Company affairs shall be
authorized if the liquidator, in the exercise of its business judgment, believes
that the interest of the Company would be best served thereby and shall not be
construed to involve a continuation of the Company. Upon dissolution of the
Company, a true, just and final accounting of all transactions relating to the
business of the Company shall be made. Liabilities of the Company shall be paid
and assets of the Company shall be distributed in accordance with the provisions
of Section 13.3 hereof as soon as is reasonably possible after the dissolution
of the Company.
46
<PAGE>
13.3 PAYMENT OF LIABILITIES AND DISTRIBUTION OF ASSETS. Upon dissolution of
the Company, the liquidator shall determine and report to all the Members each
Member's Capital Account, any amounts owing to the Company from any Member, the
interest of the Company in its properties and the value of Company properties,
equipment and other assets. The assets of the Company remaining after the
payment of all Company debts shall be distributed as follows:
(a) The liquidator may sell any or all Company property, including to
Members, and any resulting gain or loss from each sale shall be computed
and allocated to the Capital Accounts of the Members;
(b) With respect to all Company property that has not been sold, the
fair market value of that property shall be determined and the Capital
Accounts of the Members shall be adjusted to reflect the manner in which
the unrealized income, gain, loss, and deduction inherent in property that
has not been reflected in the Capital Accounts previously would be
allocated among the Members if there were a taxable disposition of that
property for the fair market value of that property on the date of
distribution;
(c) Company property shall then be distributed to the Class B Members
to the extent of all Class B Guaranteed Payment Distributions during the
distribution period and all remaining scheduled Class B Mandatory
Distributions ("Terminating Distributions"), before any distribution shall
be made to the holders of any Class A Unit. The Class B Members shall not
otherwise participate in the distribution of assets upon liquidation. If
the assets of the Company are insufficient to permit the payment of the
full required termination payment, then all assets available for
distribution shall be distributed ratably to the holders of the Class B
Units. A consolidation, merger, sale of assets or the reduction of units of
the Company shall not be deemed to be a liquidation, dissolution or
winding-up of the Company within the meaning of this Section; and
(d) Company property shall then be distributed among the Class A
Members, first, in such proportions and in such amounts (to the extent of
available funds) as necessary to cause the respective balances in the
Members' Capital Accounts to be in proportion to their respective
Membership Interests and, thereafter, in accordance with the positive
Capital Account balances of the Members, as determined after taking into
account all Capital Account adjustments for the taxable year of the Company
during which the liquidation occurs (other than those made by reason of
this clause (iii)); and those distributions shall be made by the end of the
taxable year of the Company during which the liquidation of the Company
occurs (or, if later, 90 days after the date of the liquidation).
All distributions in kind to the Members shall be made subject to the
liability of each distributee for costs, expenses and liabilities theretofore
incurred or for which the Company has committed prior to the date of termination
and those costs, expenses and liabilities shall be allocated to the distributee
pursuant to this Section 13.3. The distribution of cash and/or
47
<PAGE>
property to a Member in accordance with the provisions of this Section 13.3
constitutes a complete return to the Member of its Capital Contributions and a
complete distribution to the Member of its Membership Interests and all the
Company's property and constitutes a compromise to which all Members have
consented within the meaning of Section 18-502 of the Act. To the extent that a
Member returns funds to the Company, it has no claim against any other Member
for those funds.
Notwithstanding the foregoing, until the repayment of any Member's
indebtedness to the Company, the liquidator shall retain such Member's
distributive share of cash from such properties against such indebtedness and
the cost of operation of such properties during the period of liquidation. If,
after six (6) months after the liquidator's report, a Member's indebtedness to
the Company has not been satisfied, such Member's Membership Interest may be
foreclosed upon and sold at public or private sale at the best price immediately
obtainable which shall be determined in the sole judgment of the liquidator, the
proceeds applied to the indebtedness and the balance of such proceeds, if any,
delivered to such Member as its liquidating distribution.
ARTICLE XIV
MISCELLANEOUS PROVISIONS
14.1 NOTICES. Notices of any kind which may be or are required to be given
hereunder by any Member to another shall be in writing and personally delivered
or sent by telecopy or certified mail, return receipt requested, addressed to
the respective Member at the post office address appearing on EXHIBIT A hereto
or at such other address as may be designated by such Member by notice addressed
to the other Members. If mailed, notices shall be deemed to have been given
three (3) Business Days after deposited in the United States mail.
14.2 AMENDMENT OR MODIFICATION. This Agreement may be amended or modified
from time to time only by a written instrument adopted by the Managers and
executed and agreed to by the Required Class A Interests and the Required Class
B Interests; provided, however, that (a) an amendment or modification reducing a
Member's Percentage Interest or increasing its Commitment (other than to reflect
changes otherwise provided by this Agreement) is effective only with that
Member's consent, (b) an amendment or modification reducing the required
Percentage Interest or other measure for any consent or vote in this Agreement
is effective only with the consent or vote of Members having the Percentage
Interests or other measure theretofore required, and (c) no amendment or
modification affecting Section 2.8 hereof shall be effective unless the Required
Class B Interests shall consent.
14.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall
inure to the benefit of the Members, the Managers, and their respective
successors and assigns.
14.4 CONSTRUCTION. The captions used in this Agreement are for convenience
only and shall not be construed in interpreting this Agreement. Wherever the
context so requires, the
48
<PAGE>
masculine shall include the feminine and the neuter and the singular shall
include the plural, and vice versa, unless the context clearly requires a
different interpretation.
14.5 GOVERNING LAW. ALL PROVISIONS OF THIS AGREEMENT SHALL BE CONSTRUED
ACCORDING TO THE SUBSTANTIVE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS. The rights and liabilities of the Members
shall, except as otherwise provided in this Agreement, be as provided for in the
Act.
14.6 SEVERABILITY. This Agreement is intended to be performed in accordance
with, and only to the extent permitted by, all applicable Laws, ordinances,
rules and regulations of the jurisdictions in which the Company does business.
In the event of a direct conflict between the provisions of this Agreement and
(a) any provision of the Certificate, or (b) any mandatory provision of the Act
or (to the extent such statutes are incorporated into the Act) the DGCL, the
applicable provision of the Certificate, the Act, or the DGCL shall control. If
any provision of this Agreement or the application thereof to any person or
circumstances is for any reason and to any extent invalid or unenforceable, the
remainder of this Agreement and the application of such provision to the other
persons or circumstances will not be affected thereby, but rather are to be
enforced to the greatest extent permitted by Law.
14.7 WAIVER OF PARTITION. Each Member hereby irrevocably waives during the
term of the Company any right that it may have to maintain any action for
partition with respect to any assets of the Company and, except as provided in
Article XIII, any right it may have to maintain any action for dissolution of
the Company.
14.8 COUNTERPARTS. This Agreement may be signed in multiple counterparts,
each of which shall be deemed one and the same instrument.
14.9 NOTICE TO MEMBERS OF PROVISIONS OF THIS AGREEMENT. By executing this
Agreement, each Member acknowledges that it has actual notice of (a) all of the
provisions of this Agreement, including, without limitation, the restrictions on
the transfer of Membership Interests set forth in Article XII, and (b) all of
the provisions of the Certificate, including, without limitation, the fact that
the Certificate provides that no Member shall have the preemptive right to
acquire any Membership Interests that may at any time be issued, sold or offered
for sale by the Company. Each Member hereby agrees that this Agreement
constitute adequate notice of all such provisions, including, without
limitation, any notice requirement under Article 2.19(D) of the DGCL and Article
8 of the UCC, and each Member hereby waives any requirement that any further
notice thereunder be given.
14.10 EXAMINATION OF AGREEMENT. A signed counterpart of this Agreement
shall be deposited with the Company. The Company shall maintain such counterpart
at its principal office and shall make the same available for examination by any
Member, in person or by agent or attorney, to the same extent that the books and
records of the Company are so available or are required to be so available by
applicable Law.
49
<PAGE>
14.11 NO THIRD PARTY BENEFICIARIES. This Agreement are intended for the
exclusive benefit of the Members and their respective personal representatives,
successors and permitted assigns, and nothing contained in this Agreement shall
be construed as creating any rights or benefits in or to any third party.
MEMBERS:
PONTCHARTRAIN NATURAL GAS SYSTEM,
A TEXAS GENERAL PARTNERSHIP
By: TXO-ACADIAN GAS PIPELINE CORP.,
A DELAWARE CORPORATION
By: /S/ CHRIS TONG
Name: Chris Tong
Title: Vice President - Finance
By: MCN ACADIAN GAS PIPELINE CORP.,
A DELAWARE CORPORATION
By: /S/ CHRIS TONG
Name: Chris Tong
Title: Vice President - Finance
MCN PELICAN INTERSTATE GAS CORP.,
A DELAWARE CORPORATION
By: /S/ CHRIS TONG
Name: Chris Tong
Title: Vice President - Finance
50
<PAGE>
MAGNOLIA ENERGY VENTURE TRUST
By: STATE STREET BANK AND TRUST
COMPANY, NOT IN ITS INDIVIDUAL
CAPACITY BUT SOLELY AS TRUSTEE
By: /S/ RUTH A. SMITH
Name: Ruth A. Smith
Title: Assistant Vice President
51
<PAGE>
EXHIBIT "A"
NAME, ADDRESS,
COMMITMENT, UNITS OF MEMBERSHIP
INTEREST AND PERCENTAGE INTEREST
OF EACH MEMBER
1. CLASS A UNITS
INITIAL UNITS OF INITIAL
CAPITAL MEMBERSHIP PERCENTAGE
CONTRIBUTION INTEREST INTEREST
a. Pontchartrain Natural Tranche A 9660 96.6%
Gas System Economic
1301 McKinney, Ste. 700 Interest
Houston, TX 77002
b. MCN Pelican Interstate $2,300,000 340 3.4%
Gas Corp.
1301 McKinney, Ste. 700
Houston, TX 77002
2. CLASS B UNITS (to be issued on Tranche B Financing Funding Date)
a. Magnolia Energy $55,000,000 10,000 100%
Venture Trust
c/o State Bank and
Trust Company, Trustee
225 Franklin Street
Boston, MASS 02110
<PAGE>
DISTRIBUTION SCHEDULE
CLASS B
GUARANTEED CLASS B
DISTRIBUTION TOTAL PAYMENT MANDATORY
DATE DISTRIBUTION DISTRIBUTIONS DISTRIBUTIONS
12/29/95
01/08/96 105,149.31 105,149.31 0.00
04/29/96 2,896,466.00 1,143,022.22 1,753,443.78
07/29/96 2,158,602.00 899,097.88 1,259,504.32
10/28/96 2,182,323.00 877,830.25 1,304,492.75
01/28/97 2,182,323.00 865,207.60 1,317,115.40
04/28/97 2,142,185.00 824,402.91 1,317,782.09
07/28/97 2,185,987.00 811,311.46 1,354,675.54
10/28/97 2,189,789.00 797,101.15 1,392,687.85
01/28/98 2,189,789.00 773,326.43 1,416,462.57
04/28/98 2,142,185.00 732,860.06 1,409,324.94
07/28/98 2,165,987.00 717,205.71 1,448,781.29
10/28/98 2,189,789.00 700,354.79 1,489,434.21
01/28/99 2,189,789.00 674,928.49 1,514,860.51
04/28/99 2,142,185.00 634,957.96 1,507,227.04
07/28/99 2,165,987.00 616,562.68 1,549,424.32
10/28/99 2,189,789.00 596,887.70 1,592,901.30
01/28/2000 2,189,789.00 569,695.11 1,620,093.89
04/28/2000 2,158,602.00 536,146.58 1,622,455.42
07/28/2000 2,158,602.00 508,750.52 1,649,851.48
10/30/2000 2,182,323.00 496,745.44 1,685,577.56
01/29/2001 2,182,323.00 452,429.95 1,729,893.05
04/30/2001 2,142,185.00 423,219.75 1,718,965.25
07/30/2001 2,165,987.00 394,194.06 1,771,792.94
10/29/2001 2,189,789.00 364,276.35 1,825,512.65
01/28/2002 2,189,790.00 333,451.56 1,856,338.44
04/29/2002 2,390,427.00 302,106.25 2,088,320.75
07/29/2002 2,416,987.00 266,843.80 2,150,143.20
10/28/2002 2,443,547.00 230,537.43 2,213,009.57
01/28/2003 2,443,547.00 195,292.28 2,248,254.72
04/28/2003 2,390,427.00 153,500.94 2,236,926.06
07/28/2003 2,416,987.00 117,434.77 2,299,552.23
10/28/2003 2,443,547.00 79,469.35 2,364,077.65
01/28/2004 2,330,229.00 39,111.92 2,291,117.08
-------------------------------------------------
$72,233,412 $17,233,412 $55,000,000
=================================================
CLASS B UNITS MEMBERSHIP SUBSCRIPTION AGREEMENT
THIS CLASS B UNITS MEMBERSHIP SUBSCRIPTION AGREEMENT (this "Agreement")
dated as of December 18, 1995 is made and entered into by and between
TEJAS-MAGNOLIA ENERGY, L.L.C., a Delaware limited liability company (the
"Company"), and MAGNOLIA ENERGY VENTURE TRUST, a trust organized under the laws
of Massachusetts ("Purchaser"), and evidences the arrangements concerning the
purchase by Purchaser of TEN THOUSAND (10,000) units of Class B Units issued by
the Company.
W I T N E S S E T H:
WHEREAS, the Company desires to issue all of its authorized Class B Units
(the "Units") to Purchaser, and Purchaser desires to subscribe to and purchase
all of the Units from the Company, each upon the terms, provisions and
conditions hereof;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements set forth herein, the
Company and Purchaser do hereby agree as follows:
1. SALE AND PURCHASE OF THE UNITS. On the Tranche B Financing Funding Date
(as defined in the Amended and Restated Participation dated as of December 18,
1995, among the Company, Pontchartrain Natural Gas System, for itself and as
Servicer, State Street Bank and Trust Company as Trustee of the Purchaser, the
financial institutions named on Schedule 1 thereto, as Purchasers, and Citibank,
N.A., as Agent (the "Participation Agreement")) and subject to the terms and
conditions set forth in this Agreement, the Company will transfer, assign and
convey the Units to Purchaser, and Purchaser will acquire the Units from
Company.
2. PURCHASE PRICE. As payment for the transfer of the Units by the Company
to Purchaser, Purchaser shall pay to the Company the aggregate purchase price of
FIFTY-FIVE MILLION AND NO/100 DOLLARS ($55,000,000.00) in immediately available
funds on the Tranche B Financing Funding Date.
3. DELIVERY AT CLOSING. On the Tranche B Financing Funding Date and upon
receipt of evidence of the capital contribution of Purchaser as set forth in
Section 2, the Company shall deliver to Purchaser the following:
a. Certificates representing the Units duly executed by the Company;
b. Certificates from the Secretary of State of Delaware as to the
legal existence and good standing of the Company under the laws of the
State Delaware; and
<PAGE>
c. Certified resolutions of the Managers of the Company that the
execution and delivery of this Agreement by the Company, and the
performance of the covenants and obligations under it, have been duly
authorized by all necessary Company action.
4. CLOSING. The delivery of and payment for the Units shall take place at a
closing held at the offices of Bracewell & Patterson, L.L.P., 711 Louisiana,
Suite 2900, Houston, Texas, on the Tranche B Financing Funding Date or such
other place or time as the parties may agree.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Purchaser as follows:
a. ORGANIZATION. The Company is a limited liability company duly
organized, validly existing, and in good standing under the laws of the
State of Delaware, has all necessary power to own its properties and to
carry on its business as now owned and operated by it, and is qualified to
do business and is in good standing in such other states and jurisdictions
as may be required by its business, except for any states wherein the
failure to be so qualified will not have a material adverse effect on its
financial condition. True and correct copies of the Certificate of
Formation and the Formation Agreement and the minutes of all meetings of
the managers of the Company have been delivered to Purchaser.
b. AUTHORITY AND CONSENT. The Company has all requisite right, power,
and authority to enter into and perform its obligations under this
Agreement. The execution and delivery of this Agreement by the Company has
been duly authorized by its managers in accordance with all applicable laws
to which the Company is subject. All consents and approvals required for
the Company to consummate the transactions contemplated by this Agreement
have been obtained. Assuming the due authorization, execution and delivery
hereof by Purchaser, this Agreement constitutes the valid and legally
binding obligation of the Company and is enforceable against the Company in
accordance with its terms. The execution and delivery of this Agreement,
the consummation by the Company of the transactions contemplated hereby and
the compliance by the Company with the provisions hereof will not (i)
conflict with or result in a breach or default under any of the terms,
conditions or provisions of any agreement or other material instrument or
obligation to which the Company is a party or by which the Company's
properties or assets are bound or under any provision of its Certificate of
Formation or Limited Liability Company Agreement, or (ii) violate any
order, writ, injunction, decree or statute or any rule or regulation
applicable to the Company or any of the properties or assets of the
Company.
c. VALID ISSUANCE. When the Units are issued, all of the Units will be
duly and validly authorized and issued and fully paid and non-assessable.
<PAGE>
6. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents
and warrants to the Company as follows:
a. ORGANIZATION. Purchaser is a duly organized, validly existing trust
in good standing under the laws of the State of Massachusetts, has all
necessary power to own its properties and to carry on its business as now
owned and operated by it, and is qualified to do business and is in good
standing in such other states and jurisdictions as may be required by its
business, except for any states wherein the failure to be so qualified will
not have a material adverse effect on its financial condition.
b. AUTHORITY AND CONSENT. Purchaser has all requisite right, power,
and authority to enter into and perform its obligations under this
Agreement. The execution and delivery of this Agreement by Purchaser has
been duly authorized by its trustees in accordance with all applicable laws
to which Purchaser is subject. All consents and approvals required for
Purchaser to consummate the transactions contemplated by this Agreement
have been obtained. Assuming the due authorization, execution and delivery
hereof by the Company, this Agreement constitutes the valid and legally
binding obligation of Purchaser and is enforceable against Purchaser in
accordance with its terms. The execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby and the compliance
by Purchaser with the provisions hereof will not (i) conflict with or
result in a breach or default under any of the terms, conditions or
provisions of any agreement or material instrument or obligation to which
Purchaser is a party or by which Purchaser's properties or assets are bound
or under any provision of its Trust Agreement, or (ii) violate any order,
writ, injunction, decree or statute or any rule or regulation applicable to
Purchaser or any of the properties or assets of Purchaser.
c. INVESTMENT INTENT. The Units are being acquired by Purchaser for
its own account and not with a view to distribution within the meaning of
the Securities Act of 1933, as amended (the "Act"). Purchaser acknowledges
that there is no existing public market for the Units and that no
registration statement relating to the Units has been filed under the Act
or any applicable state securities laws and that the Units must be held by
it for an indefinite period of time unless the Units are subsequently
registered under the Act and applicable state securities laws or unless an
exemption from any such applicable registration requirement becomes
available. Purchaser further acknowledges that there is no assurance or
obligation as to any such registration or exemption. Purchaser agrees that
the Units will not be sold or otherwise transferred for value unless
registered under the Act and applicable state securities laws or an
exemption from such registration is available. The certificate or
certificates representing the Units may be marked with a suitable legend
referring to the absence of registration under the Act or applicable state
securities laws and to the need for exemption from or registration under
the Act and applicable state securities laws in connection with any
disposition of the Units.
<PAGE>
7. COVENANTS OF THE COMPANY.
a. The Company shall do or cause to be done all things necessary to
preserve, renew and keep in full force and effect and in good standing its
existence and its rights and franchises necessary to conduct its business.
b. Except as specifically provided herein or in the Limited Liability
Company Act, the Company shall not sell, transfer or otherwise dispose of
or reduce its Tranche B Economic Interest for so long as any of the Units
remain outstanding unless Purchaser shall otherwise agree pursuant to the
Limited Liability Company Agreement or otherwise.
c. The Company shall promptly give notice to Purchaser of the
occurrence of any event of default of the Company under any agreements to
which both the Company and Purchaser are parties.
d. The Company shall make demand under the $55,000,000 Intercompany
Note to the extent provided therein to the extent necessary to pay Class B
Obligations (as defined in the Formation Agreement) then due as provided in
the Formation Agreement. The Company shall make demand under the
$20,000,000 Intercompany Note (as defined in the Formation Agreement) to
the extent a loan is made pursuant to Section 6.8(a) of the Formation
Agreement and if necessary to pay Class B Obligations then due as provided
in the Formation Agreement.
8. COVENANTS OF THE PURCHASER. The Trust agrees it will not disclose
without the consent of the Company (other than to its employees, auditors,
counsel or other professional advisors, or to its Affiliates) any information
concerning the Company or any of its Affiliates; provided, that the Trust may
disclose any such information (a) that has become generally available to the
public, (b) if required or appropriate in any report, statement or testimony
submitted to any federal or state regulatory body having or claiming to have
jurisdiction over the Trust, (c) if required or appropriate in response to any
summons or subpoena or in connection with any litigation, (d) in order to comply
with any law, order, regulation or ruling applicable to the Trust, and (e) to
any prospective or actual permitted transferee in connection with any
contemplated or actual permitted transfer of the Instruments; provided, that
such actual or prospective transferee executes an agreement with the Trust
containing provisions substantially identical to those contained herein prior to
such transferee's receipt of any such information. To the extent any information
is disclosed pursuant to the provisions of (b), (c) or (d) hereof, the Trust
shall accompany such disclosure with a request to the recipients, to keep such
information confidential.
<PAGE>
9. MISCELLANEOUS.
a. RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties to it and their
respective successors and assigns, nor is anything in this Agreement
intended to relieve or discharge the obligation or liability of any third
persons to any party to this Agreement, nor shall any provision give any
third persons any right of subrogation or action over against any party to
this Agreement. Without limiting the generality of the foregoing, it is
expressly understood that this Agreement is not intended to convey to any
third party with any pre-existing contractual or legal relationship with a
party any rights as a third party beneficiary or create any obligation to
any such party not in privity with the other party.
b. BINDING EFFECT. This Agreement shall be binding on, and shall inure
to the benefit of, the parties and their respective successors and assigns.
This Agreement may not be assigned without the written consent of the other
party hereto.
c. SURVIVAL. All representations, warranties, covenants and agreements
of the parties contained in this Agreement shall survive the Closing.
d. NOTICES. All notices, requests, demands, and other communications
under this Agreement shall be in writing (including cable or telecopy) and
shall be deemed to have been duly given at its address, telecopier number
or telex numbers set forth below or such other address, telecopier number
or telex as such party may hereafter specify by notice to the party to whom
notice is to be given, given by courier, United States certified or
registered mail, by telegram or other telecommunication device capable of
creating a written record of such notice and its receipt:
The Company: Tejas-Magnolia Energy, L.L.C.
1301 McKinney, Suite 700
Houston, Texas 77010
Attention: Vice President - Finance
Telephone: (713) 658-0509
Telecopy: (713) 658-9600
Purchaser: Magnolia Energy Venture Trust
c/o State Street Bank and Trust Company, Trustee
225 Franklin Street
Boston, Massachusetts 02110
Attention: Ms. Ruth A. Smith
Telephone: (617) 664-5340
Telecopy: (617) 664-5371
<PAGE>
Each such notice, request or other communication shall be effective
(i) if given by telecopier, when such telecopy is transmitted to the
telecopier notice specified in this subsection and a confirmation of
receipt of such telecopy has been received by sender, (ii) if given by
courier, when delivered, (iii) if given by mail, three (3) days after such
communication is deposited in the mail, registered with return receipt
requested, addressed as aforesaid or (iv) if given by any other means, when
delivered at the addresses specified herein.
e. DEFINED TERMS. Unless otherwise provided for herein, all
capitalized terms shall have the meaning given such terms in the
Participation Agreement.
f. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE.
g. TIME OF ESSENCE. Due to the business requirements of the parties
and other matters, time is of the essence in the performance of this
Agreement.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it to
be effective as of the date first above written.
TEJAS-MAGNOLIA ENERGY, L.L.C.,
a Delaware limited liability company
By: /S/ CHRIS TONG
Name: Chris Tong
Title: Vice President - Finance
MAGNOLIA ENERGY VENTURE TRUST,
a Massachusetts trust
By: State Street Bank and Trust Company,
not in its individual capacity,
but solely as Trustee
By: /S/ RUTH A. SMITH
Name: Ruth A. Smith
Title: Assistant Vice President
Exhibit 11.1
TEJAS GAS CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE (1)
(unaudited)
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Weighted average number of common shares
outstanding (2) 11,568 11,483 11,336
Incremental common shares resulting from
assumed exercise of stock options based
on the stock's daily average market price(1) 146 342 489
- ------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding and common equivalent shares
for primary calculation 11,714 11,825 11,825
Incremental common shares resulting from
assumed exercise of stock options based
on the more dilutive of the stock's daily
average market price or ending price(1) 42 - 27
- ------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding and common equivalent shares
assuming full dilution 11,756 11,825 11,852
- ------------------------------------------------------------------------------------------------------
Net Earnings Applicable To Common Stock $ 24,544 $ 22,153 $ 17,016
======================================================================================================
Earnings per Common Share on Consolidated
Statements of Earnings(2):
Weighted average number of common shares outstanding 11,568 11,825 11,825
======================================================================================================
Earnings Per Common Share $ 2.12 $ 1.87 $ 1.44
======================================================================================================
Earnings Per Common and Common Equivalent
Share:
Primary earnings per common share(2) $ 2.10 $ 1.87 $ 1.44
======================================================================================================
Fully-diluted earnings per common share $ 2.09 $ 1.87 $ 1.44
======================================================================================================
<FN>
(1) All shares have been restated to reflect a stock dividend of one-tenth of
one share of Common Stock for each share of Common Stock outstanding on July 27,
1995.
(2) The earnings per share reported on the Consolidated Statements of Earnings
for 1995 do not reflect the dilutive effect of the stock options because the
dilution is less than 3%.
</FN>
</TABLE>
Exhibit 21.1
Subsidiaries of Tejas Gas Corporation
(as of March 1, 1996)
<TABLE>
<CAPTION>
NAME STATE OF ORGANIZATION
<S> <C>
Tejas Alliance Holding Company Delaware
Tejas Alliance GP Company Delaware
Tejas Alliance Energy Company Delaware
Tejas Alliance Resources Company Delaware
Tejas-Acadian Holding Company Delaware
Tejas Gas Corp. Nevada
Tejas Hydrocarbons Company Nevada
Tejas Gas Transmission Company Texas
Tejas Gas Systems, Inc. Texas
Hydrocarbon Development Corp. Texas
Tejas-Gulf Corporation Texas
Tejas Gas Holding, Inc. Delaware
Tejas Gas International Ltd. Cayman Islands
Tejas Gas de Colombia Ltd. Cayman Islands
Gulf Energy Development Corporation Delaware
Gulf Energy Pipeline Company Delaware
Gulf Energy Marketing Company Delaware
Gulf Energy Liquids Company Nevada
Gulf Energy Gas Company Delaware
Gulf Energy Gathering & Processing Corporation Delaware
Valley Gas Transmission, Inc. Delaware
Bay City Realty, Inc. Texas
East Texas Industrial Gas Company Texas
Cypress-Sabine Gas Company Texas
Stellman Transportaion Company Texas
Acadian Gas Corporation Nevada
Acadian Acquisition Corporation Delaware
LEDCO Acquisition Company, Inc. Delaware
LEDCO Inc. Louisiana
Louisiana State Gas Corporation Louisiana
LEDCO Gas Gathering, Inc. Louisiana
Delta Gas, Inc. Louisiana
NorthCan Energy, Inc. Canada
Acadian Consulting Corporation Delaware
MCN Acadian Gas Pipeline Corp. Delaware
MCN Pelican Interstate Gas Corp. Delaware
MCN Pelican Transmission Corp. Delaware
TXO-Acadian Gas Pipeline Corp. Delaware
Evangeline Gulf Coast Gas Corporation Texas
Acadian Gas Group Partnerships (1):
Acadian Gas Pipeline System Delaware
Calcasieu Gas Gathering System Texas
Neches Pipeline System Delaware
Pelican Transmission System Texas
Pontchartrain Natural Gas System Texas
Spindletop Gas Distribution System Texas
Tejas-Magnolia Energy, L.L.C.(2) Delaware
Tejas Natural Gas Company Nevada
<PAGE>
Tejas Gas Pipeline Company Nevada
Tejas Pipeline Holding Company Nevada
Tejas North Pipeline Partnership (3) Delaware
Tejas South Pipeline Partnership (3) Delaware
Tejas Gas Services Company Nevada
Tejas Gas Marketing Company Nevada
Cypress Gas Pipeline Company Delaware
Cypress Gas Marketing Company Delaware
<FN>
- ------------------------------------
(1) The partnership interests in the Acadian Gas Group partnerships are owned by
subsidiaries of Acadian Gas Corporation.
(2) The common equity interests in Tejas-Magnolia Energy, L.L.C. are held by MCN
Pelican Interstate Gas Corp. and Pontchartrain Natural Gas System.
(3) The partnership interests in the pipeline partnerships are held by Tejas Gas
Pipeline Company and Tejas Pipeline Holding Company.
</FN>
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
Tejas Gas Corporation:
We hereby consent to the incorporation by reference in Registration Statements
No. 33-32792 and 33-44615 on Form S-8 for Tejas Gas Corporation Thrift Plan, No.
33-31724 and 33-54946 on Form S-8 for Tejas Gas Corporation Employee Stock
Option Plan, No. 33-47779 on Form S-8 for Tejas Gas Corporation Directors Stock
Option Plan and No. 33-64895 on Form S-8 for Tejas Gas Corporation Director
Stock Award Plan of our report dated February 14, 1996 appearing in this Annual
Report on Form 10-K of Tejas Gas Corporation for the year ended December 31,
1995.
Deloitte & Touche LLP
Houston, Texas
March 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND
CONSOLIDATED STATEMENTS OF EARNINGS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<PERIOD-START> JAN-01-1995
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,816
<SECURITIES> 0
<RECEIVABLES> 191,708
<ALLOWANCES> 0
<INVENTORY> 38,733
<CURRENT-ASSETS> 246,405
<PP&E> 793,376
<DEPRECIATION> 178,642
<TOTAL-ASSETS> 915,451
<CURRENT-LIABILITIES> 205,795
<BONDS> 307,075
55,000
460
<COMMON> 2,901
<OTHER-SE> 299,124
<TOTAL-LIABILITY-AND-EQUITY> 915,451
<SALES> 1,043,621
<TOTAL-REVENUES> 1,043,621
<CGS> 877,088
<TOTAL-COSTS> 947,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,130
<INCOME-PRETAX> 51,790
<INCOME-TAX> 18,853
<INCOME-CONTINUING> 32,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,937
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 0
</TABLE>
