-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QBv3XJqVMTbUERWZBaBPnQ1uViH5p4MRoPSWfrQJ9L43y19x3d6vqe5sci/XjK74 ygrdWxvZjLq022BVN8XcgQ== 0000950129-97-000962.txt : 19970311 0000950129-97-000962.hdr.sgml : 19970311 ACCESSION NUMBER: 0000950129-97-000962 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970310 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TPC CORP CENTRAL INDEX KEY: 0000868576 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS) [5172] IRS NUMBER: 760091595 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10718 FILM NUMBER: 97554025 BUSINESS ADDRESS: STREET 1: 200 WESTLAKE PARK BLVD STREET 2: SUITE 1000 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 7135976200 MAIL ADDRESS: STREET 1: 200 WESTLAKE PARK BLVD STREET 2: SUITE 1000 CITY: HOUSTON STATE: TX ZIP: 77079 FORMER COMPANY: FORMER CONFORMED NAME: TEJAS POWER CORP DATE OF NAME CHANGE: 19930328 10-K 1 TPC CORPORATION - DATED 12/31/96 1 As filed March 10, 1997 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 1996 or [ ] TRANSITION REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-10718 TPC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 76-0091595 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 WESTLAKE PARK BOULEVARD SUITE 1000 HOUSTON, TEXAS 77079 (Address of principal executive offices) (281) 597-6200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act (Each class is registered on the New York Stock Exchange): CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE Securities registered pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK, PAR VALUE $0.01 PER SHARE, HELD BY NONAFFILIATES OF THE REGISTRANT AS OF MARCH 7, 1997 WAS APPROXIMATELY $145,176,000. AS OF MARCH 7, 1997, THE REGISTRANT HAD OUTSTANDING 17,424,252 SHARES OF CLASS A COMMON STOCK (NET OF 470,000 TREASURY SHARES), PAR VALUE $.01 AND 579,963 SHARES OF CLASS B, SERIES A COMMON STOCK, PAR VALUE $.01. DOCUMENTS INCORPORATED BY REFERENCE NONE ================================================================================ 2 TPC CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Business............................................................................ 2 ITEM 2. Properties.......................................................................... 15 ITEM 3. Legal Proceedings................................................................... 15 ITEM 4. Submission of Matters to a Vote of Security Holders................................. 15 PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters................ 17 ITEM 6. Selected Financial Data............................................................. 17 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 ITEM 8. Financial Statements and Supplementary Data......................................... 28 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 PART III ITEM 10. Directors and Executive Officers of the Registrant.................................. 49 ITEM 11. Executive Compensation.............................................................. 52 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................... 56 ITEM 13. Certain Relationships and Related Transactions...................................... 59 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 60 SIGNATURES......................................................................................... 66
3 PART I ITEM 1. BUSINESS GENERAL TPC Corporation (formerly Tejas Power Corporation) and its affiliates ("TPC") are engaged in gathering, processing, storage and marketing of natural gas. TPC owns and operates gathering systems located in the Gulf of Mexico, plus related natural gas processing facilities. With the completion of the acquisition of various offshore natural gas gathering systems and related assets onshore Texas from Seagull Energy Corporation and four other sellers (the "Seagull Transaction") on September 25, 1995, TPC's gathering systems currently consist of approximately 350 miles of pipe with 1,680 MMcf/day total capacity and an average throughput for the year ended December 31, 1996 of 868 MMcf/day. TPC also has a majority voting and ownership interest in Market Hub Partners ("MHP"), which is developing an integrated system of natural gas market hubs with high deliverability salt cavern storage facilities, certain of which are connected via third party pipelines to TPC's offshore gathering systems. MHP has two supply area market hubs in operation in Texas and Louisiana and three market hub projects in various stages of planning and development in Pennsylvania, Mississippi and the Midwest area. MHP's existing salt cavern storage facilities provide approximately 12.5 Bcf of working gas storage capacity and 1.65 Bcf/d of natural gas deliverability which TPC believes makes MHP the largest owner of natural gas salt cavern storage deliverability in the United States. TPC believes it is well positioned in the natural gas sales services market because of its combination of aggregation capabilities, its access to high deliverability salt cavern storage facilities located at the interconnection of multiple pipelines and its marketing and risk management expertise. TPC is also actively pursuing emerging opportunities in electric storage and power marketing. The natural gas supply requirements of pipelines, local distribution companies, utilities and other users of natural gas fluctuate over time. Large fluctuations in supply needs in the markets TPC serves are primarily caused by weather conditions. Demand for natural gas tends to peak in the winter months, reflecting home heating needs, and is typically higher in the summer than in the spring and fall, reflecting use by electric utilities to satisfy air conditioning needs. In addition, demand related to weather conditions may vary significantly over short periods of time due to sudden changes in temperature. Users of natural gas also experience changes in their natural gas supply needs unrelated to weather. For example, a natural gas utility (or an electric utility using natural gas to fuel its generators) serving a city generally requires more natural gas during the business week than on the weekend. Operators of natural gas wells are generally unable to adjust output levels precisely with changes in demand. Salt cavern storage facilities, such as MHP's Moss Bluff Facility located near Houston, Texas, and its Egan Facility in Acadia Parish, Louisiana, can modulate natural gas flow by injecting and withdrawing natural gas as needed throughout the day. This type of storage is well suited to respond to swings in natural gas supply and demand. Historically, pipelines acted as merchants of natural gas, purchasing natural gas from the producers and reselling natural gas, primarily to local distribution companies, electric utilities and other users. In 1985, the FERC commenced restructuring the regulation of interstate pipelines, requiring them to grant transportation access to any creditworthy shipper, including producers and other marketers of natural gas, on an open access, nondiscriminatory basis. In the current market, a user may purchase natural gas from a number of sources, and arrange for transportation and delivery on one or more pipelines which act as common carriers and which do not take title to the natural gas transported. Over the last ten years there has been a general oversupply of natural gas. Prior to the issuance of FERC Order No. 636 in 1992, users of natural gas had been able to purchase sufficient natural gas from pipelines, on short notice, to meet substantially all their natural gas supply needs, and pipelines had been largely obligated by contract to supply these needs. TPC believes that as general consumption of natural gas begins to more closely match supply, natural gas may not be available in sufficient quantities on a timely basis to satisfy short duration peak usage needs caused by temperature variation or supply interruptions, and such events may cause the demand for flexible, reliable natural gas supply services such as those provided by TPC to increase. TPC was incorporated as a Delaware corporation in 1984. TPC's principal executive offices are located at 200 WestLake Park Boulevard, Suite 1000, Houston, Texas 77079, and its main telephone number is (281) 597-6200. 2 4 FORWARD LOOKING STATEMENTS See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward Looking Statements" for a discussion of forward looking statements contained above and elsewhere in this Report. DEFINITIONS AND OTHER MATTERS A "market hub" is a geographic location where there is a natural gas storage facility and multiple pipeline interconnections. The term "Bcf" means billion cubic feet of natural gas, "MMcf" means million cubic feet of natural gas and "Mcf" means thousand cubic feet of natural gas. The term "MMBtu" means million British Thermal Units. The term "net" when used in connection with the transportation or storage of a quantity of natural gas means the total amount of natural gas transported or stored multiplied by TPC's or MHP's interest in the joint venture or other entity that owns the gathering or storage facility. "FERC" is the Federal Energy Regulatory Commission. References to TPC include TPC, its subsidiaries and the joint ventures managed by TPC or its interest therein, as the context requires. Injection and withdrawal capacities are presented in average volumes (Mcf, MMcf or Bcf) of natural gas per day. The principal factor affecting injection capacity is the pressure of the natural gas when stored in the cavern. The nominal or average injection rates are increased or decreased if actual cavern pressures are below or above pressures used in determining the average injection rates. Withdrawal capacity is limited by the capacity of pipeline metering stations that take natural gas away from the storage facility, which in turn is limited by pipeline operating pressures and sizes. Storage capacities of salt-dome caverns are estimated by sonar and various other techniques and are presented herein on an estimated basis. BUSINESS AND GROWTH STRATEGY TPC's primary business objective is to achieve growth in cash flow and earnings by increasing both the gross profit per Mcf and the volume of natural gas that it gathers, processes and markets. TPC seeks to take advantage of deregulation in the natural gas industry and the new technology that has reduced the cost of delivering natural gas at the time and location required by customers. TPC focuses on serving customers whose requirements to buy or sell natural gas can fluctuate sharply ("swing") within short periods of time and who value reliability of supply. TPC's strategy is to control natural gas gathering and storage assets that provide the reliability, responsiveness and flexibility needed to serve the swing market. TPC's gathering assets provide it with access to a reliable supply of natural gas which, when combined with the flexibility of MHP's innovative market hubs utilizing salt cavern storage facilities and TPC's advanced natural gas title and administrative information systems, have allowed TPC to become a major provider of premium services to the natural gas swing market. By anticipating the changes brought about by industry deregulation, TPC believes it is competitively well positioned to serve its customers' current and future natural gas market needs. TPC also believes domestic consumption of natural gas as a fuel will continue to grow, as natural gas continues to be recognized as cleaner-burning, less expensive and more abundant in North America than oil. Prior to the Seagull Transaction, TPC grew primarily through internal development of natural gas gathering systems and storage facilities, and through the expansion of its marketing activities. TPC expects future growth to result from both internal project development and selected acquisitions. RECENT DEVELOPMENTS EVALUATION OF STRATEGIC ALTERNATIVES. On November 12, 1996, TPC announced that its Board of Directors has retained an investment banking firm to assist it in exploring strategic alternatives for increasing shareholder value, including the possibility of a sale or merger of part or all of the Company. An announcement regarding the results of the process is expected in the near future. 3 5 COMMON STOCK BUYBACK PROGRAM. On August 23, 1996, TPC was authorized by its Board of Directors to repurchase up to $5 million of its Class A Common Stock over a twelve month period. Pursuant to the Board's authorization, TPC purchased a total of 95,000 shares of its Class A Common Stock at a cost of $803,000 through October 9, 1996. No additional shares have been purchased since that time. The buyback was financed out of available cash reserves and borrowings under TPC's revolving credit facility. CMS TRANSACTION AND RELATED FINANCING. On July 3, 1996, MHP and its partner in the Moss Bluff Facility, CMS Energy Corporation ("CMS"), completed a transaction whereby MHP purchased CMS's 50% interest in the Moss Bluff Facility and CMS purchased MHP's 50% interest in the Grands Lacs market hub project ("Grands Lacs Project") under development in Michigan (the "CMS Transaction"). As a result of the CMS Transaction, MHP now owns 100% of Moss Bluff but has no interest in the Grands Lacs Project. MHP is presently exploring other potential sites for a Midwest area market hub. Concurrent with the CMS Transaction, subsidiaries of MHP issued $60 million of senior secured notes with an investment grade rating in a private placement transaction. The senior secured notes bear interest at 8.1% and are due in varying amounts through December 31, 2006. In addition to financing the CMS Transaction, net proceeds of the private placement were used to retire an outstanding bank loan incurred by the Moss Bluff partnership and to repay $14.1 million of a loan made to MHP by TPC to fund development capital costs for storage facilities. TPC's remaining note receivable from MHP totaled $16.9 million after this transaction (although another $3.9 million was subsequently loaned by TPC to MHP in December 1996). TPC used the $14.1 million received from MHP to reduce revolving bank debt (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Investing and Financing Activities - Market Hub Partners"). SEAGULL TRANSACTION AND RELATED FINANCINGS/DIVESTITURES. On September 25, 1995, TPC completed the acquisition of seven gathering systems in the Gulf of Mexico offshore Texas and related assets from Seagull Energy Corporation and four other sellers for $155.9 million in cash. The acquired gathering systems include the Seagull (renamed "Seahawk") Shoreline System ("SSS"), the Cavallo Pipeline System, the Brazos Area Gathering System ("BAGS"), the El Gordo System and three smaller systems, totaling 204 miles of offshore pipeline. These acquired offshore systems have a capacity of approximately 1,080 MMcf/day. The acquired assets included the Matagorda Gas Plant, a natural gas liquids processing plant with approximately 250 MMcf/day of capacity, and the Oyster Lake condensate stabilization facility with approximately 5,200 barrels per day of capacity. TPC owns 100% of all such assets. The additional assets increased TPC's total offshore gathering system capacity to approximately 1,680 MMcf/day and approximately 350 miles of pipeline in nine systems. The purchase price was financed with an existing credit facility and $150 million of new credit facilities. The new credit facilities consisted of $120 million of five-year secured term loans and a $30 million secured subordinated bridge loan. The bridge loan was entirely repaid in November 1995 with the proceeds of a public stock offering. During 1996, TPC completed the sale of a number of small onshore gathering systems acquired in the Seagull Transaction. The net proceeds from these sales of $13.7 million were used primarily to reduce the $120 million of term loans (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Investing and Financing Activities - Seagull Transaction and Related Financings Divestitures"). NATURAL GAS GATHERING AND PROCESSING In addition to the assets acquired in the Seagull Transaction, TPC owns two other offshore gathering systems. The Galveston Island Gathering System ("GIGS") is located in the Galveston Island Area offshore Texas and consists of an 18-mile, 16-inch offshore gathering system, two additional offshore 6-inch segments of 4.6 miles and 5.5 miles in length, and an onshore 8-mile, 12-inch portion that interconnects with two intrastate pipelines. The TOMCAT system, located in the Matagorda Island Area offshore Texas, consists of a number of gathering segments ranging in size from 1.5 miles of 3-inch pipe to 42 miles of 20-inch pipe, together with a condensate separation and dehydration plant onshore, ultimately interconnecting with four interstate and intrastate pipelines. TPC owns 100% of GIGS and TOMCAT, except that one of the TOMCAT system segments, the Matagorda Island Area Gathering System, 4 6 representing pproximately 43% of average throughput and 33% of total system capacity on TOMCAT, is owned 83% by TPC and 17% by Amerada Hess. With the additional gathering assets acquired in the Seagull Transaction, TPC's systems interconnect to a total of seven intrastate and two interstate natural gas pipelines, including five of the six pipelines connected to the Moss Bluff Facility. These multiple pipeline interconnects enable TPC and producers who use TPC's facilities to access multiple markets in disparate geographic regions through several common pipeline interconnects. Generally, the gathering systems transport the natural gas to a common point onshore where it is brought into conformity with pipeline quality specifications prior to redelivery to downstream pipelines. TPC charges a tariff to transport the natural gas on its gathering facilities. Currently, approximately 90% of the natural gas reserves connected to TPC's gathering systems are dedicated under either life-of-lease gathering contracts, minimum volumetric dedications or minimum term dedications. The following table summarizes the approximate capacity and utilization of TPC's gathering facilities, including those acquired in the Seagull Transaction in September 1995, as if they had been owned from the beginning of 1995:
YEAR YEAR ENDED ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------- ---------------------------- MAXIMUM THROUGHPUT GROSS AVERAGE PERCENT GROSS AVERAGE PERCENT AREA CAPACITY THROUGHPUT CAPACITY THROUGHPUT CAPACITY (MMCF/DAY) (MMCF/DAY UTILIZED (MMCF/DAY) UTILIZED ---------- ------------- -------- ------------- --------- Matagorda Island . . . . . . . . . 1,350 691 51% 670 50% Galveston/Brazos . . . . . . . . . 330 177 54% 151 46% --- --- -- --- -- 1,680 868 52% 821 49% ===== === == === ==
Drilling activity by producers has increased recently in the Gulf of Mexico in areas adjacent to TPC's gathering systems, including those acquired in the Seagull Transaction. In addition, recent reported increases in 3-D seismic surveys and bidding activity at federal and state offshore lease sales indicate that further increases in drilling activity are likely. Increases in natural gas production resulting from successful drilling activities in these areas should provide TPC with access to additional natural gas supplies to gather and process. TPC believes that the combination of its previously existing gathering systems with the systems acquired in the Seagull Transaction has increased its franchise position in the Gulf of Mexico. Further, TPC believes it has a competitive advantage in obtaining access to these supplies because of its currently available unutilized capacity. In connection with the Seagull Transaction, TPC agreed to be responsible for certain contingent liabilities associated with the acquired assets, both known and unknown, including certain environmental liabilities. However, TPC is not currently aware of any such liabilities of a material nature. NATURAL GAS STORAGE MARKET HUB PARTNERS FORMATION. In December 1994, TPC formed MHP with subsidiaries of NIPSCO Industries, Inc., New Jersey Resources Corp., DPL Inc. (Dayton Power & Light), and Public Service Enterprise Group, Inc. Subsidiaries of TPC and these four companies (i) are the limited partners of Market Hub Partners, L.P. and (ii) own the stock of Market Hub Partners, Inc., the 1% general partner of Market Hub Partners, L.P. TPC contributed its interest in the market hub assets and facilities, market hub locations, development plans, permits, leases and signed storage service contracts relating to its five market hub projects to MHP upon formation. The contributed storage contracts had terms ranging from approximately two to twenty years. In addition, TPC's four partners agreed to contribute $45 million to MHP over the period 1994 through 1996, all of which was contributed by July 1996. TPC's limited partnership interest and stock ownership in MHP provide it with (i) a collective 66% voting and ownership interest and (ii) a revenue and expense interest which varies from approximately 61% at commencement 5 7 of MHP operations to approximately 70% at such time as two partners with reversionary revenue interests receive distributions from MHP equal to 150% of their capital contributions. MHP owns and operates market hubs located in natural gas supply areas in Texas (the Moss Bluff Facility) and Louisiana (the Egan Facility) and owns and is in various stages of planning and development of market hub projects in market areas in Pennsylvania (Tioga Project), Mississippi (MS-1 Project) and the Midwest area. With the September 1995 completion of a third salt storage cavern at the Moss Bluff Facility and of the first salt storage cavern at the Egan Facility, MHP's existing salt cavern storage facilities provide approximately 1.65 Bcf/day of natural gas deliverability and approximately 12.5 Bcf of high deliverability working gas storage capacity. MHP is currently in the process of adding a second cavern with 2.0 Bcf of working gas storage capacity at the Egan Facility of which 1.0 Bcf of capacity is expected to be placed into service in December 1997 and the balance by June 1998. This capacity will be combined with an additional 1.0 Bcf of capacity to be created in the first cavern at Egan by September 1997 utilizing a proprietary technology developed by TPC called Solution Mining Under Gas ("SMUG"), which allows expansion to take place in operating caverns without taking them out of service. MHP also plans to add 1.0 Bcf of capacity at Moss Bluff in 1997 using SMUG technology. Presently, all of the capacity of MHP's Moss Bluff and Egan Facilities is leased under long-term contracts that generally require the payment of demand/reservation charges regardless of usage. The remaining terms of these contracts range from three months to nearly twenty years. MHP is currently negotiating cavern leases covering the planned facility expansions indicated in the table below. The following table sets forth selected information regarding certain of MHP's existing and certain of its planned facilities as of February 28, 1997. MHP SYSTEM SUMMARY
ESTIMATED ESTIMATED ESTIMATED WORKING GAS PERCENT LEASED INJECTION WITHDRAWAL STORAGE PROJECTED UNDER CAPACITY CAPACITY CAPACITY IN-SERVICE LONG-TERM (MMCF/DAY) MMCF/DAY) (BCF) DATE CONTRACT ---------- ---------- ----------- ---------- ---------------- EXISTING Moss Bluff 200 900 7.8 In Service 100% Egan 185 750 4.7 In Service 100% --- ----- ---- Sub Total 385 1,650 12.5 --- ---- ---- PLANNED EXPANSIONS Moss Bluff 75(1) --(2) 1.0(3) September 1997 In negotiations Egan 75(1) --(2) 3.0(3) June 1998 In negotiations Tioga 1A 125 250 1.2 September 1999 In negotiations Tioga 1B 125 250 1.3 September 2000 In negotiations --- ----- ---- Sub Total 400 500 6.5 --- ----- ---- Totals 785 2,150 19.0 === ===== ====
- --------------------- (1) Represents additional compression to be added to serve incremental capacity. (2) No additional withdrawal capacity is currently planned. (3) Includes additional capacity to be added through use of a proprietary technology developed by TPC known as Solution Mining Under Gas ("SMUG") of 1.0 Bcf at Moss Bluff and 1.0 Bcf at Egan. 6 8 FACILITIES. Salt cavern storage facilities offer certain significant advantages over conventional reservoir natural gas storage facilities. In conventional reservoir storage, which utilizes both depleted natural gas reservoirs and aquifers, natural gas is injected for approximately 200 to 250 days per year when demand is lower and withdrawn during the 100 to 150 day period of increased demand. Because the natural gas is withdrawn in relatively constant amounts, reservoir storage is well suited for seasonal increases, seasonal price arbitrage and limited protection against supply interruptions. Salt cavern storage can easily switch from full injection to full withdrawal several times each day. Accordingly, TPC believes that salt cavern storage facilities are better suited to meet short duration load swings, such as intraday heating and air conditioning based demand, and to serve peak demand during major supply interruption events, such as hurricanes and loss of production due to extremely cold weather causing wellhead freeze-off such as occurred in early February 1996. A salt cavern is formed by drilling and leaching an underground cavern in a naturally existing salt formation and installing related surface equipment. The typical salt cavern storage facility consists of a solution mining plant, which provides fresh water to dissolve cavities within the underlying salt, brine handling and disposal facilities, and the necessary surface facilities to compress natural gas into the cavity and allow it to flow back into a pipeline. Natural gas is injected under pressure and is generally not subject to loss because salt is essentially impermeable. All storage facilities which MHP owns and all storage facility projects which MHP is currently planning or developing are salt cavern storage facilities. The Moss Bluff Facility was placed into service in December of 1990 with one salt cavern. The Moss Bluff Facility currently provides an aggregate of 7.8 Bcf of estimated working gas capacity, 200 MMcf/day of estimated injection capacity and 900 MMcf/day of estimated withdrawal capacity from three salt caverns. The Moss Bluff Facility has four compressors and three filter/separators and serves as an aggregation point for major interstate and intrastate pipelines on the Texas Gulf Coast as well as a reserve for short-term peak natural gas requirements. Currently, all of Moss Bluff's 7.8 Bcf of capacity is leased. Since July 3, 1996, the Moss Bluff Facility has been 100% owned by MHP (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Investing and Financing Activities - Market Hub Partners"). The Egan Facility is located in Acadia Parish, Louisiana on the Jennings Salt Dome. Construction of Phase I, a single cavern which currently has approximately 4.7 Bcf of estimated working natural gas capacity all of which is presently leased. The Egan Facility currently has three compressors and two filter/separators and provides service to customers on five interstate pipelines. Egan's current estimated injection capacity is 185 MMcf/day and its current estimated withdrawal capacity is 750 MMcf/day. It is wholly owned by MHP. The planned Tioga facility is a market area project located in Tioga County, Pennsylvania, near the New York border, which is ultimately planned for 10.0 Bcf of working gas storage and is targeted to begin operations in 1999 - 2000 with initial capacity of 2.5 Bcf. It is currently estimated that Tioga will initially have withdrawal capacity of 500 to 600 MMcf/d and injection capacity of 250 MMcf/d growing to an anticipated 1.0 Bcf/day of withdrawal capacity and 500 MMcf/day of injection capacity as subsequent planned phases are completed. Construction is expected to start in the spring of 1997. Total costs are estimated to be approximately $150 million for the fully developed project. MHP is currently negotiating storage service contracts with potential customers for 9.0 Bcf of capacity and has also recently negotiated a brine supply agreement with a major salt processing company to build a salt evaporation plant at Tioga to utilize the brine created from the leaching of caverns. MHP owns 100% of the Tioga project. MS-1 is located in Copiah County, Mississippi, southwest of Jackson, Mississippi. This project was formerly a joint venture between a subsidiary of MHP, which had a 75% partnership interest, and an affiliate of Texas Eastern Transmission Company ("TETCO"), which had a 25% partnership interest. In the first quarter of 1996, TPC purchased TETCO's interest in the project at TETCO's cost. It is expected that the general partnership owning the project site will ultimately be dissolved and that MHP and TPC will each receive a proportionate share of the project site acreage in order to enable them to pursue separate (but possibly related) projects in the respective areas of natural gas storage and compressed air energy storage. 7 9 In the Midwest area, TPC and CMS originally proposed to develop the Grands Lacs Project, in southeastern Michigan, with each company owning a 50% interest in the project. Service in a third party facility began under an interim contract in the second quarter of 1995. On July 3, 1996, MHP conveyed its interest in the Grands Lacs Project to CMS in conjunction with the acquisition by MHP of the 50% interest in the Moss Bluff Facility held by CMS. MHP is presently exploring other potential sites for a Midwestern area market hub. NATURAL GAS STORAGE CONTRACTS. Storage services are marketed by TPC on a "bundled" basis and by MHP on an "unbundled" basis. The unbundled storage services are marketed to local distribution companies, pipelines, marketers and producers and permit the customer to contract for injection, storage space and withdrawal capacities. These unbundled services are currently offered on a firm, secondary firm and interruptible basis. In a firm basis contract, the user pays a demand charge for the availability of the storage space and of the injection and withdrawal rights regardless of usage. In a secondary firm arrangement, the user customarily pays a lesser demand fee than in a firm basis contract because the facility has the right to make the storage capacity or injection and withdrawal facilities unavailable to the secondary firm customer if a customer with a firm contract requires the space or facilities. Interruptible contracts are similar to secondary firm contracts, except that no demand fee is paid, and the facility is allowed to give prior access to both firm and secondary firm customers. The facility may charge a fee for the actual use of its storage capacity and the use of its injection and withdrawal facilities in addition to the demand fees charged to reserve availability of capacities. The number of contracts and their terms for a given storage cavern depend upon the physical limitations of available space and injection and withdrawal capacity. MHP also offers short-term firm and interruptible "hub" services to its customers. These services include parking, wheeling, balancing and loaning natural gas. Parking services are one-turn services where a customer injects a specific amount and must withdraw this amount by a certain time. Wheeling services are the transportation of gas at the hub from one pipeline to another over the surface interconnects, and do not involve any storage service. Balancing services involve the ability to inject, withdraw and store within specified volumetric ranges over a short period of time. Loaning transactions are done with creditworthy counterparties and only involve the loaning of "extra" gas that MHP has obtained title to through in-kind fuel payments and non-critical pad gas. Any of these hub services can last for a few hours, days or weeks and are being used to generate incremental revenue for the projects. These services also provide potential long-term customers with an inexpensive way to try to use these services in their natural gas portfolios. MHP believes that this will lead to additional long-term contracts over time. NATURAL GAS MARKETING TPC, which has marketed natural gas since its inception in 1984, focuses on providing services on a bundled basis to large electric and natural gas utilities in the Midwest, Mid-Atlantic, Ohio Valley and Northeast regions of the United States. As a result of deregulation and increased competition, TPC believes there are increased opportunities for marketers of natural gas which can compete on the basis of reliability, flexibility and price. Some natural gas purchasers look to find a "one-stop shopping" substitute for the bundled sales packages that were previously provided by interstate pipelines, while others pick and choose their services from specialist providers. TPC rebundles its own storage leases at various MHP and other storage facilities with third party transportation services and its access to natural gas supplies to provide its customers innovative energy services, effectively creating a rebundled pipeline merchant function. The flexibility of MHP's storage facilities, however, allows TPC to capture high margin opportunities in both the volatile day-to-day market as well as reliably manage longer term, higher margin contracts. TPC's marketing objective is to increase market share and margins in both current and new wholesale markets over the next few years by offering bundled service alternatives. Increases in TPC's access to additional salt cavern storage capacity through MHP will also expand its ability to offer premium priced natural gas marketing services. TPC believes this can be achieved primarily by combining its aggregation capabilities with its high deliverability storage sites located at the interconnection of multiple pipelines to provide more reliable, responsive and flexible services. TPC believes these capabilities differentiate it from many other providers of natural gas sales services. NATURAL GAS PURCHASES, SALES AND SUPPLY. TPC focuses on relatively specialized services which generate higher margins and continues to de-emphasize the sale of natural gas on a "baseload" basis due to the declining margins 8 10 associated with this type of business. TPC has developed certain variations on standard contract services to create its own sales products and services. An increasingly important portion of the marketing operations of TPC is directed to the local distribution companies which, in a climate of deregulation, have generally been unable or unwilling under current market and regulatory conditions to restructure transportation and storage contracts to reduce end-user price because of being committed to previously existing bundled service arrangements with terms that extend for several more years. Because of TPC's high deliverability, interconnected storage and gathering assets, and experience in risk management and marketing, TPC has been able to provide local distribution companies with access to the economic benefits of unbundling before they are otherwise able to fully take advantage of unbundling efficiencies. This "asset optimization" strategy has helped local distribution companies realize more value for their transportation, storage and natural gas supply assets. In a typical asset optimization program, TPC agrees to place a customer's natural gas in storage at prices below the applicable market index by taking advantage of its storage flexibility combined with its risk management expertise. In return, the customer assigns to TPC the customer's storage and transportation capacities (which TPC uses in its trading and marketing activities) and TPC gives the customer a portion of the profits from such activities. This control by TPC of third party natural gas, production area supply, aggregation and storage assets allows both the customer and TPC to gain access to broader geographic markets, drives down costs per unit of natural gas, enhances usage of MHP storage assets, increases margins, gives TPC access to markets without the necessity of owning production in those geographic areas, and provides TPC a significant opportunity to further develop the market hub strategy prior to MHP's asset base being fully in place. Recent sales of TPC's summer storage fill asset optimization program have led to the development of a winter storage asset management program for local distribution companies, and TPC intends to market these programs aggressively in the future. The contracts under which TPC purchases the natural gas supply it markets and those under which it sells natural gas are comparable to each other and have provisions that are relatively standardized in the industry. Over 95% of TPC's natural gas supply is purchased offshore and onshore in Texas and Louisiana. TPC maintains direct supply relationships and arrangements with producers, marketers and financial counterparties. An important aspect of TPC's natural gas supply practice is that it does not seek to match the term of its firm, long-term sales commitments with the term of firm, long-term supply commitments because of its ability to utilize deliverability from MHP's market hub storage facilities to match flows (volumes). In this way, TPC can use lower cost, firm baseload supply contracts and interruptible transportation to supply its firm long-term swing sales obligations, and use its inventoried natural gas at MHP's storage facilities as a backup supply. Although these sources of supply are used, TPC typically contracts for firm supply for over 90% of its requirements each month with the majority of such commitments being made for periods of six months or less. Substantially all of TPC's firm sale and supply commitments have pricing terms which are indexed to market rates. Such commitments, to the extent practicable, are reflected in TPC's hedged portfolio position. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Results of Operations Natural Gas Marketing." TRANSPORTATION ARRANGEMENTS. Each sale of natural gas made by TPC takes place at one or more acceptable delivery points at which TPC agrees to deliver title to the purchaser. In general, TPC is responsible for arranging any necessary transportation on third party pipelines, which allows its purchased natural gas to be delivered to the customer's desired location. TPC attempts in two ways to minimize the risk that TPC will not be able to deliver natural gas it has contracted to deliver. For those situations in which third party transportation is necessary or desirable, TPC maintains a portfolio of transportation contracts, which frequently allow it to have multiple transportation paths from the receipt points of the purchased natural gas to the delivery points of its natural gas sales. Alternatively, to avoid the use of third party transportation, TPC sometimes takes title to purchased natural gas directly at the point at which TPC is obligated to deliver natural gas to its customers. Since 1993, TPC has also been increasingly successful in using the Moss Bluff Facility as an approved delivery point for customers utilizing pipelines connected at that market hub. This arrangement allows TPC more flexibility in aggregating natural gas supply and managing transportation risk. TPC intends to utilize the Egan Facility to the same advantage. TPC's customers are responsible for arranging transportation from the point of purchase to the point of ultimate consumption. 9 11 PORTFOLIO SERVICES AND RISK MANAGEMENT. TPC's policy is to seek as nearly as possible to fully hedge its commodity risk and basis risk. Commodity risk is a measure of the difference between physical sales commitments and physical purchase commitments. TPC has managed this risk primarily by taking appropriate positions in NYMEX natural gas futures contracts or options on such contracts. Basis risk refers to pricing supply contracts on a different index than sales contracts. TPC manages this risk by using various derivative products with a number of investment grade counterparties. In addition, TPC has undertaken an active role in educating its sales customers on the benefits of using NYMEX related pricing, which further reduces TPC's exposure to basis risk. Although the Portfolio Services' activities are typically conducted in order to manage TPC's "cash market" positions, TPC has identified certain storage arbitrage opportunities in the past which it would expect to take advantage of in the future, if applicable. An example of this storage arbitrage activity would be a purchase by TPC of natural gas at a certain price in the cash market along with the sale of natural gas futures contracts for an equivalent volume for near month delivery at a higher price. The purchased natural gas would be stored at TPC's market hub storage facilities and would be delivered against the futures contract to complete the arbitrage. MAJOR CUSTOMERS AND SUPPLIERS. TPC is not dependent upon any single customer for sales or supplies of natural gas. TPC's diverse sources of supply, its network of customers, its access to necessary transportation services, and its storage capabilities give it the flexibility to make reallocations among the matching groups quickly and smoothly in response to changing market conditions. In 1996 and 1995, the largest customer accounted for 9% and 11%, respectively, of the revenues for the natural gas marketing segment. Management does not believe that the natural gas marketing segment's loss of such customer would have a material adverse effect on TPC. TECHNOLOGY With the corporate objective of becoming a leading low-cost provider of safe and reliable salt cavern storage services, TPC has maintained an extensive technical development program. Key elements in TPC's program have been an exclusive technology agreement with the French state-owned natural gas company, Gaz de France ("GDF"), and a long standing research agreement with Sandia National Laboratories ("Sandia"), located in Albuquerque, New Mexico. The cooperative effort in technology is primarily focused on natural gas storage cavern design, construction and operation. As a result of receiving a patent for a new method of constructing storage caverns in horizontal salt formations in January 1995 and the development and announcement of other proprietary techniques, TPC is gaining recognition for technical leadership within the industry. In 1991, TPC entered into an exclusive technology agreement with a U.S. subsidiary of GDF, which was renewed in 1994. The new agreement focuses on technology for storage of natural gas in salt caverns and has a term of three to five years as determined by TPC with a minimum average annual cost to TPC of approximately $490,000. GDF, which owns approximately 23% of TPC's common stock, is recognized as a world leader in natural gas related research and development, with related expenditures of approximately $200 million per year. Over several decades GDF has constructed dozens of salt cavern storage facilities and acquired an extensive patent estate and a depth of operating skill. Sandia originally developed technology for the United States Department of Energy for the Strategic Petroleum Reserve, which stores crude oil in salt caverns. As a result of this work, TPC believes Sandia is the leading source in the United States of technology for hydrocarbon storage. Under the Sandia Natural Gas Storage Development Support Agreement, TPC is receiving three dimensional computer simulation, long-term creep and stress relaxation studies, mineral property testing, linear programming and other advanced support at an approximate cost to TPC over the life of the contract of $585,000. The Sandia contract was originally entered into in May 1990 for an initial twelve month period, and was subsequently amended and extended several times, most recently through November 1998. TPC's patent for creating horizontal caverns in bedded salt formations was a product of TPC's work with Sandia. OTHER COMPRESSED AIR ENERGY STORAGE. TPC believes that opportunities similar to those presented by the storage of natural gas in salt caverns are emerging in the electric power industry. TPC believes it is well positioned to offer 10 12 energy storage services which are not widely available at the present time, including the effective storage of electricity through use of compressed air energy storage ("CAES"). Specifically, TPC is currently analyzing opportunities to develop and offer CAES electric services from existing salt cavern storage sites or from new facilities. In CAES, air would be compressed during off-peak generating hours using low-cost electricity. The compressed air would be stored below ground in a salt cavern designed exclusively for CAES service. During peak generating hours, the compressed air is returned to the surface and used to drive turbines that generate electricity, with the expectation that the peak hour electricity would be sold at a price above the cost of the off-peak electricity used to compress the air. TPC believes that as a result of the combination of its salt cavern construction and operating expertise together with GDF's engineering and design capabilities and Sandia's knowledge of salt cavern structures, TPC is competitively well placed to develop and provide CAES service. TPC also believes that electric generators are aware of the effects of deregulation of prices in the natural gas industry, and recognize that storage has contributed to reducing the cost of natural gas to consumers and made users of storage more competitive. TPC believes that for the electric industry, the potential benefits of storage are similarly compelling. There can be no assurance that TPC will pursue opportunities in the CAES business or that any such efforts will be successful. POWER MARKETING. As the electric industry in the United States moves toward the open access system presently existing in the natural gas industry, TPC believes that significant opportunities will arise for independent power marketers. TPC is currently evaluating a number of business arrangements under which it may pursue such opportunities either on its own or in association with one or more other companies. TPC's strategy in power marketing will be similar to its strategy in gas marketing (i.e., low load factor, weather sensitive, high reliability services). TPC's goal is to create energy hubs by positioning its CAES facilities alongside MHP's gas storage facilities or third party gas storage facilities. Energy hubs utilizing salt cavern gas and electric storage should allow TPC to offer unique marketing services and should create a wide range of arbitrage opportunities across both commodities (gas and electricity) and related physical and financial products. There can be no assurance that TPC will pursue opportunities in the power marketing business or that any such efforts will be successful. COMPETITION The natural gas industry is highly competitive. TPC competes against other companies in the gathering, processing, marketing, and storage business for supplies of natural gas to gather or sell and for customers to which it sells such natural gas or storage services. Competition for natural gas supplies is primarily based on efficiency, reliability, availability of transportation and price. In marketing natural gas, TPC has numerous competitors, including interstate pipelines and their marketing affiliates, major producers, and local and national gatherers, brokers, and marketers of widely varying sizes, financial resources and experience. Many of these competitors, such as the major producers and certain large marketers, have capital and other resources many times greater than TPC and control or have access to substantially more diverse and greater supplies of natural gas. Competition for marketing customers is primarily based upon reliability, flexibility and price. For customers that have the capability of using alternative fuels, such as oil and coal, TPC also competes against companies capable of providing such alternative fuels, and that competition is based primarily on price. REGULATION Various aspects of the transportation, sale and marketing of natural gas are subject to or affected by extensive federal regulation under the Natural Gas Act ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA"), the Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol Act") and regulations promulgated by the FERC. NATURAL GAS TRANSMISSION INDUSTRY. Historically, interstate pipeline companies acted as wholesale merchants by purchasing natural gas from producers, transporting that natural gas from the fields to their markets, and reselling the natural gas to local distribution companies and large end-users. Prior to the enactment of the NGPA in 1978 and the Decontrol Act of 1989, all sales of natural gas for resale in interstate commerce, including sales by producers, were subject to the rates and service jurisdiction of the FERC under the NGA and NGPA. However, as a result of the NGPA and the Decontrol Act, by no later than January 1, 1993, all so-called "first sales" of natural gas were federally 11 13 deregulated, thus allowing all types of non-pipeline and non-local distribution sellers to market their natural gas free from federal controls. Moreover, pursuant to Section 311 of the NGPA, the FERC promulgated regulations by which wholly intrastate natural gas pipeline companies could engage in interstate transactions without becoming subject to the FERC's full rates and service jurisdiction under the NGA. At the same time, however, the FERC has retained its traditional jurisdiction over the activities of interstate pipelines. Thus, under the NGA and NGPA, the transportation and sale of natural gas by interstate pipeline companies have been subject to extensive regulation, and the construction of new facilities, the extension of existing facilities and the commencement and cessation of sales or transportation services by pipeline companies generally have required prior FERC authorization. Commencing in 1985, the FERC adopted regulatory changes that have significantly altered the transportation, sale and marketing of natural gas. These changes were intended to foster competition in the natural gas industry by, among other things, transforming the role of the interstate pipeline companies from wholesale marketers of natural gas to primarily natural gas transporters, and mandating that interstate pipeline companies provide open and nondiscriminatory transportation services to all producers, distributors, marketers and other shippers that seek such services (so-called "open access" requirements). As an incentive to cause the interstate pipeline companies to revamp their services, the FERC also sought to expedite the certification process for new services, facilities and operations of those pipeline companies providing "open access" services. Throughout the early years of this process, the FERC's actions in these areas were subject to extensive judicial review and generated significant industry comment and proposals for modification to existing regulations. In April 1992, the FERC issued its latest and most comprehensive restructuring ruling, Order No. 636, a complex regulation that has had a major impact on natural gas pipeline operations, services and rates. Among other things, Order No. 636 generally required each interstate pipeline company to "unbundle" its traditional wholesale services and make available on an open and nondiscriminatory basis numerous constituent services (such as gathering services, storage services and firm and interruptible transportation services) and to adopt a new rate making methodology to determine appropriate rates for those services. To the extent the pipeline company or its sales affiliate makes natural gas sales as a merchant in the future, it will do so pursuant to a blanket sales certificate that puts those entities in direct competition with all other sellers pursuant to private contracts; however, pipeline companies were not required by Order No. 636 to remain merchants of natural gas, and several of the interstate pipeline companies have elected to become transporters only. The FERC required that each pipeline company develop the specific terms of service in individual restructuring proceedings by means of a compliance filing that set forth the pipeline company's new, detailed procedures. In subsequent orders and on judicial review by the federal appellate courts, the court and the agency have largely affirmed the significant features of Order No. 636 and numerous related orders pertaining to the individual interstate pipelines. Nevertheless, because the FERC continues to review and modify its open access regulations, the outcome of any such later proceedings and the ultimate impact that they may have on TPC's business is uncertain. REGULATION OF TPC'S FACILITIES. Including the assets acquired in the Seagull Transaction, TPC owns gathering facilities located in waters offshore Texas. Facilities whose primary function is natural gas gathering are exempt from the FERC's jurisdiction under the NGA and the FERC regulations promulgated with respect thereto. However, as described above, interstate transmission facilities are subject to the FERC's jurisdiction and its regulations. Historically, the FERC has based its determination of the extent it will regulate the gathering facilities of an interstate transmission company on whether the primary function of the facilities in question is gathering, based on the facts of the case. In June and September 1992, respectively, the FERC disclaimed jurisdiction over TPC's TOMCAT and GIGS gathering systems. These facilities are therefore not subject to the FERC's NGA jurisdiction and regulations. The FERC reached its decision that both facilities qualified for the gathering exemption after reviewing the primary function of the facilities in light of certain physical parameters as well as twelve other relevant facts and circumstances. As long as the nature and use of the facilities and other factors remain substantially unchanged, these facilities should continue to be exempt from jurisdiction under the NGA. Moreover, in a series of orders issued in 1994, and in a statement of policy issued in 1996, the FERC rearticulated its criteria for determining whether a specific facility is gathering or transmission, the general effect of which was to call for an evaluation of the factors in a way more conducive to a finding of gathering. TPC believes that these orders do not alter or affect the regulatory status of TPC's existing gathering facilities. Also, Texas regulates the transportation of natural gas and the rates charged by pipelines, but does not regulate gathering facilities in those instances in which the gatherer has certified its status as gatherer to the state 12 14 agency. The distinction between a natural gas gathering system and a pipeline facility under such regulation is not entirely clear, but TPC believes that its natural gas gathering systems are exempt from rates and service regulations. However, in the fall of 1996, the Texas Railroad Commission (the "TRC") conducted a workshop seeking industry input respecting whether and to what extent different or additional state agency regulation of gathering services and facilities was appropriate in light of the FERC's recent decision, approved on appeal, to limit its further oversight of natural gas gatherers previously part of the interstate pipeline industry. TPC cannot predict at this time whether or to what extent the Texas agency may increase its regulation of gathering activities in that state. Of the assets acquired by TPC in the Seagull Transaction, all but one currently are considered to be gathering facilities for purposes of both state and federal regulation. As such, they are not subject to service or rate regulation by the FERC or the TRC, subject to the outcome of the TRC inquiry described above. Under applicable FERC and TRC policies and precedents, TPC believes these assets are properly considered to be gathering facilities. Of the assets acquired in the Seagull Transaction, the renamed "Seahawk" Shoreline System is considered to be an intrastate pipeline system and is subject to rate and service jurisdiction of the TRC. This asset also provides interstate service pursuant to Section 311 of the NGPA. These Section 311 services are rate regulated by the FERC, and TPC's rates for these services are required to be maintained at levels that are "fair and equitable" as that term is defined in the FERC's precedents and regulations. TPC has petitioned the FERC to have the system declared non-jurisdictional. Certain of the operations of the Moss Bluff Facility are subject to FERC regulation and other of its activities are subject to TRC regulation. The Moss Bluff Facility is classified by the FERC as a so-called "Hinshaw pipeline," exempt from the FERC's rates and service jurisdiction under the NGA. The Moss Bluff Facility is subject to regulation under the state utility statutes and its only interstate activity has been the receipt, from time to time, of natural gas produced outside of Texas for ultimate consumption within Texas. However, under regulations promulgated by the FERC, Hinshaw pipelines can engage in other interstate transactions by complying with certain reporting and other regulations applicable to such transactions. In this regard, the FERC has issued a limited-jurisdiction certificate to Moss Bluff authorizing Moss Bluff to engage in the sale, transportation (including storage), or assignment of natural gas that is subject to the FERC's jurisdiction under the NGA to the same extent that intrastate pipelines are authorized to engage in such activities pursuant to Section 311 of the NGPA. Further, the FERC has authorized Moss Bluff to charge rates for its interstate services equal to the intrastate rates approved by the TRC. Pursuant to the Texas Gas Utility Regulatory Act, intrastate rates are deemed to be just and reasonable and approved by the TRC if they have been negotiated at arm's length with pipeline companies or large industrial customers. Moss Bluff has requested that the FERC grant it authority to charge market-based rates for its services performed under Section 311 of the NGPA. If market-based rate authority is denied, Moss Bluff will continue to charge rates for interstate services equal to the intrastate rates approved by the TRC. Egan Hub Partners, L.P., the MHP subsidiary that owns and operates the Egan Facility, is an interstate pipeline and storer of natural gas. In October 1996, Egan Hub Partners, L.P., received a certificate of public convenience and necessity from the FERC for its storage facility. This certificate grants Egan Hub Partners, L.P., the authority under Section 7 of the Natural Gas Act to own and operate its existing facilities and to build a second salt cavern storage facility at the Egan site capable of serving customers via a recently completed interconnection with Columbia Gulf Transmission Company. Egan's natural gas storage and hub services will be offered at market-based rates. Egan is the first hub in the United States with FERC authorization to charge market-based rates for natural gas hub services. The Tioga Project is also being developed to provide services in interstate commerce. Accordingly, a certificate of public convenience and necessity has been requested from the FERC for the Tioga Project. NE Hub Partners, L.P., a subsidiary of MHP, has also requested market-based rate authority for the Tioga Project. If market-based rate authority is not granted, the Tioga Project's rates will be regulated by the FERC on a cost basis and will be maintained at a "just and reasonable" level required by the FERC's precedent and regulations. NE Hub Partners, L.P., also recently received an Area Wide Permit from the U.S. Environmental Protection Agency for the construction and operation of the Tioga Project. ENVIRONMENTAL AND SAFETY MATTERS. TPC and MHP are subject to environmental risks normally incident to the operation and construction of pipelines, plants and other facilities for gathering, processing, treating, storing and 13 15 transporting natural gas and other products including, but not limited to, uncontrollable flows of natural gas, fluids and other substances into the environment, fires, pollution, and other environmental and safety risks. The following is a discussion of certain environmental safety concerns related to TPC and MHP. It is not intended to constitute a complete discussion of the various federal, state and local statutes, rules, regulations, or orders to which TPC's and MHP's operations may be subject. For example, TPC, without regard to fault, could incur liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or state counterparts, in connection with the disposal or other releases of hazardous substances. Further, the recent trend in environmental legislation and regulations is toward stricter standards, and this will likely continue in the future. TPC's activities in connection with the operation and construction of pipelines, plants, injection wells, storage caverns, and other facilities for gathering, processing, treating, storing, and transporting natural gas and other products are subject to environmental and safety regulation by federal and state authorities, including, without limitation, the Texas Natural Resource Conservation Commission ("TNRCC"), the Louisiana Office of Conservation, the TRC, and the Federal Environmental Protection Agency ("EPA"), which can increase the costs of designing, installing and operating such facilities. In most instances, the regulatory requirements relate to the discharge of substances into the environment and include measures to control water and air pollution. Environmental laws and regulations may require the acquisition of a permit before certain activities may be conducted by TPC. Further, these laws and regulations may limit or prohibit activities on certain lands lying within wilderness areas, wetlands, areas providing habitat for certain species or other protected areas. TPC is also subject to other federal, state, and local laws covering the handling, storage or discharge of materials used by TPC, or otherwise relating to protection of the environment, safety and health. An example of state environmental regulation affecting TPC is the Texas Clean Air Act ("TCA Act") as administered by the TNRCC. The TCA Act restricts emission of air pollutants from wells, pipelines, and processing plants, and the TNRCC may curtail operations not meeting applicable standards. Additionally, the TRC has the authority to take any steps necessary to ensure compliance with applicable safety regulations through pipeline construction standards and to issue permits and regulations necessary to prevent environmental pollution by pipeline operations. These regulations are subject to change from time to time. The design, construction, operation, and maintenance of TPC's natural gas pipeline facilities are subject to the safety regulations established by the Secretary of the Department of Transportation pursuant to the Natural Gas Pipeline Safety Act of 1968, as amended ("1968 Act"), or by state agency regulations meeting the requirements of the 1968 Act. The Moss Bluff Facility is subject to environmental regulations monitored by the TRC that pertain to natural gas storage, disposal of salt water, brine pit operations and noxious emissions. Management believes TPC and MHP have obtained and are in current compliance with all necessary and material permits and that TPC and MHP are in substantial compliance with applicable material environmental and safety regulations. TPC and MHP maintain insurance coverages that they believe are customary in the industry, although they are not fully insured against all environmental and safety risks. TPC and MHP are not aware of any existing environmental or safety claims that would have a material impact upon their financial position or results of operations. EMPLOYEES As of March 7, 1997, TPC had 143 full-time employees (including 19 employed full-time at MHP). TPC is not a party to any collective bargaining agreement and has experienced no work stoppages or strikes as a result of labor disputes. TPC considers relations with its employees to be excellent. 14 16 ITEM 2. PROPERTIES See "Item 1. Business" for a discussion of properties and locations and "Notes to Consolidated Financial Statements, Note 5 - Long-Term Debt and Credit Arrangements" contained in Part II, Item 8 for a discussion of any liens or encumbrances. ITEM 3. LEGAL PROCEEDINGS TPC is currently a party to several lawsuits which, in management's opinion, will not have a significant adverse impact on TPC's financial position or results of operations. See additional discussion in Note 14 - Commitments and Contingencies, in the Notes to the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1996. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is a list of TPC's executive officers and their business experience. All executive officers are expected to hold their office until the next annual meeting of the TPC Board of Directors.
NAME AGE POSITION ---- --- -------- Larry W. Bickle........................... 51 Chairman of the Board of Directors and Chief Executive Officer John A. Strom............................. 43 President J. Chris Jones............................ 41 Senior Vice President and Chief Operating and Financial Officer Marilyn I. Eckersley...................... 42 Vice President - Administration Joseph J. DiNorscia....................... 44 Vice President - Risk Management Robert D. Kincaid......................... 36 Treasurer Michael E. Calderone...................... 40 Vice President - Gas Marketing Patrick J. Peldner........................ 48 Vice President - Power Marketing M. Scott Jones............................ 42 Vice President, General Counsel and Secretary Ronald H. Benson.......................... 51 Vice President - Corporate Development D. Hughes Watler, Jr...................... 48 Controller
LARRY W. BICKLE, 51, has been Chairman of the Board of Directors and Chief Executive Officer since December 1990. Mr. Bickle, as a co-founder of TPC, has served as a director of the company since its founding in 1984, and President from 1984 until February 1994. JOHN A. STROM, 43, as a co-founder of TPC, has served as its President since February 1994. From April 1992 until February 1994 Mr. Strom served as Senior Vice President of TPC. J. CHRIS JONES, 41, has served as Senior Vice President and Chief Operating and Financial Officer of TPC since January 1996. From May 1993 to January 1996, Mr. Jones served as Senior Vice President and Chief Operating Officer, and from January 1986 until June 1993 as Vice President and Chief Financial Officer of TPC. 15 17 MARILYN I. ECKERSLEY, 42, has been Vice President -- Administration since February 1996. From May 1994 until February 1996 Mrs. Eckersley served as Manager -- Administration, and from January 1986 when she joined TPC until May 1994, Mrs. Eckersley held various administrative positions. JOSEPH J. DINORSCIA, 44, has been Vice President -- Risk Management of TPC since February 1994. Mr. DiNorscia joined TPC in 1990 as Manager of Portfolio Services. Prior to joining TPC, Mr. DiNorscia served as Manager of Risk Management and Strategy Development for Lyondell Petrochemical Company. ROBERT D. KINCAID, 36, has been Treasurer of TPC since September 1992, and has been engaged as a consultant and, subsequently, an employee of TPC since December 1991. From 1990 to 1991, he was associated with EnCap Partners, a private partnership engaged in the management of institutional debt and equity funds for energy related investments. MICHAEL E. CALDERONE, 40, has been Vice President -- Gas Marketing of TPC since February 1994. Mr. Calderone joined TPC in 1992 as Manager of Transportation and Exchange and, since that time, has held the positions of Director of Profit Optimization and Manager of Marketing. PATRICK J. PELDNER, 48, has been Vice President -- Power Marketing since July 1996 and was Vice President Storage from February 1994 until that time. Mr. Peldner joined TPC in October 1992 as Manager of Storage Development. Prior to joining TPC, Mr. Peldner was Vice President of Property Acquisitions and a member of the executive committee for Nicor Oil and Gas Corporation from 1987 to 1992. M. SCOTT JONES, 42, joined TPC in 1992 as Vice President, General Counsel and Secretary. Mr. Jones was a shareholder of the Houston, Texas law firm of Dickerson, Carmouche & Jones from May 1991 to October 1992, and was associated with various Houston, Texas law firms prior to that time. RONALD H. BENSON, 51, has been Vice President -- Corporate Development of TPC since November 1994. From March 1993 to November 1994, Mr. Benson acted as an independent consultant in the energy business. Mr. Benson was President of Phibro Energy Production Inc. from December 1989 to March 1993. D. HUGHES WATLER, JR., 48, joined TPC as Controller in September 1995. Prior to joining TPC, Mr. Watler was Chief Financial Officer of Texoil, Inc. from 1992 to 1995, and prior thereto was a partner with the accounting firm, Price Waterhouse. 16 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF CLASS A COMMON STOCK TPC's Class A Common Stock was traded on the American Stock Exchange ("AMEX") through December 10, 1996 and has been traded on the New York Stock Exchange ("NYSE") since December 11, 1996, in both cases under the symbol "TPC." The following table sets forth, for the periods indicated, the high and low closing sales prices per share for the Class A Common Stock as reported on the AMEX or NYSE Composite Tape:
HIGH LOW ---- --- Year ended December 31, 1995: First quarter . . . . . . . .$10 1/8 $ 9 1/8 Second quarter. . . . . . . . 9 7/8 8 1/4 Third quarter . . . . . . . . 10 8 Fourth quarter. . . . . . . . 9 1/2 8 1/4 Year ended December 31, 1996: First quarter . . . . . . . . 9 1/4 7 1/4 Second quarter. . . . . . . . 6 5/8 9 Third quarter . . . . . . . . 8 7/8 6 3/8 Fourth quarter. . . . . . . . 9 1/2 7 7/8
On March 7, 1997, the closing price per share for TPC's Class A Common Stock was $10 5/8. As of March 7, 1997, there were approximately 2,200 beneficial owners of Class A Common Stock. The transfer agent for TPC's Class A Common Stock is ChaseMellon Shareholder Services, L.L.C., 2323 Bryan Street, Suite 2300, Dallas, Texas 75201. There is one stockholder of record of Class B Common Stock and there is no established public market for this class of stock. DIVIDENDS TPC has not paid cash dividends on its Class A or Class B Common Stock and does not contemplate that it will pay any cash dividends on either issue in the foreseeable future. Any payment of future dividends and the amounts thereof will depend upon the earnings, financial condition, capital requirements, and other factors deemed relevant by TPC's board of directors. TPC's bank credit facilities and other debt agreements contain covenants that generally restrict the circumstances under which TPC or its subsidiaries may pay dividends. The most restrictive of TPC's debt agreements would allow for dividends to be paid in an aggregate maximum amount of $5 million plus 50% of TPC's Consolidated Net Income (as defined in such debt agreements), or if such Consolidated Net Income is a deficit, then minus 100% of such deficit, from June 30, 1995 to and including the date of payment. See Note 5 of Notes to Consolidated Financial Statements for a discussion of TPC's debt agreements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA The following table sets forth, for the periods and at the dates indicated, selected historical consolidated financial data for TPC. This financial data has been derived from and should be read in conjunction with the consolidated financial statements of TPC and notes thereto included in Part II, Item 8. 17 19 TPC holds a majority voting interest in MHP. However, partners were afforded participation in the governance of MHP such that certain decisions require approval of TPC and at least two other partners. Accordingly, TPC's investment in MHP has been accounted for under the equity method of accounting beginning in December 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues ............................... $ 617,292 $ 311,565 $ 294,162 $ 257,226 $ 184,186 Operating Income ....................... 24,102 12,898 11,544 14,428 12,215 Income (Loss) Before Extraordinary Item 5,044 494 3,317 4,545 3,086 Extraordinary Item, net of income tax provision of $107,000 in 1995 and income tax benefit of $105,000 in 1994 -- 207 (195) -- -- Net Income ............................. $ 5,044 $ 701 $ 3,122 $ 4,545 $ 3,086 --------- --------- --------- --------- --------- Net Income Per Common Share Before Extraordinary Item ................... $ .27 $ .04 $ .22 $ .31 $ .23 Extraordinary Item ..................... -- .01 (.01) -- -- --------- --------- --------- --------- --------- Net Income Per Common Share ............ $ .27 $ .05 $ .21 $ .31 $ .23 ========= ========= ========= ========= ========= Weighted Average Shares Outstanding .... 18,695 15,609 15,222 14,858 13,386 ========= ========= ========= ========= ========= BALANCE SHEET DATA: Working Capital ........................ $ 20,072 $ 14,204 $ 14,899 $ 3,485 $ 1,051 Total Assets ........................... 348,611 375,916 166,589 153,357 120,140 Long-term Debt ......................... 138,532 146,515 36,064 39,294 23,556 Redeemable Preferred Stock ............. -- -- 1,200 22,516 22,516 Common Stockholders' Equity ............ 102,880 98,441 65,021 40,758 29,491
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the historical financial condition and results of operations of TPC should be read in conjunction with the consolidated financial statements and related notes contained in Part II, Item 8. GENERAL TPC operates in three business segments of the natural gas industry: gathering and processing, marketing, and storage. In its gathering and processing businesses, TPC receives revenues from tariffs charged to producers connected to its gathering facilities. As a result of the Seagull Transaction, results in this segment since September 1995 also include revenues from the share of natural gas liquids ("NGLs") received under processing contracts with producers of natural gas; such contracts are on a "percentage of proceeds" basis whereby TPC receives a flat percentage (usually 20%) of the NGL revenues as a fee for processing the producers' gas. TPC's gathering tariffs are established by negotiation between the producers of natural gas and TPC. Currently, approximately 90% of the natural gas reserves 18 20 connected to TPC's gathering systems are dedicated under either life-of-lease gathering contracts, minimum volumetric dedications or minimum term dedications. In its marketing business, TPC realizes gross profit representing the difference between the prices at which TPC purchases and the prices at which it sells, transports and stores natural gas. TPC purchases and sells natural gas under short- and long-term contracts. Short-term contracts have terms as short as one hour or as long as a full month. Short-term contract prices are typically based on the spot-market price of natural gas, while long-term contract prices are based on market indices and may include a premium in addition to the index average. TPC's storage business is presently conducted through its majority owned subsidiary, MHP. In this business, MHP receives fees for use of its salt cavern storage facilities, which generally include a contractual demand charge for the reservation of storage space or the use of injection and withdrawal facilities and a fee for actual use of storage space and injection and withdrawal facilities. In addition, MHP also offers short-term and interruptible "hub" services, including parking, wheeling, balancing and loaning of natural gas to its customers (see "Business - Natural Gas Storage - Natural Gas Storage Contracts"). TPC holds a 66% majority voting interest in MHP. However, partners were afforded participation in the governance of MHP such that certain decisions require approval of TPC and at least two other partners. Accordingly, TPC's investment in MHP has been accounted for under the equity method of accounting since December 1994, whereas prior thereto the activities of TPC's natural gas storage business were reflected in its consolidated financial statements. TPC's equity in the net earnings of MHP is reflected in the revenues of the natural gas storage segment in TPC's Consolidated Statements of Operations. RESULTS OF OPERATIONS The following tables present certain data for major operating segments of TPC for each of the three years ended December 31, 1996. A discussion follows of certain significant factors that have affected TPC's operating results during these periods. Gross profit for each of the segments is defined to be the revenues of the segment less segment related costs and expenses as shown in the Consolidated Statements of Operations. 19 21 NATURAL GAS GATHERING AND PROCESSING As indicated in Note 2 - Seagull Transaction, in the Notes to the Consolidated Financial Statements, TPC completed the acquisition of various natural gas gathering systems offshore and onshore Texas and related assets from Seagull Energy Corporation and four other sellers in September 1995. The effective date of the transaction was September 1, 1995. Accordingly, the operating results applicable to the assets acquired in the Seagull Transaction for the last four months of 1995 and the full year 1996 are reflected in the tables below. Such amounts for the year ended December 31, 1996 and the four months ended December 31, 1995, respectively, include net volumes of 258,420,000 and 91,484,000 Mcf and revenues of $17,851,000 and $7,147,000 derived from the natural gas gathering systems and volumes of 28,675,000 and 6,824,000 gallons and revenues of $6,625,000 and $1,571,000 representing TPC's share of natural gas liquids sold from processing plants included in the Seagull Transaction.
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1995 1994 --------- ---------- ---------- (IN THOUSANDS, EXCEPT PER UNIT DATA) NATURAL GAS GATHERING AND PROCESSING Revenues Gathering ................... $ 25,439 $ 15,149 $ 13,346 Processing .................. 6,625 1,571 -- --------- --------- --------- 32,064 16,720 13,346 Field operating expense ......... (7,737) (5,030) (3,205) --------- --------- --------- Gross profit ................ 24,327 11,690 10,141 --------- --------- --------- Management and fee income ....... 1,286 882 390 Segment administrative expense .. (1,739) (607) (465) Depreciation and amortization ... (10,171) (6,717) (6,215) --------- --------- --------- Operating costs ................. (10,624) (6,442) (6,290) --------- --------- --------- Operating income ............ $ 13,703 $ 5,248 $ 3,851 ========= ========= ========= Operating volumes Gathering (Mcf) ............. 316,739 150,039 90,579 Processing (net gallons) .... 28,675 6,824 -- Gross profit Gathering (per Mcf) ......... 6.03(cent) 7.00(cent) 11.20(cent) Processing (per net gallon) . 18.18(cent) 17.27(cent) -- Operating income Gathering (per Mcf) ......... 3.18(cent) 2.99(cent) 4.25(cent) Processing (per net gallon) . 12.68(cent) 11.02(cent) --
The decline in unit gross profit in TPC's gathering business in 1996 relative to 1995 reflects a full year's impact of the Seagull Transaction in 1996 (versus only four months in 1995) and the fact that the average tariffs on the gathering systems acquired in the Seagull Transaction were less than those on TPC's existing gathering systems. TPC believes that it will be able to increase average tariff rates in future years. Since completing the Seagull Transaction, TPC has 20 22 added new gathering volumes from various gas producers totaling approximately 75 MMcf per day at an average tariff rate of approximately 12.8(cent) per Mcf. TPC has also increased net liquids production in its processing plants by approximately 22,600 gallons per day while reducing monthly operating expenses of its combined gathering and processing systems by approximately 19%. The gross throughput in TPC's gathering systems averaged approximately 52% of capacity in the year ended December 31, 1996 compared to approximately 49% of capacity in the year ended December 31, 1995 assuming that the systems acquired in the Seagull Transaction had been owned from the beginning of 1995. Drilling activity by producers in the Gulf of Mexico in areas adjacent to TPC's gathering systems has increased in the last several years. In addition, recent reported increases in 3-D seismic surveys and bidding activity at federal and state offshore lease sales indicate that further increases in drilling activity are likely. Increases in natural gas production resulting from successful drilling activities in these areas should provide TPC with access to additional natural gas supplies to gather and process. TPC believes it has a competitive advantage in obtaining access to these supplies because of its currently available unutilized capacity. NATURAL GAS MARKETING Volumes sold during 1996 and 1995 increased compared to the prior periods due to expanding spring and summer period gas sales contracts. The greatest portion of this increase is due to large volume customer optimization contracts that TPC is managing on behalf of several large local distribution company customers. Operating profits from gas sales and storage related services for 1995 decreased, however, due to the lower margins that were experienced in the initial year of the optimization program as well as the impact of certain operational decisions which were made in December 1995 that resulted in a greater portion of the gross margin that was ultimately recognized in TPC's winter optimization program being deferred to 1996. Due to a more favorable pricing environment, unit gross margins increased to 4.18(cent) per Mcf in 1996 from 2.97(cent) per Mcf in 1995 after adjusting for the settlements of prior year natural gas imbalance positions that reduced the cost of gas sold by approximately $0.9 and $2.7 million in the years ended December 31, 1996 and 1995, respectively. TPC anticipates its marketing volumes to increase in 1997 due to continued growth in TPC's optimization program and increased use of its leased capacity at the Moss Bluff and Egan storage facilities.
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1995 1994 --------- ---------- --------- NATURAL GAS MARKETING ........... (IN THOUSANDS, EXCEPT PER UNIT DATA) Revenues ..................... $ 577,249 $ 286,602 $ 272,486 Cost of natural gas sold ..... (568,081) (279,326) (263,511) --------- --------- --------- Gross profit ............. 9,168 7,276 8,975 --------- --------- --------- Segment administrative expense (3,690) (3,012) (2,644) Depreciation and amortization (72) (230) (230) --------- --------- --------- Operating costs .............. (3,762) (3,242) (2,874) --------- --------- --------- Operating income ......... $ 5,406 $ 4,034 $ 6,101 ========= ========= ========= Sales volume (Mcf) ........... 197,940 154,305 134,474 Gross profit (per Mcf) ....... 4.63(cent) 4.72(cent) 6.67(cent) Operating income (per Mcf) ... 2.73(cent) 2.61(cent) 4.54(cent)
TPC uses futures, option and swap contracts with maturities of eighteen months or less to hedge against the volatility of the price of natural gas purchases and sales. It is TPC's policy to seek to maintain as nearly as practicable a fully hedged position on its net natural gas purchase and sale commitments, substantially all of which have pricing terms which are indexed to the NYMEX futures contract. Gains or losses on hedging activities are deferred and recognized as a part of the physical transactions hedged; net gains and losses on hedging activities reflected in income, which are largely offset by net gains and losses on physical transactions, amounted to losses of $866,000 and 21 23 $3,336,000 in the years ended December 31, 1996 and 1995, respectively. At December 31, 1996, TPC had 483 net open futures and various option contracts which together covered an aggregate of 4,830,000 MMBtu. The net unrealized loss on these instruments was approximately $63,000 at December 31, 1996. NATURAL GAS STORAGE As indicated in Note 3 - Investment in and Receivable from MHP, in the Notes to the Consolidated Financial Statements, the activities of TPC's natural gas storage business were reflected in its consolidated financial statements prior to the December 1994 formation of MHP. As a result of the formation of MHP, the natural gas storage business previously conducted by TPC is now conducted by MHP, in which TPC currently has an approximate 61% revenue and expense interest and accounts for its investment under the equity method. TPC's share of the underlying equity in the net assets of MHP exceeded its investment by approximately $17 million at the date of formation of MHP and such difference is being amortized to income over the lives of the existing storage contracts at the storage facilities contributed to MHP (averaging approximately nine years from the date of formation of MHP). MHP's operations consist of the Moss Bluff Facility in Texas, which went in to service in December 1990, and the Egan Facility in Louisiana, which went into service in September 1995. In addition, prior to the formation of MHP, TPC sold a 50% interest in the partnership owning the Moss Bluff Facility to a third party in March 1994. As a result of certain options associated with that transaction, TPC accounted for the 50% interest transferred to the third party as "Revenues of Business Transferred" and "Expenses of Business Transferred" through June 30, 1996. On July 3, 1996, MHP acquired such 50% interest from the third party effectively canceling the options between TPC and the third party to retransfer the interest. TPC recognized an after-tax gain of approximately $1.5 million related to this transaction (see "- Other Income, Costs and Expenses") and MHP commenced accounting for 100% of the Moss Bluff Facility's revenues and expenses in the third quarter of 1996.
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS, EXCEPT PER UNIT DATA) NATURAL GAS STORAGE Revenues Business transferred .............. $ 2,581 $ 5,347 $ 3,484 Equity in earnings (loss) of MHP .. 5,111 2,536 (403) Other ............................. 287 360 5,249 -------- -------- -------- 7,979 8,243 8,330 -------- -------- -------- Operating expenses Business transferred .............. (1,800) (3,438) (2,707) Other ............................. (2) (23) (2,919) Segment administrative expense .......... (1,174) (1,154) 233 Depreciation ............................ (10) (12) (1,345) -------- -------- -------- Operating costs ......................... (2,986) (4,627) (6,738) -------- -------- -------- Operating income ........................ $ 4,993 $ 3,616 $ 1,592 ======== ======== ======== Cavern turnover capacity leased to third parties (Mcf) ................ 44,145 21,521 15,198 Operating income per Mcf of turnover .... 9.54(cent) 7.94(cent) 5.36(cent) capacity leased to third parties (1)
- ---------------- (1) Excludes net earnings of business transferred. 22 24 The increases in TPC's equity in earnings of MHP indicated above reflect the startup of the Egan Facility and the addition of a third storage cavern at the Moss Bluff Facility, both of which occurred in September 1995, as well as the growth in hub services (short term storage and other services) at both facilities. Detailed financial information concerning MHP can be found in the combined financial statements of MHP at Exhibit 99 to this Form 10-K. OTHER INCOME, COSTS AND EXPENSES For the year ended December 31, 1996, corporate administrative expense increased relative to the same period in 1995 due to increased employee bonuses being accrued under TPC's profit-based incentive compensation program (resulting from higher corporate profits) as well as increases in executive and administrative salaries, professional fees and a one time listing fee to the New York Stock Exchange. For the year ended December 31, 1995, corporate administrative expense increased relative to the same period in 1994 as a result of organizational expansions within TPC. Interest expense increased from $2.1 million in 1994 to $6.5 million in 1995 and $13.4 million in 1996 with virtually all of both increases due to the issuance of new debt incurred in connection with the Seagull Transaction which closed in September 1995. Interest income increased for the years ended December 31, 1996 and 1995 due primarily to TPC recording increasingly greater portions of its share of the interest income on a promissory note receivable from MHP. See "- Liquidity and Capital Resources - Financing and Investing Activities - Market Hub Partners." In the third quarter of 1996, TPC recognized in "Other Income" a pre-tax gain of approximately $2.5 million ($1.5 million after-tax) on the transfer of a 50% interest in the Moss Bluff Facility (see "- Natural Gas Storage"). Such amount was attributable to a previously deferred gain resulting from a 1994 transaction between TPC and a third party prior to the formation of MHP (see Note 3 - Investment in and Receivable from MHP, in the Notes to the Consolidated Financial Statements). In December 1995, TPC repurchased 1,000 shares of its Series B Preferred Stock that were held by its former parent company in exchange for all of the former parent's preferred stock held by TPC. An extraordinary gain of $207,000 (net of income taxes) was recorded on this transaction. In March 1994, TPC issued $35 million of senior unsecured notes due in 2004 through a private placement. Proceeds from the sale of the notes were used to retire term notes payable to TPC's former bank resulting in an extraordinary loss of $195,000 (net of income taxes). INCOME TAXES As indicated in Note 1 to the Consolidated Financial Statements, TPC follows Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires an asset and liability method of accounting for income taxes. Under this method, TPC's effective tax rates for the years ended December 31, 1996 and 1994 were 33% and 37%, respectively, compared to the federal statutory rate of 34%. The effective tax rate for the year ended December 31, 1996 was less than the statutory rate due to a non-recurring credit while the 1994 effective tax rate exceeded the statutory rate primarily due to permanent differences caused by the amortization of intangible assets. In 1995, TPC determined that certain deferred tax liabilities accrued during the former parent company's ownership of TPC were no longer required, therefore, an adjustment of $610,000 was made to eliminate such liabilities resulting in a negative effective tax rate for the year. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL TPC's working capital increased to $20.1 million at December 31, 1996 from $14.2 million at December 31, 1995 due to a number of items including the December 1996 operational decision to significantly build natural gas 23 25 inventories in TPC's natural gas marketing business in anticipation of higher commodity prices in the first quarter of 1997. In addition to its working capital, TPC had unutilized borrowing capacity of $23.5 million available under its $40 million revolving credit facility as of December 31, 1996 (see "- Investing and Financing Activities"). In the prior year, TPC's working capital decreased moderately to $14.2 million at December 31, 1995 from $14.9 million at the end of 1994. The cash and cash equivalents reported by TPC on a consolidated basis at December 31, 1996 are available for its marketing and gathering and processing operations and should be sufficient, in combination with TPC's $40 million revolving credit line, to fund working capital requirements during 1997. At December 31, 1996, TPC holds a $20.8 million receivable due March 31, 1997 from MHP which represents storage facility development costs advanced by TPC on behalf of MHP. Amounts to be paid under this receivable are expected to have a positive impact on the liquidity of TPC. Although the entire balance of this receivable is due by its terms on March 31, 1997, the portion that is expected to be repaid within the next twelve months is approximately $8,800,000; accordingly, this amount has been classified by TPC as a current asset at December 31, 1996. See "- Investing and Financing Activities - Market Hub Partners." Since the outside investors in MHP were afforded participation in the governance of the partnership including decisions concerning financing, acquisitions or divestitures, and other matters, TPC cannot make unilateral decisions on all aspects of the partnership's operations. Therefore, for accounting purposes, MHP is treated as an unconsolidated affiliate of TPC. Accordingly, since the formation of MHP in December 1994, the operating cash flow from the natural gas storage facilities formerly owned by TPC and the working capital utilized in the business have been reported on the financial statements of MHP and not those of TPC. Cash flows will be reported by TPC as distributions, if any, are made from MHP. OPERATING ACTIVITIES TPC's net cash provided by operating activities was $17.0 million in the year ended December 31, 1996 compared to a deficit of $16.3 million in the year ended December 31, 1995. This significant increase was due to higher cash flow from operations (net income plus depreciation and amortization, less equity in earnings of MHP) associated with the assets acquired in the Seagull Transaction as well as the decrease in inventory and accounts receivable growth related to 1996 being the second year (rather than the initial year) of the customer optimization program that TPC is managing on behalf of several large local distribution companies. TPC's net cash used in operating activities was $16.3 million in 1995 in contrast to the net cash provided by operations of $9.3 million in 1994. This comparative decrease was due to lower net income as well as significant increases in inventory and receivable levels related to the customer storage fill contracts that TPC is managing on behalf of several large local distribution companies and to a storage delivery program entered into with a major midwestern pipeline company customer. Such inventory and receivable balances were substantially reduced in 1996 as payments were received and the inventories were delivered. INVESTING AND FINANCING ACTIVITIES SEAGULL TRANSACTION AND RELATED FINANCINGS/DIVESTITURES. On September 25, 1995, TPC completed the acquisition from Seagull Energy Corporation and four other sellers of a number of natural gas pipeline gathering assets, as well as a natural gas processing plant, which serve areas offshore Texas adjacent to those currently served by TPC's existing TOMCAT and Galveston Island gathering systems. The purchase price was $155.9 million. No significant future capital expenditures are planned with regard to the assets acquired in the Seagull Transaction. TPC will continue to seek project development and acquisition opportunities in this segment, although TPC is not currently contemplating acquisitions of a size comparable to the Seagull Transaction. The acquisition of the gathering systems and related assets was financed with existing credit facilities and $150 million of new credit facilities provided by Internationale Nederlanden (U.S.) Capital Corporation ("ING Capital"). 24 26 The new credit facilities consisted of $120 million of five-year secured term loans and a $30 million secured subordinated bridge loan which was repaid in November 1995 with proceeds of a public stock offering (see "- Public Stock Offering"). Under these credit facilities, TPC and its subsidiaries are subject to certain financial and other covenants, one of which was amended in the fourth quarter of 1996 (see Note 2 - Seagull Transaction, in the Notes to the Consolidated Financial Statements). TPC was also required to amend the terms of its existing revolving credit agreement (the "Revolver") and its $35 million of senior unsecured notes to permit the acquisition. The Revolver, as amended, was subsequently increased to $30 million in December 1995 and $40 million in October 1996. The amended credit agreement currently requires TPC and certain subsidiaries to maintain a total debt to total capitalization ratio of not more than 70%. With a total debt to total capitalization ratio of 59% (determined as specified in the amended credit agreement), TPC was in compliance with this requirement at December 31, 1996. The $35 million of senior unsecured notes were likewise amended in connection with the Seagull Transaction to provide for, among other things, an increase in the interest rate payable from 7.33% to 9.33% per annum (reducible to 8.33% and 7.33% if and when TPC and certain subsidiaries achieve total debt to total capitalization ratios of not more than 60% and 50%, respectively). In February 1996, TPC completed the sale of a number of the smaller non-core gathering systems acquired in the Seagull Transaction for $12.1 million with the net proceeds applied to reduction of the ING Capital term loan. Such reduction as well as the regularly scheduled principal payments made in the first two quarters of 1996 reduced TPC's debt to capitalization ratio below 60% resulting in a decline in the interest rate on the senior unsecured notes from 9.33% to 8.33% per annum beginning in the third quarter of 1996. MARKET HUB PARTNERS. The December 1994 formation of MHP provided TPC and its natural gas industry partners a vehicle for the construction and operation of a network of five market hub centers with high deliverability storage. TPC contributed its interest in the assets and facilities, market hub locations, development plans, permits, leases and signed storage service contracts for these market centers to MHP. TPC's four natural gas industry partners agreed to contribute $45 million to MHP from closing through 1996, all of which has been contributed to date. In addition to the July 3, 1996 issuance of $60 million of senior secured notes by MHP's Moss Bluff and Egan Facilities, MHP will seek to arrange debt financings (either at the individual project or overall partnership level) on the other market hub facilities as development progresses. The combination of these planned financings, MHP's internally generated cash flow, and possible additional equity investments by the MHP partners are presently expected to provide sufficient financing for the capital costs of the MHP market hubs and high deliverability storage facilities over the next several years assuming continuation of existing market conditions. The capital costs incurred by MHP on the Moss Bluff and Egan Facilities aggregated approximately $108 million through December 31, 1996, and the projected capital costs for expansion of Egan and construction of the Tioga Project aggregate approximately $160 million through the year 2000, subject to approval by the MHP partners. Under the terms of the Agreement of Limited Partnership, MHP has assumed an obligation to TPC for advances made by TPC to the gas storage projects after the effective date of the formation in order to fund construction activities. Additional advances were made to MHP to fund construction and development activities in 1995 and in the first quarter of 1996 such that cumulative advances at that date totaled $31,020,000. Interest on the outstanding balance was accrued through December 1996 at the prime rate stated by Wells Fargo Bank and the principal was originally intended to be paid to TPC out of the proceeds of MHP financings. On July 3, 1996, two of MHP's subsidiaries completed the issuance of $60 million of senior secured notes in a private placement transaction. The senior secured notes bear interest at a rate of 8.10% per annum and are due in varying amounts through December 31, 2006. Proceeds of the private placement were used by MHP to acquire the remaining 50% interest in the Moss Bluff Facility owned by a third party, to retire an outstanding bank loan on the Moss Bluff Facility, to repay a portion of the promissory note owed by MHP to TPC, and to pay the costs of the financing transaction. The portion of the promissory note repaid by MHP to TPC with proceeds of the private placement amounted to approximately $14,100,000. The remaining balance of the promissory note payable by MHP to TPC, which was originally due in December 1996, was extended through March 31, 1997 at an annual interest rate of 12%; an additional $3,900,000 was also loaned by TPC to MHP on the same terms in December 1996. Repayment of approximately $8,800,000 of the promissory note is expected to be made from the proceeds of a new MHP private placement debt financing that is anticipated to close on or around March 31, 1997 25 27 (commitments from the lenders have been obtained for this financing). Accordingly, such portion of the promissory note has been classified as a current receivable and the balance, which is expected to be refinanced on a long-term basis, has been classified by TPC as a non-current asset at December 31, 1996. It is also expected that the non-TPC partners in MHP will participate in such refinanced long-term loans to the extent of their equity interest in MHP resulting in a further reduction of TPC's note receivable from MHP of approximately $4,000,000. PUBLIC STOCK OFFERING. On November 15, 1995, TPC closed an offering of its Class A Common Stock at a price to the public of $8.50 per share. Of the 3,900,000 shares offered, 3,600,000 were sold by TPC and 300,000 were sold by a stockholder of TPC. On November 20, 1995, the underwriters for the offering purchased an additional 540,000 shares from TPC and 45,000 shares from the selling stockholder to cover overallotments. Net proceeds to TPC from the combined stock sales were approximately $32.7 million. Of this amount, $30 million was used to repay the bridge loan incurred in the Seagull Transaction and the balance was added to TPC's working capital. On August 23, 1996, TPC was authorized by its Board of Directors to repurchase up to $5 million of its Class A Common Stock over a twelve month period. Pursuant to the Board's authorization, TPC purchased a total of 95,000 shares of its Class A Common Stock at a cost of $803,000 through October 9, 1996. No additional shares have been purchased since that time. The buyback was financed out of available cash reserves and borrowings under TPC's revolving credit facility. GENERAL. Increased natural gas marketing inventories in 1996 resulted in additional demands on funds. These extra demands related to the growth of TPC's customer storage fill program, and are expected to continue and perhaps increase in 1997. TPC anticipates that cash flow from operations will be sufficient to meet its foreseeable requirements for working capital, capital expenditures and other cash requirements. However, because future cash flows are subject to a number of variables, such as changes in supply and demand, general economic conditions and other market conditions over which TPC has no control, there can be no assurance that TPC's capital resources will be sufficient to meet such requirements. Cash flow generated by the gathering and processing facilities, including facilities acquired in the Seagull Transaction, is dependent on production of natural gas reserves presently dedicated to flow through the systems. Production from these reserves will decline in future years. In order for cash flow from TPC's natural gas gathering and processing facilities to be maintained at current levels or increased, additional successful drilling and production will have to occur in areas adjacent to the facilities. TPC has no control over future drilling or production activity in the Gulf of Mexico. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This Report includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, other TPC documents or oral presentations, the words "anticipate," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are generally intended to identify forward-looking statements. All statements other than statements of historical fact included in this Report are forward looking statements. Such forward looking statements include, without limitation, statements under (a) "Business General" regarding TPC's expectations for future demand for its natural gas supply services, (b) "- Business and Growth Strategy" regarding TPC's expectations for domestic consumption of natural gas, (c) "- Recent Developments - Evaluation of Strategic Alternatives" regarding TPC's expectation that an announcement regarding the results of the evaluation process is expected to be made in the near future, (d) "- Natural Gas Gathering and Processing" regarding TPC's expectations of potential increases in drilling activity, resulting natural gas production, and TPC's ability to obtain access to such natural gas supplies to gather and process, (e) "- Natural Gas Storage" regarding MHP's plans for natural gas storage projects at the Moss Bluff Facility, the Egan Facility and the Tioga project and its belief that the use by its customers of "hub" services will lead to additional long-term contracts over time, (f) "- Natural Gas Marketing" regarding TPC's marketing objectives over the next several years and its ability to provide premium priced natural gas marketing services, TPC's intentions regarding the marketing of its summer storage fill asset optimization and winter storage asset management programs, TPC's plans to use the Egan Facility as an approved delivery point for customers utilizing pipelines connected at that market hub, and TPC's expectations regarding its use of storage arbitrage activities, (g) "- Other" regarding TPC's plans and expectations for compressed air energy storage and power marketing, (h) "- Regulation of 26 28 TPC's Facilities" regarding the TOMCATand GIGS Systems' exemption from jurisdiction under the NGA and TPC's plans for the development of the Tioga project to provide services in interstate commerce, (i) "- Regulation - Environmental and Safety Matters" regarding TPC's expectations for the continuations of trends towards stricter standards in environmental law and regulation, (j) "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations Natural Gas Gathering and Processing" regarding TPC's belief that it will be able to increase average tariff rates in future years, TPC's expectations for increases in natural gas production resulting from successful drilling activities in areas served by TPC's gathering systems and the likelihood of such activities providing TPC with access to additional natural gas supplies to gather and process, (k) "Natural Gas Marketing" regarding TPC's expectations for increases in natural gas marketing volumes in 1997, (l) "- Liquidity and Capital Resources - Working Capital" regarding TPC's anticipation of higher commodity prices in the first quarter of 1997 and the likely affect of repayments by MHP of its note to TPC on TPC's liquidity, (m) "- Investing and Financing Activities" regarding TPC's expectations for a lack of future significant capital expenditures in connection with the assets acquired in the Seagull Transaction, TPC's plans for project development and acquisition opportunities in the natural gas gathering and processing segment, and TPC's expectations regarding the timing and effect to TPC of an anticipated new MHP private placement debt financing as well as TPC's expectation that the non-TPC partners in MHP will also participate in the refinancing of a long-term loan to MHP to the extent of their equity interest in MHP, and (n) "- General" regarding TPC's expectation that cash flow from operations will be sufficient to meet its foreseeable requirements for working capital, capital expenditures and other cash requirements as well as TPC's expectations with regard to production of natural gas reserves and future drilling or production activity in the Gulf of Mexico. Although TPC believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from TPC's expectations ("Cautionary Statements") are disclosed in this Report, including without limitation in conjunction with the forward looking statements included in this Report. All subsequent written and oral forward looking statements attributable to TPC or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. 27 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TPC CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants........................................................... 29 Consolidated Balance Sheets as of December 31, 1996 and 1995....................................... 30 Consolidated Statements of Operations for the three years ended December 31, 1996.................. 32 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1996........ 33 Consolidated Statements of Cash Flows for the three years ended December 31, 1996.................. 34 Notes to Consolidated Financial Statements......................................................... 35
The information required by Schedules I, II, III, IV and V is not applicable to TPC. 28 30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of TPC Corporation: We have audited the accompanying consolidated balance sheets of TPC Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TPC Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 6, 1997 29 31 TPC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 1996 1995 --------- --------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents ..................... $ 1,536 $ 6,102 Accounts and notes receivable ................. 96,410 65,621 Account receivable from MHP ................... 1,818 8,989 Note Receivable from MHP ...................... 8,800 -- Inventory ..................................... 13,451 8,362 Prepaid expenses and other current assets ..... 2,512 2,769 Assets held for resale ........................ -- 13,700 --------- --------- Total Current Assets ................ 124,527 105,543 --------- --------- Property and Equipment: Natural gas gathering and processing facilities 206,657 205,470 Construction in progress ...................... 11,709 5,069 Other ......................................... 1,926 3,207 Less accumulated depreciation ............ (49,464) (40,427) --------- --------- 170,828 173,319 --------- --------- Note Receivable from MHP .......................... 12,000 25,021 Investment in MHP ................................. 29,154 27,796 Assets of Business Transferred .................... -- 31,690 Intangible Assets, net ............................ 5,486 5,809 Other Assets ...................................... 6,616 6,738 --------- --------- $ 348,611 $ 375,916 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 30 32 TPC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1996 1995 --------- --------- (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Trade payables........................................................ $ 83,325 $ 53,416 Accrued liabilities and other......................................... 10,909 6,640 Note payable.......................................................... -- 7,451 Current portion of long-term debt..................................... 10,221 23,832 ---------- ---------- Total Current Liabilities........................................ 104,455 91,339 --------- ---------- Long-Term Debt, net of current portion.................................... 138,532 146,515 Proceeds from Business Transferred........................................ -- 17,500 Liabilities of Business Transferred....................................... -- 20,583 Deferred Income Taxes..................................................... 2,614 1,483 Deferred Revenue.......................................................... 130 55 Commitments and Contingencies Stockholders' Equity: Common stock, Class A, $.01 par value; authorized 25,000,000 shares; issued and outstanding 17,894,252 shares............................ 179 179 Common stock, Class B, convertible, $.01 par value; authorized 5,000,000 shares; issued and outstanding 6 6 579,963 shares...................................................... Additional paid-in capital............................................ 86,820 86,820 Unearned ESOP compensation............................................ (765) (963) Retained earnings .................................................... 18,279 13,235 ---------- ---------- 104,519 99,277 Less: Treasury stock, at cost, 470,000 shares and 375,000 shares of Class A Common Stock at December 31, 1996 and 1995, respectively.... (1,639) (836) ---------- ------------ Total Stockholders' Equity....................................... 102,880 98,441 --------- ---------- $348,611 $375,916 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 31 33 TPC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Natural gas marketing sales .................................. $ 577,249 $ 286,602 $ 272,486 Natural gas gathering and processing ......................... 32,064 16,720 13,346 Natural gas storage (including equity in earnings of MHP) .... 7,979 8,243 8,330 --------- --------- --------- 617,292 311,565 294,162 --------- --------- --------- Costs of Operations: Natural gas marketing ........................................ 571,843 282,568 266,385 Natural gas gathering and processing ......................... 18,361 11,472 9,495 Natural gas storage .......................................... 2,986 4,627 6,738 --------- --------- --------- 593,190 298,667 282,618 --------- --------- --------- Operating Income ................................................ 24,102 12,898 11,544 Other Income (Expense): Corporate administrative expense ............................. (7,416) (6,266) (5,238) Interest expense ............................................. (13,386) (6,472) (2,063) Interest income .............................................. 2,404 1,705 1,092 Net earnings of business transferred ......................... (782) (1,908) (777) Other income (expense) ....................................... 2,584 84 705 --------- --------- --------- (16,596) (12,857) (6,281) --------- --------- --------- Income Before Income Tax and Extraordinary Item ................. 7,506 41 5,263 Benefit (provision) for income tax expense ................... (2,462) 453 (1,946) --------- --------- --------- Income Before Extraordinary Item ................................ 5,044 494 3,317 Extraordinary Item, net of income tax provision of $107,000 in 1995 and income tax benefit of $105,000 ...... -- 207 (195) in 1994 .................................................. -- -- -- Net Income ...................................................... $ 5,044 $ 701 $ 3,122 ========= ========= ========= Net Income Per Common Share Before Extraordinary Item ........... $ .27 $ .04 $ .22 Extraordinary Item ........................................... -- .01 (.01) --------- --------- --------- Net Income Per Common Share ..................................... $ .27 $ .05 $ .21 ========= ========= ========= Weighted Average Shares Outstanding ............................. 18,695 15,609 15,222 ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 32 34 TPC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CLASS A CLASS B COMMON STOCK COMMON STOCK ADDITIONAL UNEARNED ------------------ ---------------- PAID-IN ESOP RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS STOCK TOTAL ---------- ------ ------- ------ ------- ------- ------- ------- --------- Balance, January 1, 1994 ... 10,210,623 $102 579,963 $ 6 $32,594 $ (520) $ 9,412 $ (836) $ 40,758 ---------- ---- ------- ------ ------- ------- ------- ------- --------- Conversion of Series A ............... 3,467,036 35 -- -- 21,273 -- -- -- 21,308 Preferred Stock Common Stock purchased by ........... -- -- -- -- -- (787) -- -- (787) ESOP ESOP awards .............. -- -- -- -- -- 275 -- -- 275 Options exercised ........ 76,593 1 -- -- 344 -- -- -- 345 Net income ............... -- -- -- -- -- -- 3,122 -- 3,122 Balance, December 31, 1994 . 13,754,252 138 579,963 6 54,211 (1,032) 12,534 (836) 65,021 ---------- ---- ------- ------ ------- ------- ------- ------- --------- Class A Common Stock public ........... 4,140,000 41 -- -- 32,609 -- -- -- 32,650 offering ESOP awards .............. -- -- -- -- -- 69 -- -- 69 Net income ............... -- -- -- -- -- -- 701 -- 701 ---------- ---- ------- ------ ------- ------- ------- ------- --------- Balance, December 31, 1995 . 17,894,252 179 579,963 6 86,820 (963) 13,235 (836) 98,441 ---------- ---- ------- ------ ------- ------- ------- ------- --------- Class A Common Stock buyback .......... -- -- -- -- -- -- -- (803) (803) program ESOP awards .............. -- -- -- -- -- 198 -- -- 198 Net income ............... -- -- -- -- -- -- 5,044 -- 5,044 ---------- ---- ------- ------ ------- ------- ------- ------- --------- Balance, December 31, 1996 . 17,894,252 $179 579,963 $ 6 $86,820 $ (765) $18,279 $(1,639) $ 102,880 ========== ==== ======= ====== ======= ======= ======= ======= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 33 35 TPC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Cash Flows from Operating Activities: Net income ................................................... $ 5,044 $ 701 $ 3,122 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................ 11,214 7,654 8,124 Amortization of deferred charges ......................... 1,156 341 131 Equity in earnings of MHP ................................ (5,111) (2,536) 403 Gain on sale of storage assets ........................... (2,466) -- -- Changes in assets and liabilities, net of effects of business transferred: (Increase)decrease in accounts and notes receivable ...... (23,618) (43,950) 651 (Increase)decrease in prepaid expenses, inventory and .... (9,494) 335 other assets ........................................... (4,832) Increase (decrease)in trade payables and other liabilities............................................. 34,174 31,150 (2,642) Increase (decrease)in deferred income taxes .............. 1,131 (232) (1,042) Increase (decrease)in deferred revenue ................... 75 29 (70) Decrease in unearned ESOP compensation ................... 198 69 275 --------- --------- --------- Net cash provided by (used in) operating activities . 16,965 (16,268) 9,287 --------- --------- --------- Cash Flows from Investing Activities, net of effects of business transferred: Capital and other asset additions ............................ (9,482) (159,075) (41,446) Proceeds from sales of assets ................................ 13,700 1,996 -- Net proceeds from transfer of business ....................... -- -- 17,500 Net decrease in note receivable from MHP ..................... 4,221 -- -- Change in assets and liabilities of business transferred ..... (123) 1,102 (1,212) --------- --------- --------- Net cash provided by (used in)investing activities .. 8,316 (155,977) (25,158) --------- --------- --------- Cash Flows from Financing Activities, net of effects of business transferred: Issuance of Class A Common Stock net of expenses of $2,540,000 in 1995 and $10,000 in 1994)...................... -- 32,650 345 Net borrowings (repayments)on unsecured revolving credit agreement ................................................... 1,500 15,000 -- Issuance of long-term debt (net of expenses of $4,650,000 in 1995 and $504,000 in 1994) .................................. 575 145,609 34,496 Repayment of long-term debt .................................. (23,668) (31,083) (22,435) Issuance (repayment) of note payable ......................... (7,451) 7,451 -- Class A Common Stock repurchased (for treasury in 1996 and for ESOP in 1994) ........................................... (803) -- (788) --------- Net cash provided by (used in) financing activities . (29,847) 169,627 11,618 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ............. (4,566) (2,618) (4,253) Cash and cash equivalents at beginning of period ................. 6,102 8,720 12,973 --------- --------- --------- Cash and cash equivalents at end of period ....................... $ 1,536 $ 6,102 $ 8,720 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for interest, net of amounts capitalized ................................................. $ 12,693 $ 4,468 $ 1,397 Cash paid during the period for income taxes ................. 1,343 614 2,480
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 34 36 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND PRESENTATION - The Consolidated Financial Statements include the accounts of TPC Corporation (formerly Tejas Power Corporation) and its subsidiaries ("TPC"). Material intercompany balances and transactions have been eliminated. TPC is engaged in gathering, processing, marketing and storage of natural gas; it owns and operates gathering systems located in the Gulf of Mexico, plus related onshore natural gas processing facilities. TPC also has a majority voting and majority ownership interest in its equity investee, Market Hub Partners, Inc. and Market Hub Partners L.P. (collectively, "MHP", see Note 3), which owns, operates and is developing an integrated system of natural gas market hubs utilizing high deliverability salt cavern storage facilities. TPC's revenue, profitability and future rate of growth are substantially dependent upon the price of, and demand for natural gas. Prices for natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for natural gas, market uncertainty and a variety of additional factors that are beyond TPC's control. CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of demand deposits and highly liquid investments purchased with an original maturity of three months or less. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject TPC to concentration of credit risk consist primarily of temporary cash investments and trade receivables derived principally from uncollateralized sales to customers in the oil and gas and natural gas utility industries. The concentration of credit risk in these industries affects TPC's overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. INVENTORIES - Inventories of natural gas are carried at the lower of weighted average cost or market value. PROPERTY AND EQUIPMENT - Property and equipment are carried at cost. Natural gas gathering and processing facilities and equipment are depreciated primarily on the straight-line method over their estimated useful lives ranging from ten to thirty years. Other property is depreciated on the straight-line method over estimated useful lives, which range from three to five years. Additions, renewals and betterments that add materially to productive capacity or extend the life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. Interest cost is capitalized during the construction period of major facilities and amounted to approximately $737,000, $1,640,000 and $1,551,000 in 1996, 1995 and 1994, respectively. In addition, TPC capitalized certain internal costs in such years of approximately $100,000, $938,000 and $1,966,000, which are directly related to projects under development. In 1996, TPC adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Since adoption, SFAS No. 121 has had no impact on TPC's financial statements. HEDGING ACTIVITIES - TPC periodically enters into physical and financial derivative transactions for the purpose of hedging against the volatility of natural gas prices. These activities are accomplished through the use of forwards, futures, options, and price swap contracts with maturities of eighteen months or less. Gains or losses on hedging activities are deferred and recognized as a part of the physical transactions hedged. INCOME TAXES - TPC provides deferred income taxes for temporary differences between financial and income tax reporting in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 35 37 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EARNINGS PER COMMON SHARE - Earnings per common share are based upon the weighted average number of shares of both TPC's Class A and Class B Common Stock and common stock equivalents, if dilutive, outstanding during the year. Common stock equivalents consist of shares issued assuming all stock options are exercised using the treasury stock method. The difference between earnings per common share on a primary and a fully diluted basis is not significant. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements relate to the depreciable lives of property and equipment as well as to the determination of liabilities for gas purchase costs and deferred income taxes. (2) SEAGULL TRANSACTION In September 1995, TPC completed the acquisition of various natural gas gathering systems offshore and onshore Texas and related assets from Seagull Energy Corporation and four other sellers for $155.9 million in cash (the "Seagull Transaction"). The purchase price was based on an effective date of September 1, 1995 and was accounted for as a purchase. Transaction costs, consisting primarily of fees paid to financial advisors, totaled approximately $2.1 million. The acquisition was financed through a combination of existing credit facilities and $150 million under new credit facilities provided by a group of lenders led by ING Capital Corporation ("ING Capital"). The $150 million in new credit facilities included a subordinated secured $30 million bridge loan which was subsequently repaid in November 1995 with proceeds of a public stock offering (see Note 5) and two secured term loan tranches of $60 million each (collectively referred to as the "Term Loan"). The first tranche ("Tranche A") amortizes on a quarterly basis through its maturity on June 30, 2000. The second tranche ("Tranche B") is non-amortizing and matures on September 30, 2000. Interest on the Term Loan is, at TPC's discretion, either a Eurodollar rate or a base rate, plus a LIBOR rate spread or base rate spread, respectively, as defined in the loan agreements. The base rate is the average of the prime rates publicly announced by The Chase Manhattan Bank, Citibank, N.A., and Morgan Guaranty Trust Company of New York. The base and LIBOR rate spreads for each tranche are calculated based on certain capitalization ratios of TPC. The base rate spread for the tranches can be as high as 2.5% per annum and as low as 0% per annum and the LIBOR rate spread can be as high as 4% per annum and as low as 1% per annum. The credit facilities require the maintenance of certain financial ratios and other covenants, including minimum consolidated net worth, minimum capitalization, and a ratio of current assets to current liabilities of not less than 1 to 1. In the fourth quarter of 1996, the lenders agreed to amend one of the financial covenants in the credit agreement and to also amend the Tranche A amortization schedule, while retaining the June 30, 2000 maturity date. The Term Loan is secured by the assets acquired in the Seagull Transaction. A number of the smaller non-core gathering systems acquired in the Seagull Transaction were classified as "Assets Held for Sale" at December 31, 1995. Sales of such assets totaling $13,700,000 were made in the first three quarters of 1996, with proceeds of $12,100,000 applied in February 1996 to the reduction of both tranches of the Term Loan on a pro rata basis. No gain or loss was recorded on these sales. In connection with obtaining the financing for the Seagull Transaction, $4,650,000 in commitment fees, legal, accounting and other fees were incurred. Such costs have been capitalized and included in the accompanying consolidated balance sheet under the caption "Other Assets" and are being amortized over the period of the Term Loan. The following table presents the unaudited pro forma revenues, income before extraordinary item, net income and net income per share for the years ended December 31, 1996 and 1995 assuming that the Seagull Transaction and the sale of the smaller acquired non-core gathering systems, which were made primarily in the first quarter of 1996, had occurred on January 1, 1995. 36 38 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues ....................... $614,902 $333,865 Income before extraordinary item 4,994 984 Net income ..................... 4,994 1,191 Net income per share ........... 0.27 0.08
(3) INVESTMENT IN AND RECEIVABLE FROM MHP In December 1994, TPC formed Market Hub Partners, Inc. and Market Hub Partners, L.P. (collectively referred to as Market Hub Partners or MHP) with subsidiaries of NIPSCO Industries, Inc., New Jersey Resources Corporation, DPL Inc., and Public Service Enterprise Group, Incorporated. Subsidiaries of TPC and these four companies own the stock of Market Hub Partners, Inc. (the 1% general partner of Market Hub Partners, L.P.) and are the limited partners of Market Hub Partners, L.P. TPC contributed its interests in five market center projects (in varying stages of operation or development) to MHP through a series of mergers between the TPC subsidiaries in which it conducted its gas storage business and subsidiaries of MHP. TPC's contribution of interests to MHP upon formation included facilities, market center locations, development plans, permits, leases, signed storage service contracts and associated long-term debt and other liabilities relating to its five market center projects. TPC's four partners agreed to contribute $45,000,000 to MHP over the period 1994 through 1996, all of which was contributed by July 1996. TPC's limited partnership interest and stock ownership in MHP provide it with a 66% voting and ownership interest. TPC has an approximate 61% revenue and expense interest from the commencement of MHP operations which increases to approximately 70% at such time as two of the initial partners with reversionary interests receive distributions from MHP equal to 150% of their cumulative capital contributions. MHP owns and operates natural gas market centers located in Texas (the Moss Bluff Facility) and Louisiana (the Egan Facility) and it is anticipated that MHP will construct, own and operate up to three such additional natural gas market centers. Prior to the formation of MHP, TPC sold a 50% interest in the partnership owning the Moss Bluff Facility to a third party in March 1994. As a result of certain options associated with that transaction, TPC deferred recognition of an approximate $6 million gain and accounted for balance sheet transactions related to the 50% interest transferred to the third party as "Assets of Business Transferred" and "Liabilities of Business Transferred" while the related income statement transactions through June 30, 1996 were accounted for as "Revenues of Business Transferred" and "Expenses of Business Transferred." On July 3, 1996, MHP acquired such 50% interest from the third party effectively canceling the options between TPC and the third party to retransfer the interest. After eliminating the portion of the deferred gain on the March 1994 transaction applicable to TPC's ownership interest in MHP, TPC recognized in "Other Income" a pre-tax gain of approximately $2.5 million ($1.5 million after-tax) related to this transaction and MHP commenced accounting for 100% of the Moss Bluff Facility's revenues and expenses in the third quarter of 1996. The four minority partners in MHP have been afforded participation in its governance and, under the terms of the Agreement of Limited Partnership, certain decisions require the approval of TPC and at least two other partners. Such matters include decisions involving financing and acquisitions or divestitures. Because the MHP agreements do not permit unilateral decisions by TPC in these and certain other circumstances, TPC's investment in MHP has been accounted for on an equity basis since MHP's formation in December 1994. TPC's share of the underlying equity in net assets of MHP exceeded its original investment of $24,227,000 by approximately $17,000,000 at the time of formation of MHP. This difference, adjusted for the aforementioned July 3, 1996 transaction involving the Moss Bluff Facility, is being amortized in relation to the lives of existing storage service contracts. The amortization of this amount totaled 37 39 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $2,189,000 and $1,971,000 in the years ended December 31, 1996 and 1995, and is included in income as a part of TPC's equity in earnings of MHP. Under the terms of the Agreement of Limited Partnership, MHP has assumed an obligation to TPC for advances made by TPC to the gas storage projects after the effective date of the formation in order to fund construction activities. Additional advances were made to MHP to fund construction and development activities in 1995 and in the first quarter of 1996 such that cumulative advances at that dated totaled $31,020,000. Interest on the outstanding balance was accrued through December 1996 at the prime rate stated by Wells Fargo Bank, which was a weighted average of 8.25% and 8.83% for the years ended December 31, 1996 and 1995; a total of $2,037,000 and $2,261,300 of interest was accrued on the advances during the years ended December 31, 1996 and 1995, respectively, and the unpaid portions of such amounts are included in the current payable to TPC below. On July 3, 1996, two of MHP's subsidiaries completed the issuance of $60 million of senior secured notes in a private placement transaction. The senior secured notes bear interest at a rate of 8.10% per annum and are due in varying amounts through December 31, 2006. Proceeds of the private placement were used by MHP to acquire the remaining 50% interest in the Moss Bluff Facility owned by a third party, to retire an outstanding bank loan on the Moss Bluff Facility, to repay a portion of the promissory note owed by MHP to TPC, and to pay the costs of the financing transaction. The portion of the promissory note repaid by MHP to TPC with proceeds of the private placement amounted to approximately $14,100,000. The remaining balance of the promissory note payable by MHP to TPC, which was originally due in December 1996, was extended through March 31, 1997 at an annual interest rate of 12%; an additional $3,900,000 was also loaned by TPC to MHP on the same terms in December 1996. Repayment of approximately $8,800,000 of the promissory note is expected to be made from the proceeds of a new MHP private placement debt financing that is anticipated to close on or around March 31, 1997 (commitments from the lenders have been obtained for this financing). Accordingly, such portion of the promissory note has been classified as a current receivable and the balance, which is expected to be refinanced on a long-term basis, has been classified by TPC as a non-current asset at December 31, 1996. Audited financial statements of MHP are included as Exhibit 99 to TPC's Annual Report on Form 10-K. Summarized financial information of MHP is presented below:
DECEMBER 31, ------------------- 1996 1995 -------- -------- (IN THOUSANDS) Current assets ........................... $ 6,781 $ 5,555 Property and equipment, net .............. 119,443 81,473 Construction in progress ................. 26,493 16,087 Other noncurrent assets .................. 4,018 2,970 -------- -------- $156,735 $106,085 ======== ======== Payable to TPC - Trade account ........... $ 1,818 $ 8,989 - Promissory note ......... 8,800 25,021 Other current liabilities ................ 6,454 6,496 Note payable to TPC (long-term) .......... 12,000 -- Long-term debt, net of current portion ... 53,492 8,464 Capital .................................. 74,171 57,115 -------- -------- $156,735 $106,085 ======== ========
38 40 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 ------- ------- (IN THOUSANDS) Revenues .................................................................. $ 20,517 $10,664 Operating income .......................................................... 10,327 3,401 Net income ................................................................ 4,816 929
(4) INTANGIBLE ASSETS Intangible assets represent the cost paid by Harken Energy Corporation ("HEC"), TPC's former parent, in excess of TPC's net assets at January 1, 1989, and are amortized over twenty-five years using the straight-line method. The balances at December 31, 1996 and 1995 were $5,486,000 and $5,809,000, net of accumulated amortization of $2,582,000 and $2,259,000, respectively. Amortization expense of $323,000 was recorded for each of the years ended December 31, 1996, 1995 and 1994. (5) LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt consists of the following:
DECEMBER 31, ------------------ 1996 1995 -------- -------- (IN THOUSANDS) Notes payable secured by natural gas gathering and processing facilities (A) $ 95,417 $119,000 Senior notes, unsecured (B) ................................................ 35,000 35,000 Revolving credit facility (C) .............................................. 16,500 15,000 Other ...................................................................... 1,836 1,347 -------- -------- 148,753 170,347 Less: Current portion ..................................................... 10,221 23,832 -------- -------- $138,532 $146,515 ======== ========
- ---------------- (A) This represents the Term Loan in the original amount of $120 million payable to a consortium of lenders led by ING Capital incurred in connection with the Seagull Transaction on September 25, 1995 (see Note 2). At December 31, 1996, the balances outstanding of Tranches A and B of the Term Loan were $41,518,000 and $53,899,000 and the effective interest rates at that date were 7.0625% and 8.4375%, respectively. (B) On March 25, 1994, TPC issued $35,000,000 of senior unsecured notes, due March 15, 2004, through a private placement. Interest is paid semi-annually with annual principal payments of $5,000,000 beginning March 15, 1998. Proceeds from the sale of the notes were used to retire, prior to the scheduled repayment, a $19,400,000 balance on TPC's term notes payable to its former bank. As a result of this debt retirement, an extraordinary loss of $195,000 (net of income taxes) was recorded. The interest rate on the notes was initially set at 7.33%. In connection with the financing for the Seagull Transaction (see Note 2), the senior unsecured notes were amended to provide for, among other things, an increase in the interest rate payable from 7.33% to 9.33% per annum (reducible to 8.33% and 7.33% if and when TPC and certain subsidiaries achieve total debt to total capitalization ratios of not more than 60% and 50%, respectively). TPC's total debt to total capitalization ratio was reduced below 60% in the third quarter of 1996; accordingly, the interest rate in effect at December 31, 1996 was 8.33%. 39 41 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (C) On March 25, 1994, TPC entered into a $15,000,000 unsecured revolving credit agreement with its banks, which was subsequently amended and increased to $30,000,000 on December 28, 1995 and $40,000,000 on October 30, 1996. Borrowings under the revolving credit facility mature January 1, 1999. Interest on the credit facility is, at TPC's discretion, either a Eurodollar rate or a base rate, plus a LIBOR rate spread or base rate spread, respectively, as defined in the loan agreements. The base rate is the average of the prime rates publicly announced by The Chase Manhattan Bank, Citibank, N.A., and Morgan Guaranty Trust Company of New York. The base and LIBOR rate spreads for each tranche are calculated based on certain capitalization ratios of TPC. The base rate spread for the tranches can be as high as .5% per annum and as low as 0% per annum and the LIBOR rate spread can be as high as 2.25% per annum and as low as 1.5% per annum. In addition, TPC pays a commitment fee of .375% per annum on the unused portion of the revolving credit facility. The unsecured revolving credit agreement currently requires TPC and certain subsidiaries to maintain a total debt to total capitalization ratio of not more than 70%. With a total debt to total capitalization ratio of 59% (determined as specified in the amended credit agreement), TPC was in compliance with this requirement at December 31, 1996. At December 31, 1996, $16,500,000 of the facility was utilized and the remaining available balance was $23,500,000. TPC is subject to certain financial covenants under each of the above described credit agreements. These agreements require TPC to maintain minimum consolidated net worth, a ratio of current assets to current liabilities of not less than 1 to 1 and other various coverage ratios. TPC was in compliance with such financial covenants, as amended, at December 31, 1996. Maturities of long-term debt for the five fiscal years following December 31, 1996 are as follows: AMOUNT ------------ (IN THOUSANDS) 1997 ........................................... $ 10,221 1998 ........................................... 15,148 1999 ........................................... 31,664 2000 ........................................... 70,598 2001 ........................................... 5,201 Thereafter ...................................... 15,921 -------- $148,753 ======== At December 31, 1995, TPC also had a current note payable to a bank with an outstanding balance of $7,451,000. Such note payable represented financing related to an inventory purchase, storage and resale transaction entered into by TPC in June 1995 with a major midwestern interstate pipeline company. The note bore interest at a rate of approximately 6.6% per annum and was secured by TPC's inventory with a cost (including storage payments) equal to the amount of the outstanding note. The note was paid in three monthly principal installments of $2,483,666 each on January 25, 1996, February 25, 1996, and March 25, 1996; such principal payment dates approximated the pipeline customer's remittance dates to TPC based on the inventory delivery and resale schedule (TPC's resale price to the customer was approximately $250,000 higher than the cost of the inventory). 40 42 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK The following table presents the carrying amounts and estimated fair values of TPC's financial instruments at December 31, 1996 and 1995.
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- (IN THOUSANDS) Assets: Cash and cash equivalents $ 1,536 $ 1,536 $ 6,102 $ 6,102 Liabilities: Long-term debt ........... 148,753 147,554 170,347 169,978 Hedging Financial Instruments: Commodity price hedges ... 866 803 538 736
The following methods and assumptions were used to estimate the fair value of the financial instruments summarized in the table above. The carrying value of trade receivables and trade payables included in the accompanying Consolidated Balance Sheets approximated fair value at December 31, 1996 and 1995. CASH AND CASH EQUIVALENTS - The carrying amounts of cash and cash equivalents approximated fair value due to their short-term nature. DEBT - The fair value of long-term debt is estimated using discounted cash flow analysis, based on the borrowing rate currently available to TPC for loans with similar terms and maturity. COMMODITY PRICE HEDGES - TPC uses futures, option and swap contracts with maturities of eighteen months or less to hedge against the volatility of the price of natural gas purchases and sales. It is TPC's policy to seek as nearly as practicable a fully hedged position on its net natural gas purchase and sale commitments, substantially all of which have pricing terms which are indexed to the NYMEX futures contract. Gains or losses on hedging activities are deferred and recognized as a part of the physical transactions hedged; net gains and losses on hedging activities reflected in income, which are largely offset by net gains and losses on physical transactions, amounted to losses of $866,000 and $3,336,000 in the years ended December 31, 1996 and 1995, respectively. At December 31, 1996, TPC had 483 net open futures contracts and various option contracts which together covered an aggregate of 4,830,000 net MMBtu. The fair value of such contracts is determined by reference to quoted market prices and the net unrealized loss on these instruments was approximately $63,000 at December 31, 1996. (7) REDEEMABLE PREFERRED STOCK SERIES A PREFERRED STOCK - In June 1991, TPC sold and issued 25,000 shares of Series A Preferred Stock to a group of three investors. The aggregate proceeds were $22,500,000. Those investors also purchased shares of Class B Common Stock in connection therewith. See Note 8 - Common Stockholders' Equity. In March 1994, the group of three investors exercised their option to convert their 25,000 shares of Series A Preferred Stock into 3,467,036 shares of Class A Common Stock. The conversion, in conjunction with the Class B Common Stock already owned, resulted in the investors then owning approximately 25% of the common stock of TPC. Immediately prior to year end 1994, one of the three investors purchased all of the Class A and Class B Common Stock of the other two investors. 41 43 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SERIES B PREFERRED STOCK - In May 1991, TPC issued 1,000 shares of its Series B Preferred Stock to its former parent company, HEC (see Note 4), in connection with a distribution of TPC's common stock to the stockholders of HEC. In December 1995, TPC repurchased such shares in exchange for all of HEC's Series C Cumulative Preferred Stock held by TPC. An extraordinary gain of $207,000 (net of income taxes) was recorded on this transaction. (8) COMMON STOCKHOLDERS' EQUITY CLASS A COMMON STOCK - In March 1994, 3,467,036 shares of Class A Common Stock were issued to a group of three investors as a result of their exercise of an option to convert their 25,000 shares of Series A Preferred Stock in Class A Common Stock. See Note 7 - Redeemable Preferred Stock. On November 15, 1995, TPC closed an offering of its Class A Common Stock at a price to the public of $8.50 per share. Of the 3,900,000 shares offered, 3,600,000 were sold by TPC and 300,000 were sold by a stockholder of TPC. On November 20, 1995, the underwriters for the offering purchased an additional 540,000 shares from TPC and 45,000 shares from the selling stockholder to cover overallotments. Net proceeds to TPC from the combined stock sales were approximately $32.7 million. Of this amount, $30 million was used to repay the bridge loan incurred in the Seagull Transaction (see Note 2) and the balance was added to TPC's working capital. On August 23, 1996, TPC was authorized by its Board of Directors to repurchase up to $5 million of its Class A Common Stock over a twelve month period. Pursuant to the Board's authorization, TPC purchased a total of 95,000 shares of its Class A Common Stock at a cost of $803,000 through December 31, 1996. Such repurchased shares have been accounted for as treasury stock. The buyback was financed out of available cash reserves and borrowings under TPC's revolving credit facility. CLASS B COMMON STOCK - In June 1991, TPC sold and issued 565,065 shares of Class B Common Stock to a group of three investors. The aggregate proceeds were $2,500,000 for the common stock. Each share of Class B Common Stock is convertible at any time into one share of TPC Class A Common Stock. The stock was sold in conjunction with the Series A Preferred Stock. The holders of Class B Common Stock are entitled to elect the greater of three directors or two-sevenths of the members (rounded to the next whole number) of TPC's board of directors. An additional 9,079 and 5,819 shares of Class B Common Stock were issued in 1992 and 1993, respectively, in connection with an anti-dilution provision. See Note 7 - Redeemable Preferred Stock. (9) STOCK-BASED COMPENSATION PLANS TPC has two stock option plans for its employees (the "1991 Plan" and the "1994 Plan," collectively referred to as the "Employee Plans") and two stock option plans for its non-employee directors (the "1992 Plan" and the "1995 Plan," collectively referred to as the "Director Plans"). Options granted under the Employee and Director Plans are for a period not to exceed ten years and at an exercise price equal to the fair market value of TPC's Class A Common Stock at the date of the grant. TPC accounts for these plans under APB Opinion No. 25 under which no compensation expense has been recognized in the Consolidated Statements of Operations. Had compensation cost for options issued under these plans in the years ended December 31, 1996 and 1995 been determined consistent with the measurement provisions of SFAS No. 123, TPC's income before extraordinary item, net income and net income per share amounts for such years would have been as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 ------------- ------------------ (IN THOUSANDS, EXCEPT SHARE DATA) Income (Loss) before extraordinary item ..... $4,253 $ (88) Net income .................................. 4,253 119 Net income per share ........................ 0.23 0.01
42 44 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TPC may grant options for a total of up to 3,736,370 shares under the Employee Plans and a total of up to 148,000 shares under the Director Plans. Options for a total of 243,661 shares are available for issue under the Employee Plans and options for a total of 48,000 shares are available for issue under the Director Plans at December 31, 1996. A summary of transactions in the Employee and Director Plans for the three years ended December 31, 1996 is presented below:
SHARES Outstanding, January 1, 1994 (option price $4.16 - $7.25)..................................... 2,305,377 Granted (option price $9.31 - $11.25)...................................................... 860,000 Exercised.................................................................................. (76,993) Cancelled.................................................................................. (138,750) ---------- Outstanding, December 31, 1994................................................................ 2,949,634 Granted (option price $9.12 - $9.38)....................................................... 318,500 Exercised.................................................................................. -- Cancelled.................................................................................. (85,100) ----------- Outstanding, December 31, 1995................................................................ 3,183,034 Granted (option price $8.00 - $8.25)....................................................... 410,100 Exercised.................................................................................. -- Cancelled.................................................................................. (84,316) ----------- Outstanding, December 31, 1996................................................................ 3,508,818 ========= Exercisable December 31, 1994.......................................................................... 1,963,417 December 31, 1995.......................................................................... 2,194,257 December 31, 1996.......................................................................... 2,535,801
Of the 3,508,818 options outstanding at December 31, 1996, 1,807,918 having an exercise price of $4.16 per share expire in May 1997. All of these options are currently exercisable. The remaining 1,700,900 options outstanding at December 31, 1996 have exercise prices ranging between $5.00 and $11.25 per share, with a weighted average exercise price of $9.36 per share. Of these options, 727,883 are currently exercisable and their weighted average exercise price is $9.38 per share. For purposes of meeting the pro forma disclosure requirements of SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: risk-free interest rates of 6.206% and 5.374%; expected volatility of 33% and 26%; and no dividend yield. An expected option term of four years was used for options granted in both 1996 and 1995. Based upon the above assumptions, the weighted average fair value per share of options granted in 1996 and 1995 was $2.92 and $2.77, respectively. 43 45 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) EMPLOYEE STOCK OWNERSHIP PLAN Effective January 1, 1992, TPC established an Employee Stock Ownership Plan (the "ESOP") for eligible employees. In September 1992, the ESOP borrowed $1,034,000 from TPC to purchase 250,000 shares of Class A Common Stock previously owned by HEC (see Note 4). The loan obligation of the ESOP is considered unearned employee compensation and, as such, recorded as a reduction of TPC's stockholders' equity. Compensation expense of $198,000, $69,000 and $275,000 was recorded in 1996, 1995 and 1994, respectively. During the third quarter of 1994, TPC purchased 75,000 shares of its Class A Common Stock. The ESOP purchased these shares from TPC with the proceeds of a loan from TPC. The loan obligation of the ESOP is considered unearned employee compensation and, as such, is recorded as a reduction of TPC's stockholders' equity. Both the loan obligation and the unearned compensation are reduced by the amount of any loan repayments made by the ESOP. (11) INCOME TAXES TPC is subject to federal income tax and certain state income taxes. An analysis of the combined provision for income taxes for 1996, 1995 and 1994 is as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------- ------- -------- (IN THOUSANDS) Current, Federal .................. $ 983 $ 150 $ 1,942 Current, State .................... 50 50 50 Deferred .......................... 1,429 (546) (151) ------- ------- ------- $ 2,462 $ (346) $ 1,841 ======= ======= =======
TPC's effective tax rates for the years ended December 31, 1996 and 1994 were 33% and 37%, respectively, compared to the federal statutory rate of 34%. The effective tax rate for the year ended December 31, 1996 was less than the statutory rate due to a non-recurring credit while the 1994 effective tax rate exceeded the statutory rate primarily due to permanent differences caused by the amortization of intangible assets (see Note 4). In 1995, TPC determined that certain deferred tax liabilities accrued during the former parent company's ownership of TPC (see Note 4) were no longer required, therefore, an adjustment of $610,000 was made to eliminate such liabilities resulting in a negative effective tax rate for the year. Deferred tax liabilities at December 31, 1996 and 1995 are composed of the following:
DECEMBER 31, ----------------- 1996 1995 ------- ------- (IN THOUSANDS) Net deferred tax liability: Accelerated depreciation and other ....... $ 2,959 $ 1,633 Net deferred tax assets: Alternative minimum tax credits .......... (345) (150) ------- ------- Total deferred taxes ............... $ 2,614 $ 1,483 ======= =======
No deferred tax asset valuation allowances were considered to be necessary at December 31, 1996 or 1995. 44 46 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) RELATED PARTY TRANSACTIONS In addition to the advances made to its equity affiliate, MHP (see Note 3), TPC receives natural gas storage services from MHP and in turn, provides certain administrative, financial and other services to MHP. Storage fees paid by TPC to MHP are at contractual rates which are comparable to those rates reflected in MHP's third party storage contracts and amounted to $3,177,000 and $1,888,000 in the years ended December 31, 1996 and 1995, respectively. Charges for services provided by TPC to MHP are based substantially upon contracts approved by TPC and MHP and are meant to approximate the market rate for such services. Contracts covering a substantial portion of such services were cancelled by mutual agreement between TPC and MHP effective July 1, 1996 and the TPC employees who were previously involved in providing these services to MHP became employees of MHP at that date. The aggregate charges for contractual services provided by TPC to MHP in the years ended December 31, 1996 and 1995 were as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ------ ------ (IN THOUSANDS) Services provided to MHP which were continued subsequent to July 1, 1996 ............ $1,641 $4,292 Services provided to MHP which were discontinued on July 1, 1996 .................... 774 1,158 ------ ------ $2,415 $5,450 ====== ======
In 1991, TPC executed a Technical Cooperation Agreement with GDF Technology US, Incorporated ("GDF Tech") a wholly owned subsidiary of Gaz de France, holder of a combined total of 4,046,999 shares of TPC's Class A and Class B Common Stock (see Notes 7 and 8). The agreement granted TPC access to technology via a consulting arrangement which was renewed in 1994. Total fees incurred during 1996, 1995 and 1994 were $478,000, $426,000 and $292,000, respectively. Except for $345,000 of the 1995 fees which were capitalized, such amounts were expensed in the accompanying Consolidated Statements of Operations. The renewed technology agreement with GDF Tech expires in April 1999 and TPC anticipates that total minimum fees of approximately $1,257,000 will be expensed ratably over the remaining term of the agreement, unless the agreement should be terminated early (TPC has the right to cancel the agreement with six months notice to GDF Tech). (13) SEGMENT INFORMATION AND OTHER TPC's operations are comprised of three segments: natural gas marketing, natural gas gathering and processing and natural gas storage. There are no material intersegment sales. Operating profit for each segment includes total revenues less operating expenses (including depreciation) and segment administrative expenses, and excludes corporate administrative expense, interest expense, interest income and income taxes. 45 47 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents information relating to TPC's business segments included in its Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994:
YEARS ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Segment Revenues: Natural gas marketing...................................... $577,249 $286,602 $272,486 Natural gas gathering and processing....................... 32,064 16,720 13,346 Natural gas storage (including equity in earnings of MHP).. 7,979 8,243 8,330 -------- -------- -------- Total............................................... $617,292 $311,565 $294,162 ======== ======== ======== Segment Operating Income: Natural gas marketing...................................... $ 5,406 $ 4,034 $ 6,101 Natural gas gathering and processing....................... 13,703 5,248 3,851 Natural gas storage........................................ 4,993 3,616 1,592 -------- -------- -------- Total............................................... 24,102 12,898 11,544 Corporate administrative expense........................... (7,416) (6,266) (5,238) Interest expense........................................... (13,386) (6,472) (2,063) Interest income............................................ 2,404 1,705 1,092 Net earnings of business transferred....................... (782) (1,908) (777) Other income............................................... 2,584 84 705 -------- -------- -------- Income before income tax and extraordinary item.......... $ 7,506 $ 41 $ 5,263 ======== ======== ========
Included in the natural gas marketing segment's operating income for the years ended December 31, 1996 and 1995 are reductions in the cost of gas sold of approximately $0.9 and $2.7 million as a result of favorable settlements of certain natural gas imbalance positions. These settlements were made with various producers and pipelines and covered imbalance positions through December 31, 1994 and 1993, respectively. The identifiable assets of TPC, by segment, at December 31, 1996 and 1995 are as follows:
DECEMBER 31, ---------------------- 1996 1995 -------- -------- (IN THOUSANDS) Natural gas marketing ............................ $108,930 $ 66,874 Natural gas gathering and processing ............. 172,423 197,178 Natural gas storage .............................. 59,938(A) 107,007(B) -------- -------- Total ......................................... 341,291 371,059 Corporate and other .............................. 7,320 4,857 -------- -------- Total ......................................... $348,611 $375,916 ======== ========
- -------------- (A) Consists principally of investments in and advances to MHP of $49,954, at December 31, 1996. 46 48 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (B) Consists principally of investments in and advances to MHP and assets of business transferred of $52,817,000 and $31,690,000, respectively, at December 31, 1995. Depreciation and amortization expense and capital expenditure information for each segment is as follows:
YEARS ENDED DECEMBER 31, ------------- -------------- ------------- 1996 1995 1994 ------- ----- --------- ----- -------- ---- (IN THOUSANDS) Depreciation and Amortization Expense: Natural gas marketing...................................... $ 72 $ 230 $ 230 Natural gas gathering and processing....................... 10,171 6,717 6,215 Natural gas storage........................................ 10 12 1,345 ---------- ------- ------- Total............................................... 10,253 6,959 7,790 Corporate and other........................................... 961 695 334 ---------- ------- ------- Total............................................... $ 11,214 $ 7,654 $ 8,124 ========== ======= =======
DECEMBER 31, ---------------------------- 1996 1995 --------- ------------ (IN THOUSANDS) Capital Expenditures: Natural gas marketing........................................................ $ -- $ -- Natural gas gathering and processing......................................... 1,374 156,044 Natural gas storage.......................................................... 3,045 1,939 --------- ------------ Total................................................................. 4,419 157,983 Corporate and other............................................................. 5,063 1,092 --------- ------------ Total................................................................. $ 9,482 $ 159,075 ========= ============
Natural gas storage capital expenditures shown above consist principally of land acquisitions made by TPC for future storage project sites. Some such land purchases are expected to be ultimately sold by TPC to MHP, while others will likely be retained by TPC for possible non-natural gas storage projects. SIGNIFICANT CUSTOMERS - Significant customers are those which individually account for more than 10% of TPC's consolidated revenues. For the year ended December 31, 1996, there were no such customers. For the years ended December 31, 1995 and 1994, one natural gas marketing segment customer accounted for 11% and 14%, respectively, of consolidated revenues. 47 49 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) COMMITMENTS AND CONTINGENCIES TPC leases its corporate and certain other office space. Total office and equipment lease expense was $822,000, $721,000 and $576,000 during 1996, 1995 and 1994, respectively. Future minimum rental payments required under such office leases, as well as under two lease agreements that TPC has with MHP for natural gas storage services (see Note 12) as of December 31, 1996, are as follows:
OFFICE AND EQUIPMENT STORAGE LEASES LEASES TOTAL ---------- -------- -------- (IN THOUSANDS) 1997.................................................................... $ 879 $ 3,612 $ 4,491 1998.................................................................... 685 2,913 3,598 1999.................................................................... 569 2,400 2,969 2000.................................................................... 142 2,400 2,542 2001.................................................................... -- 2,400 2,400 Thereafter.............................................................. -- 6,300 6,300 ------ -------- -------- Total minimum payments required......................................... $2,275 $ 20,025 $ 22,300 ====== ======== ========
TPC is currently a party to several lawsuits which, in management's opinion, will not have a significant adverse affect on TPC's financial position, results of operations or cash flows. One such lawsuit involves a case filed in the U.S. District Court for the Southern District of Texas by two plaintiffs in an action against TPC and other defendants. This suit arose out of a gas gathering contract entered into by the parties in January 1989, pursuant to which the plaintiff producers delivered gas for treatment to an offshore gas gathering system which, at the time, was jointly owned by TPC and another company. The subject gathering system is now wholly owned by TPC which assumed full responsibility in connection with the acquisition of the interest previously held by the other defendant. The contract was amended in 1990 and, as amended, provided that the respective parties would make keepwhole payments to each other for any monthly disparities between the amounts of natural gas and condensate delivered by the producers into the gathering system and TPC's subsequent allocations to each producer at the redelivery points. Pursuant to the contract, TPC billed the producers for keepwhole fees commencing in 1991 and the producers paid such amounts to TPC through early 1994. Subsequently, the plaintiff producers filed this action claiming that the keepwhole payments were only to be paid in the event of a shortage at the redelivery point, but not in the event of an overdelivery unless due to misallocation among the several producers on the system. On July 28, 1995, the magistrate assigned by the Court issued a memorandum and recommendation granting summary judgment in favor of TPC. The memorandum extensively discussed the court's interpretation of the subject contract as being in agreement with the construction given to the contract by TPC. The magistrate found that TPC was owed the sums which it has sought in its counterclaim against the plaintiffs under the "keepwhole" provision of the contract. The plaintiffs sought review of the magistrate's rulings by the District Court. On April 25, 1996, the District Court, upon review of the same facts and circumstances, overturned the magistrate's ruling and granted partial summary judgment that the gathering contract was to be construed as requested by the plaintiffs, ordering a refund to them of approximately $1.8 million in previously paid keepwhole fees, together with as yet undetermined attorneys' fees and interest. Following the partial summary judgment, the remaining claims of the plaintiffs were dismissed by agreement of the parties (subject to the plaintiffs' ability to revive them), to permit entry of a final judgment. If a final judgment is entered consistent with the partial summary judgment, TPC intends to defend its position vigorously on appeal to the United States Court of Appeals for the Fifth Circuit, seeking reversal and rendition on several independent grounds. There are several substantial issues to be addressed on appeal which provide the basis for a reversal and remand for new trial. In management's view, based on consultation with 48 50 TPC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) litigation counsel, TPC would likely prevail in such an appeal. Pending entry of a final judgment and appeal, no accrual for a loss from this litigation has been made. (15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Results of operations by quarters for the years ended December 31, 1996 and 1995 are set forth in the following table.
QUARTER ENDED ----------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ----------- ------------ --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Revenues .................................... $ 165,828 $ 151,037 $ 155,365 $ 145,062 Operating income ............................ 6,494 5,025 4,900 7,683 Net income .................................. 1,315 1,715 576 1,438 Per Common Share: Net income .................................. $ .07 $ .09 $ .03 $ .08 1995 Revenues .................................... $ 108,656 $ 65,452 $ 70,127 $ 67,330 Operating income ............................ 6,795 3,101 1,024 1,978 Income (loss) before extraordinary item ..... 456 (693) 316 415 Extraordinary item, net of income tax ....... 207 -- -- -- Net income (loss) ........................... $ 663 $ (693) $ 316 $ 415 Per Common Share: Income (loss) before extraordinary item ..... $ .03 $ (.05) $ .02 $ .03 Extraordinary item .......................... .01 -- -- -- Net income (loss) ........................... $ .04 $ (.05) $ .02 $ .03
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There was no reported disagreement on any matter of accounting principles or procedures of financial statement disclosure in 1996 with TPC's independent public accountants. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning executive officers of TPC is set forth in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant," in reliance on General Instruction G to Form 10-K. Information concerning the directors of TPC is presented below. 49 51 TPC's Board of Directors is currently comprised of nine directors: Jean P. Abiteboul, Larry W. Bickle, W. J. Bowen, Bernard Brelle, Robert Cosson, Roger L. Jarvis, Thomas M. Jenkins, Michael E. McMahon, and James S. Pignatelli. TPC's Certificate of Incorporation and by-laws provide that its directors are to be classified into three classes, with the directors in each class serving for three-year terms and until their successors are elected, except that the initial terms of the directors of TPC expired, or will expire, at the 1996, 1997 and 1998 annual meeting of the stockholders of TPC, depending upon the particular class in which each such director was placed. The terms of the persons presently serving on the Board expire at the annual meetings of stockholders for the years indicated: Messrs. Michael E. McMahon, Roger L. Jarvis and Bernard Brelle: 1997; Messrs. W. J. Bowen, James S. Pignatelli and Jean P. Abiteboul: 1998; and Messrs. Larry W. Bickle, Thomas M. Jenkins and Robert Cosson: 1999. JEAN P. ABITEBOUL, 45, is Vice President, Manager of the Major Projects Department of the International Division of Gaz de France. He has served as President of the United States subsidiary of Gaz de France since its formation in 1991. In addition, M. Abiteboul has acted as Chairman and Chief Executive Officer of NOVERGAZ (1994) Inc., a non-regulated gas company in Montreal, Canada, since May 1994. M. Abiteboul is a director of Northern New England Gas Corporation, Sceptre Resources Limited, and Gaz Metropolitain. M. Abiteboul has served as a director of TPC since 1991. LARRY W. BICKLE, 51, has been Chairman of the Board of Directors and Chief Executive Officer of TPC since December 1990. Further information regarding Mr. Bickle is provided in Item 4 "Executive Officers of the Registrant." W. J. BOWEN, 74, has extensive experience in the energy industry. In May 1992, Mr. Bowen retired as Chairman of the Board of Transco Energy Company after an eighteen year career. Mr. Bowen is also a director of J.B. Poindexter & Co., Inc. and has served as a director of TPC since 1994. BERNARD BRELLE, 44, has been head of the Tariffs and Contracts Department of the Commercial Division of Gaz de France since 1993. From 1990 to 1992 he was Regional Manager of CFM, an affiliate company of Gaz de France. Mr. Brelle has been a director of TPC since 1995. ROBERT COSSON, 47, has been the President of Financial and Jurisdictional Services of Gaz de France since 1990. Mr. Cosson has been a director of TPC since 1991. ROGER L. JARVIS, 42, has been the Chief Executive Officer of Spinnaker Exploration, L.L.C. since December 1996. Prior thereto, Mr. Jarvis was an independent consultant and private investor, and President, Chief Executive Officer and a director of King Ranch, Inc., a privately-held company with interests in agribusinesses, oil and gas exploration and production, real estate development, and retail businesses. Mr. Jarvis has been a director of TPC since 1991. THOMAS M. JENKINS, 46, is Group Vice President, Treasurer and Chief Financial Officer of DPL Inc., the parent company of Dayton Power and Light Company ("DP&L"), which positions he has held since 1990. Mr. Jenkins is also Group Vice President and Chief Financial Officer of DP&L, which positions he has held since 1995. From 1990 to 1995, Mr. Jenkins was Group Vice President and Treasurer of DP&L. Mr. Jenkins has been a director of TPC since 1996. MICHAEL E. MCMAHON, 49, is a Managing Director of Lehman Brothers, Inc. He was a Partner of Aeneas Group, Inc., a wholly owned subsidiary of Harvard Management Company, Inc., from January 1993 to September 1994. From December 1989 through 1992, Mr. McMahon was Managing Director and co-head of the Energy & Chemicals Group of Salomon Brothers Inc. Mr. McMahon also serves as a director of Triton Energy Corporation. Mr. McMahon has been a director of TPC since 1993. JAMES S. PIGNATELLI, 53, has served as Senior Vice President and Chief Operating Officer of Tucson Electric since 1994. Mr. Pignatelli retired from Mission Energy Company in 1993, where he served as the President and 50 52 Chief Executive Officer. Mr. Pignatelli is a director of BWIP International and has served as a director of TPC since 1991. THE BOARD OF DIRECTORS AND ITS COMMITTEES The business and affairs of TPC are managed under the direction of the Board. The Board has responsibility for establishing broad corporate policies and for the overall performance of TPC, rather than day-to-day operating details. The Board met ten times in 1996. The Board has regularly scheduled meetings during the year and meets at other times during the year as necessary to review significant developments affecting TPC and to act on matters requiring Board approval. In 1996, each of the directors attended at least seventy-five percent of the meetings of the Board and the committees on which he served, except for Messrs. Brelle and Cosson whose attendance was below this threshold. BOARD COMMITTEES. The Board has five standing committees which include an Executive Committee, an Audit Committee, a Compensation Committee, a Nominating Committee and a Strategic Planning Committee. Actions taken by a committee of the Board are reported to the Board of Directors at its next meeting. The Executive Committee consists of five directors. Although this Committee has very broad powers, it is intended that this committee only meet to take formal action on a specific matter when it would be impracticable to call a formal meeting of the Board. The Executive Committee, and all other committees of the Board, are prohibited by TPC's by-laws from taking certain major corporate actions. The members of the Executive Committee in 1996 were Messrs. Abiteboul, Bickle, Bowen, Jarvis and Pignatelli. In 1996, there were no Executive Committee meetings. The Audit Committee consists of three nonemployee directors. This committee recommends the appointment of a firm of independent certified public accountants to audit the accounting records of TPC each year. It reviews with representatives of the independent public accountants the auditing arrangements and scope of the independent public accountants' examination of the accounting records, results of those audits, their fees, and any problems identified by the independent public accountants regarding internal accounting controls, together with their recommendations. It also meets with TPC's Chief Financial Officer and its Controller to review reports on the functioning of TPC's programs for compliance with its policies and procedures regarding financial reporting and internal controls. The members of the Audit Committee in 1996 were Messrs. Jarvis, Jenkins and Pignatelli. The Audit Committee met three times in 1996. The Compensation Committee consists of four nonemployee directors. This Committee makes recommendations to the Board of Directors as to the salaries and annual bonuses of the Chief Executive Officer and the other elected officers, and reviews the salaries of certain other senior executives. It makes recommendations to the Board of Directors regarding grants of stock options to elected and other senior executive officers and other eligible employees and consultants, and reviews guidelines for the administration of TPC's incentive compensation programs. It also reviews and makes recommendations to the Board of Directors with respect to proposed compensation or benefits plans or programs, and periodically reviews the operations of such plans or programs. The members of the Compensation Committee in 1996 were Messrs. Abiteboul, Bowen, Jarvis and McMahon. The Compensation Committee met three times in 1996. The Nominating Committee consists of three directors. This Committee identifies, evaluates, and nominates potential individuals to stand for election as directors of TPC as an opening on the Board occurs. The members of the Nominating Committee in 1996 were Messrs. Bickle, Cosson and Jarvis. The Nominating Committee did not meet in 1996. The Strategic Planning Committee consists of five directors. This Committee determines the focus of TPC's annual business plan, as well as establishes and monitors TPC's strategic goals throughout the year. The members of the Strategic Planning Committee in 1996 were Messrs. Abiteboul, Bickle, Bowen, McMahon and Pignatelli. The Strategic Planning Committee met two times in 1996. 51 53 DIRECTOR NOMINATION PROCEDURES. The by-laws provide that nominations for election of directors by the stockholders will be made by the Board or by any stockholder entitled to vote in the election of directors generally. The by-laws require that stockholders intending to nominate candidates for election as directors deliver written notice thereof to the Secretary of TPC not later than eighty days in advance of the meeting of stockholders; provided however, that in the event that the date of the meeting is not publicly announced by TPC by an inclusion in a filing with the Securities and Exchange Commission pursuant to Section 13(a) or 14(a) of the Exchange Act, by mail, or by press release more than ninety days prior to the meeting, notice by the stockholder to be timely must be delivered to the Secretary of TPC not later than the close of business on the tenth day following the day on which such announcement of the date of the meeting was so communicated. The by-laws further require that the notice by the stockholder set forth certain information concerning such stockholder and the stockholder's nominees, including their names and addresses, a representation that the stockholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, the class and number of shares of TPC's stock owned or beneficially owned by such stockholder, and such other information as would be required to be included in a proxy statement soliciting proxies for the election of the nominees of such stockholder and the consent of each nominee to serve as a director of TPC if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with these requirements. Similar procedures prescribed by the by-laws are applicable to stockholders desiring to bring any other business before an annual meeting of stockholders. ITEM 11. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION Employee directors are not compensated for their services as a director of TPC. In 1996, each nonemployee director was paid $3,000 per quarter, $1,000 per Board meeting attended and $500 for each committee meeting attended. Nonemployee directors participate in both the Non-Management Director Stock Option Plan (the "1992 Director Plan") and the 1995 Stock Option Plan for Non-Employee Directors (the "1995 Director Plan"), which were respectively adopted on February 4, 1992 and February 13, 1995. The 1992 Director Plan provides for nonqualified stock options to purchase up to 100,000 Shares, in the aggregate, by TPC's outside directors. The 1995 Director Plan provides for nonqualified stock options to purchase up to 48,000 Shares, in the aggregate, by TPC's outside directors. Under the 1992 Director Plan, each director, on the date of the Board meeting following his initial election to the Board, is granted an option to purchase 10,000 Shares, which option vests ratably over a five year period. Under the 1995 Director Plan, on May 15th of each year (or the first succeeding business day thereafter) each nonemployee director receives an annual option grant to purchase 2,000 Shares, which options also vest ratably over five years. The exercise price for the options granted under both the 1992 Director Plan and the 1995 Director Plan is the fair market value of TPC's Shares on the date of grant. The following table sets forth information with respect to the Chief Executive Officer and the other four most highly compensated executive officers of TPC (the "Named Officers") for the fiscal year ended December 31, 1996. 52 54 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ---------------------------------------------------------- OTHER ANNUAL SHARES ALL OTHER COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS ($)(1) ($)(3) OPTIONS (#) (4) ($) (5) ---- ----------- ------------ ----- --------------- ----------- Larry W. Bickle........................ 1996 162,000 189,200 9,973 35,000 3,136 Chairman of the Board and 1995 157,500 62,235 (2) 10,728 10,000 9,492 Chief Executive Officer 1994 108,000 137,699 12,668 50,000 19,310 John A. Strom.......................... 1996 162,000 189,200 9,973 35,000 3,136 President 1995 157,500 62,235 (2) 10,728 10,000 9,492 1994 108,000 137,699 12,668 50,000 19,310 J. Chris Jones......................... 1996 162,000 189,200 9,973 35,000 3,566 Senior Vice President, Chief 1995 157,500 62,235 (2) 10,728 10,000 9,492 Operating Officer and Chief 1994 108,000 137,699 12,668 50,000 19,310 Financial Officer Ronald H. Benson....................... 1996 84,000 341,000 1,192 15,000 4,224 Vice President-Corporate 1995 84,000 59,485 (2) 243 -- 1,053 Development 1994 3,500 -- -- 50,000 -- Michael E. Calderone................... 1996 106,800 147,050 685 15,000 4,199 Vice President-Gas Marketing 1995 87,508 84,571 (2) 2,322 25,000 9,492 1994 84,000 92,288 3,669 57,125 3,669
- ---------------- (1) Amounts include cash compensation earned and received by the Named Officers as well as amounts deferred under a 401(k) Savings Plan. (2) A portion of each Named Officer's third quarter 1995 bonus was deferred until the first quarter of 1996. The amounts deferred for each of the Named Officers, respectively, was $105,750, $105,750, $105,750, $300,000 and $100,000. (3) Amounts shown include car allowances paid to the Named Officers, the value of financial planning services and the payment of insurance premiums for long-term disability coverage. (4) All options awarded in 1994, 1995 and 1996 were granted under the terms of TPC's 1994 Stock Option Plan (the "1994 Plan"). (5) Amounts shown are derived from TPC contributions to the 401(k) Savings Plan and to TPC's Employee Stock Option Plan (the "ESOP"). The respective amounts paid under each plan are shown in the following table. TPC's ESOP contributions to each of the Named Officers for 1996 will not be calculated until the second quarter of 1997. 53 55
NAME YEAR 401(K) ($) ESOP ($) - ---- ---- --------- ------- Larry W. Bickle 1996 3,136 -- 1995 2,310 7,182 1994 2,310 17,000 John A. Strom 1996 3,136 -- 1995 2,310 7,182 1994 2,310 17,000 J. Chris Jones 1996 3,566 -- 1995 2,310 7,182 1994 2,310 17,000 Ronald H. Benson 1996 4,224 -- 1995 1,053 -- 1994 -- -- Michael E. Calderone 1996 4,199 -- 1995 2,310 7,182 1994 1,785 1,884
The following table shows, as to the Named Officers, information about option grants in the last fiscal year. TPC does not grant any stock appreciation rights. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: a risk-free interest rate of 6.206%, expected volatility of 33%, a dividend yield of 0% and an expected option term of four years. No gain to the options is possible without an increase in stock price which will benefit all stockholders proportionately. Actual gains, if any, on option exercises and common stockholdings are dependent on the future performance of the shares of TPC's Class A Common Stock (the "Shares"). There can be no assurance that the actual realized values will not be greater or less than potential realizable values shown in this table. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS -------------------------------------------------------- PERCENT OF TOTAL SHARES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES BASE PRICE EXPIRATION GRANT DATE NAME GRANTED (#)(1) IN 1996 ($/SH) (2) DATE PRESENT VALUE($) ---- ------------ ---------- ------------- ---------- ---------------- Larry W. Bickle........... 35,000 8.5% 8.25 5/15/06 102,212 John A. Strom............. 35,000 8.5% 8.25 5/15/06 102,212 J. Chris Jones............ 35,000 8.5% 8.25 5/15/06 102,212 Ronald H. Benson.......... 15,000 3.7% 8.25 5/15/06 43,805 Michael E. Calderone...... 15,000 3.7% 8.25 5/15/06 43,805
- ----------------- (1) Options granted under the 1994 Plan. Options generally are nontransferable and vest ratably over four years. (2) The exercise price is the closing market price per share of the Shares on the date of grant, as reported on the New York Stock Exchange Composite Tape. 54 56 The following table shows aggregate fiscal year-end option values for the Named Officers. No options were exercised during the last fiscal year by any of the Named Officers. TPC does not grant any stock appreciation rights. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT YEAR-END OPTIONS AT YEAR-END ($)(1) SHARES ACQUIRED VALUE -------------------------- ---------------------------- NAME ON EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------- ----------- ----------- ------------- ------------ ------------- (#) Larry W. Bickle......... -- -- 567,313 67,500 4,858,317 405,000 John A. Strom........... -- -- 567,313 67,500 4,858,317 405,000 J. Chris Jones.......... -- -- 567,313 67,500 4,858,317 405,000 Ronald H. Benson........ -- -- 25,000 40,000 -- 135,000 Michael E. Calderone.... -- -- 36,013 63,112 10,800 142,200
- ----------------- (1) Based on the closing market price of $9.00 per Share as reported on the New York Stock Exchange Composite Tape for December 31, 1996. These amounts do not reflect the actual amounts, if any, which may be realized in the future upon exercise of stock options and should not be considered indicative of future stock performance. SENIOR EXECUTIVE PERFORMANCE BONUS AND SEVERANCE PACKAGE Pursuant to a resolution of the TPC Board of Directors in November 1996, Messrs. Larry Bickle, John Strom and Chris Jones (the "Senior Executives"), are entitled to receive a cash bonus upon the consummation of a change in control of TPC prior to December 31, 1997, measured by their performance in obtaining a premium to the then current market price for TPC's Shares in such a transaction. If the entire Company is sold for a per Share price equal to $15.50, the Senior Executives will each receive a Performance Bonus equal to two times his Base Amount (being the respective Senior Executive's base amount on the date of the consummation of the change in control as determined in accordance with Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")). A per Share price between $10.50 and $15.50 will entitle each of the Senior Executives to a performance bonus equal to the interpolated value; i.e., four-tenths of their Base Amount for each dollar of per Share value between $10.50 and $15.50. For example, a per Share sales price of $12.00 results in a Performance Bonus equal to six-tenths of the Senior Executive's Base Amount. In addition thereto, if a per Share price in excess of $15.50 is received, each of the Senior Executives will be entitled to an additional one-half of the Base Amount for each dollar of Share value in excess of $15.50. If the entire Company is sold for a per Share price less than or equal to $10.50, the Senior Executives will not receive any performance bonus. Each Senior Executive will also be entitled to a severance payment equal to his respective Base Amount, plus the cost to continue his medical and dental health benefits for up to two years following the consummation of the transaction. The value of the benefits to be paid to any one of the Senior Executives, as a result of a change of control in TPC, shall be limited so as to escape application of the excise tax imposed on excessive change of control payments. CHANGE OF CONTROL AGREEMENTS TPC is a party to a change in control agreement (a "Change in Control Agreement") with certain officers, key employees, affiliate employees and consultants (each a "Named Executive") of TPC. Under the Change in Control Agreement, if, prior to the expiration or termination thereof, a change in control (as defined in the Change in 55 57 Control Agreement) occurs, each Named Executive would be entitled to receive (i) a retention bonus equal to a specified multiple of their Base Amount, and (ii) if, thereafter TPC or, in certain circumstances, the Named Executive, terminates the Named Executive's employment and, in the case of termination by TPC "cause" (as defined in the Change in Control Agreement) for such termination does not exist, a cash severance benefit equal to a specified multiple of the Named Executive's Base Amount, as provided in the respective agreement of each Named Executive. Each Named Executive would also be entitled to COBRA continuation for a period of twenty-four months following such termination at no cost to the Named Executive. In the event that any Named Executive's receipt of all payments under the Change in Control Agreement would subject such Named Executive to the excise tax imposed by Section 4999 of the Code, then the aggregate present value of all payments to such Named Executive shall be reduced to an amount, expressed in present value, which maximizes the aggregate present value of the payment, without causing any payment to be nondeductible by TPC because of Code Section 280G, or subject the Named Executive to such excise tax. The Change in Control Agreements with the Named Executives will expire on November 8, 1997, provided however, that the term shall automatically be extended without further action by the parties for additional one year periods, unless TPC gives a Named Executive six months written notice of its intent not to extend the current term of the respective Change in Control Agreement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT GENERAL The outstanding voting securities of TPC consist of 17,424,252 shares ("Shares") of Class A Common Stock and 579,963 shares of Class B Common Stock (the "Common Stock"), with approximately 3,508,818 Shares reserved for issuance pursuant to outstanding stock options granted by TPC to key employees, directors and consultants. Each Share is entitled to one vote on matters other than the election of directors, in which case the holders of the Class A Common Stock are entitled to elect two members to the Board class being elected each year, and the holder of the Class B Common Stock is entitled to elect one member to the Board class being elected each year. BENEFICIAL OWNERS The following table and the information under "Stockholders' Agreements" below describe the ownership of Shares by each person known by TPC to own beneficially more than five percent of the Shares (including any "group" as that term is used in Section 13(d) (3) of the Exchange Act). Unless otherwise indicated, to TPC's knowledge, such persons have sole voting and investment power with respect to such Shares, and all such Shares are owned beneficially and of record by the person indicated. The table reflects the ownership of such Shares (including Shares that may be acquired within sixty days of March 7, 1997) at March 7, 1997. Certain of the information in the following table and set forth under "Stockholders' Agreements" was taken from materials filed with the Securities and Exchange Commission by certain owners of TPC's capital stock. Certain of the stockholders identified in the following table have entered into agreements regarding the disposition and voting of their capital stock as described under "Stockholders' Agreements" which may cause certain of the parties to such agreements to be deemed to have beneficial ownership of stock subject to such agreements. All of the percentages in the following table assume that the 579,963 outstanding shares of Class B Common Stock have been converted into the same number of Shares. 56 58
SHARES BENEFICIALLY OWNED AT MARCH 7, 1997 ---------------------- PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF CLASS - ------------------------------------ -------- -------- Foreign & Colonial Management Limited (1)............................................... 921,000 5.28% Exchange House Primrose Street London EC2A 2NY, England Gaz de France (2)....................................................................... 4,046,999 23.22% No. 32 Lookerman Square Suite L-100 Dover, Delaware 19901 Miami Valley Leasing, Inc. (3).......................................................... 1,000,000 5.74% Courthouse Plaza Southwest Dayton, Ohio 45402 NAR Group Limited (4)................................................................... 1,546,000 8.87% Citco Building P.O. Box 662 Wickhams Cay Road Town, Tortola British Virgin Islands
- ----------------- (1) Foreign & Colonial Management Limited ("F&C") is an investment advisor wholly owned by Hypo Foreign & Colonial Management (Holdings) Limited ("Holdings"). Both of these entities are organized under the laws of the United Kingdom. F&C and Holdings share voting and dispositive power with respect to the shares indicated as beneficially owned by F&C. (2) The Shares indicated as beneficially owned by Gaz de France ("GDF") are held of record by GDF US INCORPORATED, a Delaware corporation and an indirect wholly owned subsidiary of GDF. M. Abiteboul, a director of TPC, is President of GDF US INCORPORATED. These shares include 579,963 Shares issuable upon conversion of the Class B Shares now owned by GDF. (3) Miami Valley Leasing, Inc., an Ohio corporation ("Miami Valley"), is a wholly owned subsidiary of DPL Inc. ("DPL"), also an Ohio corporation. DPL is also the parent company of Dayton Power & Light Company ("DP&L"), an Ohio corporation engaged in the business of generating, transmitting and selling electric energy and distributing natural gas in the State of Ohio. Mr. Thomas Jenkins is an officer of both DPL and DP&L, however, Mr. Jenkins disclaims any beneficial ownership to the Shares owned by Miami Valley. (4) The Shares beneficially owned by NAR Group Limited ("NAR") are owned of record by Intercontinental Mining & Resources Incorporated, a British Virgin Islands company and a wholly owned subsidiary of NAR. NAR is a private investment holding company that is a joint venture between the family of Mr. Alan Quasha, and Compagnie Financiere Richemont A.G., a Swiss public company engaged in the tobacco, luxury goods, and other businesses. STOCKHOLDERS' AGREEMENTS Effective June 14, 1991, TPC sold an aggregate of 565,065 Class B Shares, and preferred shares that are no longer outstanding, to GDF and certain other entities (which certain other entities no longer own any such shares). In connection with this transaction, Phemus Corporation, Intercontinental Mining & Resources Incorporated, a 57 59 wholly owned subsidiary of NAR Group Limited, and another company that has since sold its Shares, entered into a stockholders' agreement with GDF ("Stockholders' Agreement"). The Stockholders' Agreement provides, among other things, that so long as such stockholders own Shares, they will consult with GDF regarding the nomination of two directors to be elected by holders of the Shares. Such nominees must also be acceptable to TPC. Messrs. Jarvis and Pignatelli serve on TPC's Board in accordance with this arrangement. By letter agreement dated June 12, 1991, TPC agreed with the holders of the Class B Common Stock that if TPC granted any additional options under TPC's 1991 Stock Option Plan (the "1991 Plan") or sold any of the 375,000 Shares held in treasury on that date, TPC would issue additional shares of Class B Common Stock to the holders of such stock equal to five percent of the options granted or treasury stock sold. Pursuant to this agreement and in connection with the grant of additional options under the 1991 Plan, TPC issued 9,079 additional shares of Class B Common Stock in 1992, 5,819 additional shares of Class B Common Stock in 1993 and no additional shares of Class B Common Stock in 1994, 1995 or 1996. MANAGEMENT The table below describes the ownership of Shares by (i) each director of TPC, (ii) the Chief Executive Officer and each of the four most highly compensated executive officers of TPC, and (iii) all officers and directors of TPC as a group. Unless otherwise indicated, to TPC's knowledge, such persons have sole voting and investment power with respect to such shares and all such shares are owned beneficially and of record by the person indicated. The table reflects the ownership of such Shares (including Shares that may be acquired within sixty days after March 7, 1997) at March 7, 1997. Certain of the information in the following table was taken from materials filed with the Securities and Exchange Commission by certain owners of TPC's capital stock. All of the percentages in the following table assume that the 579,963 shares of Class B Common Stock have been converted into the same number of Shares.
SHARES BENEFICIALLY OWNED AT MARCH 7, 1997 ---------------------- PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF CLASS ------------------------------------- --------- --------- Larry W. Bickle (1)...................................................................... 580,293 3.2% John A. Strom (1)......................................................................... 732,642 4.1% J. Chris Jones (1)........................................................................ 634,140 3.5% Ronald H. Benson (1)...................................................................... 27,700 0.2% Michael E. Calderone (1).................................................................. 39,602 0.2% Jean P. Abiteboul (2) (4)................................................................. 8,400 * W. J. Bowen (3)........................................................................... 9,400 * Bernard Brelle (2) (4).................................................................... 2,400 * Robert Cosson (2) (4)..................................................................... 8,400 * Roger L. Jarvis (2)....................................................................... 8,400 * Thomas M. Jenkins (2)(5).................................................................. - - Michael E. McMahon (2).................................................................... 400 * James S. Pignatelli (3)................................................................... 8,900 * All officers and directors as a group (nineteen persons including those listed above) (6) .................................. 2,411,319 12.5%
- ----------------- * Less than 0.1%. 58 60 (1) Shares shown as beneficially owned by Messrs. Bickle, Strom, Jones, Benson, and Calderone include 567,313, 567,313, 567,313, 25,000 and 36,013 Shares, respectively, which each of them has the right to acquire within sixty days after March 7, 1997, through the exercise of stock options. (2) All Shares shown as beneficially owned are Shares which the named director has the right to acquire within sixty days after March 7, 1997, through the exercise of stock options. (3) Shares shown as beneficially owned by Messrs. Bowen and Pignatelli include 5,000 and 500 Shares, respectively, and the right to acquire 4,400 and 8,400 Shares, respectively, within sixty days after March 7, 1997, through the exercise of stock options. (4) Messrs. Abiteboul, Brelle and Cosson are affiliated with GDF, which beneficially owns 4,046,999 Shares, including 579,963 Shares issuable upon conversion of the Class B Shares now owned by GDF. (5) See footnote (3) to the table on page 57. (6) Shares shown as beneficially owned by the officers and directors of TPC as a group include 1,929,716 Shares which such officers and directors have the right to acquire within sixty days after March 7, 1997, through the exercise of stock options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATIONSHIP WITH MHP. In December 1994, TPC formed Market Hub Partners, Inc. and Market Hub Partners, L.P. (collectively referred to as Market Hub Partners or MHP) with subsidiaries of NIPSCO Industries, Inc., New Jersey Resources Corporation, DPL Inc., and Public Service Enterprise Group, Incorporated. Subsidiaries of TPC and these four companies own the stock of Market Hub Partners, Inc., the 1% general partner of Market Hub Partners, L.P., and are the limited partners of Market Hub Partners. MHP owns and operates two natural gas market centers located in Texas and Louisiana and it is anticipated that MHP will construct, own and operate three such additional natural gas market centers. Miami Valley Leasing, Inc. ("Miami Valley"), is a wholly owned subsidiary of DPL Inc. ("DPL") and the beneficial owner of 5.74% of TPC's Shares as of March 7, 1997. Miami Valley Hub Partners, Inc., a wholly owned subsidiary of Miami Valley, is a stockholder of MHP's corporate general partner and a limited partner of MHP. Mr. Thomas M. Jenkins, a director of TPC, is an officer of DPL. DPL is also the parent company of Miami Valley Resources, Inc., an Ohio corporation ("MVR"), which entered into a storage contract with MHP in September 1995 for storage services at MHP's Egan facility in Louisiana. The contract provides MVR with firm monthly withdrawal and injection capacity, with a term that expires in March 1999. The demand charges payable to MHP for the full term of the contract are estimated to be $792,000. The commodity charges payable to MHP under the contract are not currently estimable, as they will depend upon MVR's actual usage of the storage facility. The demand charges and the commodity charges under this contract are comparable with the demand and commodity charges included in storage contracts between MHP and nonaffiliated parties. RELATIONSHIP WITH GDF. In 1991, TPC entered into a Technical Cooperation Agreement with GDF Technology U.S. Incorporated ("GDF Tech"), a wholly owned subsidiary of GDF, a holder of 3,467,036 Shares and 579,963 Class B Shares. The Agreement granted TPC access to technology under a consulting arrangement which was renewed in 1994. In 1996, TPC paid $366,000 in fees to GDF Tech under this Agreement. The renewed technology agreement with GDF Tech expires in April 1999, and may be terminated by TPC at any time upon six months' notice. TPC anticipates that total minimum fees of approximately $1,257,000 will be expensed ratably over the remaining term of the agreement. 59 61 RELATIONSHIP WITH LEHMAN BROTHERS, INC. In November 1996, the Board retained Lehman Brothers, Inc. to assist it in exploring strategic alternatives for increasing shareholder value, including the possible sale or merger of all or part of TPC. Assuming the successful completion of a change in control of TPC, Lehman Brothers will receive a fee from TPC for its services. Mr. McMahon, a director of TPC since 1993, is a managing director of Lehman Brothers. As a result of a change in control of TPC, the vesting of Mr. McMahon's two stock option grants, to acquire a total of 4,000 Shares, will be accelerated. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires TPC's directors and executive officers, and persons who own more than ten percent of a registered class of TPC's equity securities, to file reports of ownership and changes in ownership of shares of TPC's stock with the Securities and Exchange Commission. Directors, officers and greater than ten percent stockholders are required by the Securities and Exchange Commission Regulations to furnish TPC with copies of all Section 16(a) reports they file. Based on TPC's review of the copies of such reports received by it, and written representations from certain reporting persons that no Form 5s were required for those persons, TPC believes that, from January 1 through December 31, 1996, its directors, officers and greater than ten percent stockholders complied with all applicable filing requirements of Section 16(a), with the exceptions of Messrs. Jarvis and Jenkins. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a). The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS Report of Independent Public Accountants........................................................... 29 Consolidated Balance Sheets as of December 31, 1996 and 1995....................................... 30 Consolidated Statements of Operations for the three years ended December 31, 1996.................. 32 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1996........ 33 Consolidated Statements of Cash Flows for the three years ended December 31, 1996.................. 34 Notes to Consolidated Financial Statements......................................................... 35
2. FINANCIAL STATEMENT SCHEDULES None 3. EXHIBITS The following exhibits are included: 60 62
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 2.1 - Purchase and Sale Agreement by and among Seagull Energy Corporation, Amoco Gas Company, Houston Pipeline Company, Enron Gas Processing Company and Mantaray Pipeline Company as Sellers, Seahawk Gathering and Liquids Company as Buyer, and Tejas Power Corporation ("TPC") as Guarantor, dated July 28, 1995 (incorporated by reference to Exhibit 2.1 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 2.2 - First Amendment to Purchase and Sale Agreement dated September 25, 1995 (incorporated by reference to Exhibit 2.2 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 3.1 - Amended and Restated Certificate of Incorporation of Tejas Power Corporation, together with a Certificate of Correction thereto (incorporated by reference to Exhibit 3.3.1 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 3.2 - Certificate of Designation, Preferences and Rights of Series A, 8% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.3 - Certificate of Correction to Certificate of Designation, Preferences and Rights of Series A, 8% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.2.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.4 - Certificate of Designation, Preferences, and Rights of Series A, Class B Common Stock (incorporated be reference to Exhibit 3.3 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.5 - Certificate of Correction to Certificate of Designation, Preferences, and Rights of Series A, Class B Common Stock (incorporated by reference to Exhibit 3.3.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.6 - Certificate of Designation, Preferences, and Rights of the Series B Preferred Stock of Tejas Power Corporation (incorporated by reference to Exhibit 4.2 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 3.7 - Certificate of Correction to Certificate of Designation, Preferences, and Rights of Series A, 8% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.7 to Tejas Power Corporation's Registration Statement, Registration No. 33-55578). 3.8 - Amended and Restated Certificate of Incorporation of Tejas Power Corporation (incorporated by reference to Exhibit 3.3.1 of Tejas Power Corporation's Registration Statement No. 33-37141). 3.9 - Bylaws of Tejas Power Corporation, as amended (incorporated by reference to Exhibit 3.4 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 3.10 - Bylaws of Tejas Power Corporation, as amended and restated (incorporated by reference to Exhibit 3.5.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). *3.11 - Amended and Restated Certificate of Incorporation of TPC Corporation.
61 63
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.1 - Term Facility Credit Agreement among TPC, ING Capital individually as a Facility A Term Lender and as a Facility B Term Lender, and as Term Agent, certain institutions as Facility A Term Lenders and certain institutions as Facility B Term Lenders, dated September 25, 1995 (incorporated by reference to Exhibit 4.1 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.2 - Bridge Facility Credit Agreement among TPC, ING Capital individually as a Bridge Lender and as Bridge Agent and certain institutions as Bridge Lenders, dated September 25, 1995 (incorporated by reference to Exhibit 4.2 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.3 - First Restated Credit Agreement among ING Capital as agent and certain institutions as Lenders, dated September 25, 1995 (incorporated by reference to Exhibit 4.3 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.4 - Amendment to Note Agreement of March 15, 1994 among TPC and the purchasers named therein, dated as of September 25, 1995 (incorporated by reference to Exhibit 4.4 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.5 - Second Amendment to First Restated Credit Agreement dated as of December 28, 1995, by and among Tejas Power Corporation, ING Capital and CIBC, Inc. *4.6 - Third Amendment to First Restated Credit Agreement dated as of October 30, 1996, by and among TPC Corporation, Internationale Nederlanden (U.S.) Capital Corporation, as Agent, CIBC, Inc., as Co-Agent, and the Lenders under the Credit Agreement. *4.7 - Fourth Amendment to Term Facility Credit Agreement dated as of October 30, 1996, by and among TPC Corporation, Internationale Nederlanden (U.S.) Capital Corporation, as Term Agent, and the Term Lenders under the Original Term Agreement. *4.8 - Amendment to Note Agreement dated as of November 15, 1996 between TPC Corporation, Massachusetts Mutual Life Insurance Company and The Travelers Insurance Company. 9 - Stockholders Agreement dated as of June 12, 1991, among Tejas Power Corporation, GDF US INCORPORATED, Aeneas Venture Corporation, Traco International, N.V., and Intercontinental Mining & Resources Incorporated (incorporated by reference to Exhibit 9.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.1 - Joint Venture Agreement among Tejas Power Corporation and Transco Offshore Gathering Company and Amerada Hess Corporation dated February 29, 1988 (incorporated by reference to Exhibit 10.15 to Harken Energy Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1989). 10.2 - Tax Sharing Agreement among Harken Energy Corporation and certain subsidiaries of Harken Energy Corporation (incorporated by reference to Exhibit 10.53 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 10.3 - Master Intercompany Agreement between Harken Energy Corporation and Tejas Power Corporation (incorporated by reference to Exhibit 10.55 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141).
62 64
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.4 - Litigation, Indemnification and Contribution Agreement between Harken Energy Corporation and Tejas Power Corporation (incorporated by reference to Exhibit 10.57 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 10.5 - Tejas Power Corporation 1991 Stock Option Plan (incorporated by reference to Exhibit 4.14 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). 10.6 - Stockholders Agreement dated as of June 12, 1991, between Tejas Power Corporation, GDF US INCORPORATED, Aeneas Venture Corporation, Traco International, N.V., and Intercontinental Mining & Resources Incorporated (incorporated by reference to Exhibit 9 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.7 - Letter dated June 12, 1991, from Tejas Power Corporation to GDF US INCORPORATED, Francarep, Inc., and Petrorep, Inc. relating to obligation to issue additional shares of Class B Common Stock, $0.01 par value per share (incorporated by reference to Exhibit 10.26 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.8 - Gas Storage Contract effective as of November 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company regarding intrastate service (incorporated by reference to Exhibit 10.31 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.9 - Gas Storage Contract effective as of November 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company regarding interstate service (incorporated by reference to Exhibit 10.32 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.10 - Purchase and Sale Agreement effective as of June 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company (incorporated by reference to Exhibit 10.33 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.11 - Assignment and Bill of Sale effective as of June 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company (incorporated by reference to Exhibit 10.34 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.12 - Operating Agreement effective as of June 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company (incorporated by reference to Exhibit 10.35 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.13 - Amendment to Gas Transport Agreement effective as of June 1, 1991, between Tejas Power Corporation and Channel Industries Gas Company (incorporated by reference to Exhibit 10.36 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.14 - Tejas Power Corporation 401(k) Savings Plan (incorporated by reference to Exhibit 10.37 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.15 - Firm Gas Storage Contract effective as of November 1, 1991, between Moss Bluff as Storage Systems and Northern Indiana Public Service Company regarding interstate service (incorporated by reference to Exhibit 10.37 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991).
63 65
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.16 - Firm Gas Storage Contract effective as of November 1, 1991, between Moss Bluff Gas Storage Systems and Northern Indiana Public Service Company regarding intrastate service (incorporated by reference to Exhibit 10.38 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.17 - Gas Purchase Contract effective as of November 1, 1991, between Tejas Power Corporation and Northern Indiana Public Service Company (incorporated by reference to Exhibit 10.39 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.18 - Performance Guaranty Agreement dated November 14, 1991, by Tejas Power Corporation in favor of Northern Indiana Public Service Company (incorporated by reference to Exhibit 10.40 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.19 - Letter Agreement dated November 14, 1991, between Moss Bluff Gas Storage Systems and Northern Indiana Public Service Company regarding financing contingencies (incorporated by reference to Exhibit 10.41 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.20 - Letter Agreement dated November 14, 1991, between Tejas Power Corporation and Northern Indiana Public Service Company regarding operational imbalances (incorporated by reference to Exhibit 10.42 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.21 - Form of Gas Gathering, Separation, Dehydration and Redelivery Service agreement by and between TPC Services, Inc., and Anadarko Petroleum Corporation, Seagull Energy Exploration & Production, Inc., Union Pacific Resources Company, Wolverine Exploration Company, and Energy Service Company (incorporated by reference to Exhibit 10.43 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.22 - Credit Agreement, dated as of November 2, 1992, among Moss Bluff Gas Storage Systems and the Banque Indosuez, New York Branch, individually and as agent (incorporated by reference to Exhibit 10.58 to Tejas Power Corporation's Registration Statement, Registration No. 33-55578). 10.23 - Tejas Power Corporation Employee Stock Ownership Plan and Trust (incorporated by reference to Exhibit 10.37 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1992). 10.24 - Purchase Agreement By and Between MB Acquisition Corporation, Tejas Power Corporation, Moss Bluff Gas Storage Company, Inc., Phibro Gas Properties, Inc., and Phibro Energy USA, Inc. dated July 30, 1993 (incorporated by reference to Exhibit 2 to Tejas Power Corporation's Current Report of Form 8-K dated October 15, 1993 for an event occurring on October 1, 1993). 10.25 - Purchase Agreement between MB Acquisition Corporation and CMS Gulf Coast Storage Company, dated March 11, 1994 (incorporated by reference to Exhibit 2 to Tejas Power Corporation's Current Report on Form 8-K dated March 25, 1994 for an event occurring on March 11, 1994). 10.26 - Letter dated March 30, 1994, from GDF US Incorporated to Tejas Power Corporation (incorporated by reference to Exhibit 7.9 to Tejas Power Corporation's Current Report on Form 8-K dated April 15, 1994 for an event occurring on March 31, 1994).
64 66
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.27 - Agreement of Limited Partnership of Market Hub Partners, L.P. dated as of December 15, 1994 (incorporated by reference to Exhibit 1 to Tejas Power Corporation's Current Report on Form 8-K dated January 4, 1995 for an event occurring on December 21, 1994). 10.28 - Formation Agreement dated as of December 20, 1994 by and between Tejas Power Corporation, Market Hub Partners, L.P. and the MHP subsidiaries (incorporated by reference to Exhibit 2 to Tejas Power Corporation's Current Report on Form 8-K dated January 4, 1995 for an event occurring on December 21, 1994). 10.29 - Technical Cooperation Agreement dated as of April 1, 1994, between Tejas Power Corporation and GDF Technology US Incorporated. 10.30 - Tejas Power Corporation Non-Management Directors Stock Option Plan (incorporated by reference to Exhibit 4.13 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). 10.31 - Tejas Power Corporation 1994 Stock Option Plan (incorporated by reference to Exhibit 4.15 to Exhibit 4.15 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). 10.32 - Tejas Power Corporation 1995 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.16 to Exhibit 4.15 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). *11 - Computation of Earnings Per Share *21 - Subsidiaries of TPC Corporation *23.1 - Consent of Arthur Andersen LLP *24 - Power of Attorney *27 - Financial Data Schedule *99 - Financial Statements of Market Hub Partners Report of Independent Public Accountants Combined Balance Sheets as of December 31, 1996 and 1995 Combined Statements of Operations for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994 Combined Statements of Capital for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994 Combined Statements of Cash Flows for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994 Notes to Combined Financial Statements
- --------------- * Filed herewith (b) Reports on Form 8-K None 65 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, TPC Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1997. TPC CORPORATION (Registrant) By: /s/ LARRY W. BICKLE --------------------------------- LARRY W. BICKLE CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of TPC Corporation and in the capacities indicated on March 10, 1997: SIGNATURES TITLE ---------- ----- /s/ LARRY W. BICKLE Chairman and Chief Executive Officer (Principal - ------------------------- Executive Officer) Larry W. Bickle /s/ J. CHRIS JONES Senior Vice President and Chief Operating and - ------------------------- Financial Officer (Principal Financial Officer) J. Chris Jones /s/ D. HUGHES WATLER, JR. Corporate Controller (Principal Accounting - ------------------------- Officer) D. Hughes Watler, Jr. D. Hughes Watler, Jr., pursuant to powers of attorney which are being filed with this annual report on Form 10-K, has signed below on March 10, 1997, as attorney-in-fact for the following directors of the Registrant, constituting a majority of the Registrant's Board of Directors: Jean P. Abiteboul Roger L. Jarvis Bernard Brelle Thomas M. Jenkins W. Jack Bowen Michael E. McMahon Robert Cosson James S. Pignatelli /s/ D. HUGHES WATLER, JR. ------------------------- D. Hughes Watler, Jr. 68 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 2.1 - Purchase and Sale Agreement by and among Seagull Energy Corporation, Amoco Gas Company, Houston Pipeline Company, Enron Gas Processing Company and Mantaray Pipeline Company as Sellers, Seahawk Gathering and Liquids Company as Buyer, and Tejas Power Corporation ("TPC") as Guarantor, dated July 28, 1995 (incorporated by reference to Exhibit 2.1 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 2.2 - First Amendment to Purchase and Sale Agreement dated September 25, 1995 (incorporated by reference to Exhibit 2.2 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 3.1 - Amended and Restated Certificate of Incorporation of Tejas Power Corporation, together with a Certificate of Correction thereto (incorporated by reference to Exhibit 3.3.1 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 3.2 - Certificate of Designation, Preferences and Rights of Series A, 8% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.3 - Certificate of Correction to Certificate of Designation, Preferences and Rights of Series A, 8% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.2.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.4 - Certificate of Designation, Preferences, and Rights of Series A, Class B Common Stock (incorporated be reference to Exhibit 3.3 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.5 - Certificate of Correction to Certificate of Designation, Preferences, and Rights of Series A, Class B Common Stock (incorporated by reference to Exhibit 3.3.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 3.6 - Certificate of Designation, Preferences, and Rights of the Series B Preferred Stock of Tejas Power Corporation (incorporated by reference to Exhibit 4.2 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 3.7 - Certificate of Correction to Certificate of Designation, Preferences, and Rights of Series A, 8% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.7 to Tejas Power Corporation's Registration Statement, Registration No. 33-55578). 3.8 - Amended and Restated Certificate of Incorporation of Tejas Power Corporation (incorporated by reference to Exhibit 3.3.1 of Tejas Power Corporation's Registration Statement No. 33-37141). 3.9 - Bylaws of Tejas Power Corporation, as amended (incorporated by reference to Exhibit 3.4 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 3.10 - Bylaws of Tejas Power Corporation, as amended and restated (incorporated by reference to Exhibit 3.5.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). *3.11 - Amended and Restated Certificate of Incorporation of TPC Corporation.
69
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 4.1 - Term Facility Credit Agreement among TPC, ING Capital individually as a Facility A Term Lender and as a Facility B Term Lender, and as Term Agent, certain institutions as Facility A Term Lenders and certain institutions as Facility B Term Lenders, dated September 25, 1995 (incorporated by reference to Exhibit 4.1 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.2 - Bridge Facility Credit Agreement among TPC, ING Capital individually as a Bridge Lender and as Bridge Agent and certain institutions as Bridge Lenders, dated September 25, 1995 (incorporated by reference to Exhibit 4.2 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.3 - First Restated Credit Agreement among ING Capital as agent and certain institutions as Lenders, dated September 25, 1995 (incorporated by reference to Exhibit 4.3 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.4 - Amendment to Note Agreement of March 15, 1994 among TPC and the purchasers named therein, dated as of September 25, 1995 (incorporated by reference to Exhibit 4.4 to Tejas Power Corporation's Current Report on Form 8-K dated September 28, 1995 for an event occurring on September 25, 1995). 4.5 - Second Amendment to First Restated Credit Agreement dated as of December 28, 1995, by and among Tejas Power Corporation, ING Capital and CIBC, Inc. *4.6 - Third Amendment to First Restated Credit Agreement dated as of October 30, 1996, by and among TPC Corporation, Internationale Nederlanden (U.S.) Capital Corporation, as Agent, CIBC, Inc., as Co-Agent, and the Lenders under the Credit Agreement. *4.7 - Fourth Amendment to Term Facility Credit Agreement dated as of October 30, 1996, by and among TPC Corporation, Internationale Nederlanden (U.S.) Capital Corporation, as Term Agent, and the Term Lenders under the Original Term Agreement. *4.8 - Amendment to Note Agreement dated as of November 15, 1996 between TPC Corporation, Massachusetts Mutual Life Insurance Company and The Travelers Insurance Company. 9 - Stockholders Agreement dated as of June 12, 1991, among Tejas Power Corporation, GDF US INCORPORATED, Aeneas Venture Corporation, Traco International, N.V., and Intercontinental Mining & Resources Incorporated (incorporated by reference to Exhibit 9.1 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.1 - Joint Venture Agreement among Tejas Power Corporation and Transco Offshore Gathering Company and Amerada Hess Corporation dated February 29, 1988 (incorporated by reference to Exhibit 10.15 to Harken Energy Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1989). 10.2 - Tax Sharing Agreement among Harken Energy Corporation and certain subsidiaries of Harken Energy Corporation (incorporated by reference to Exhibit 10.53 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 10.3 - Master Intercompany Agreement between Harken Energy Corporation and Tejas Power Corporation (incorporated by reference to Exhibit 10.55 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141).
70
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.4 - Litigation, Indemnification and Contribution Agreement between Harken Energy Corporation and Tejas Power Corporation (incorporated by reference to Exhibit 10.57 to E-Z Serve Corporation's and Tejas Power Corporation's Registration Statement, Registration No. 33-37141). 10.5 - Tejas Power Corporation 1991 Stock Option Plan (incorporated by reference to Exhibit 4.14 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). 10.6 - Stockholders Agreement dated as of June 12, 1991, between Tejas Power Corporation, GDF US INCORPORATED, Aeneas Venture Corporation, Traco International, N.V., and Intercontinental Mining & Resources Incorporated (incorporated by reference to Exhibit 9 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.7 - Letter dated June 12, 1991, from Tejas Power Corporation to GDF US INCORPORATED, Francarep, Inc., and Petrorep, Inc. relating to obligation to issue additional shares of Class B Common Stock, $0.01 par value per share (incorporated by reference to Exhibit 10.26 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.8 - Gas Storage Contract effective as of November 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company regarding intrastate service (incorporated by reference to Exhibit 10.31 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.9 - Gas Storage Contract effective as of November 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company regarding interstate service (incorporated by reference to Exhibit 10.32 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.10 - Purchase and Sale Agreement effective as of June 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company (incorporated by reference to Exhibit 10.33 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.11 - Assignment and Bill of Sale effective as of June 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company (incorporated by reference to Exhibit 10.34 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.12 - Operating Agreement effective as of June 1, 1991, between Moss Bluff Gas Storage Systems and Channel Industries Gas Company (incorporated by reference to Exhibit 10.35 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.13 - Amendment to Gas Transport Agreement effective as of June 1, 1991, between Tejas Power Corporation and Channel Industries Gas Company (incorporated by reference to Exhibit 10.36 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.14 - Tejas Power Corporation 401(k) Savings Plan (incorporated by reference to Exhibit 10.37 to Tejas Power Corporation's Registration Statement, Registration No. 33-42302). 10.15 - Firm Gas Storage Contract effective as of November 1, 1991, between Moss Bluff as Storage Systems and Northern Indiana Public Service Company regarding interstate service (incorporated by reference to Exhibit 10.37 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991).
71
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.16 - Firm Gas Storage Contract effective as of November 1, 1991, between Moss Bluff Gas Storage Systems and Northern Indiana Public Service Company regarding intrastate service (incorporated by reference to Exhibit 10.38 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.17 - Gas Purchase Contract effective as of November 1, 1991, between Tejas Power Corporation and Northern Indiana Public Service Company (incorporated by reference to Exhibit 10.39 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.18 - Performance Guaranty Agreement dated November 14, 1991, by Tejas Power Corporation in favor of Northern Indiana Public Service Company (incorporated by reference to Exhibit 10.40 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.19 - Letter Agreement dated November 14, 1991, between Moss Bluff Gas Storage Systems and Northern Indiana Public Service Company regarding financing contingencies (incorporated by reference to Exhibit 10.41 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.20 - Letter Agreement dated November 14, 1991, between Tejas Power Corporation and Northern Indiana Public Service Company regarding operational imbalances (incorporated by reference to Exhibit 10.42 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.21 - Form of Gas Gathering, Separation, Dehydration and Redelivery Service agreement by and between TPC Services, Inc., and Anadarko Petroleum Corporation, Seagull Energy Exploration & Production, Inc., Union Pacific Resources Company, Wolverine Exploration Company, and Energy Service Company (incorporated by reference to Exhibit 10.43 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1991). 10.22 - Credit Agreement, dated as of November 2, 1992, among Moss Bluff Gas Storage Systems and the Banque Indosuez, New York Branch, individually and as agent (incorporated by reference to Exhibit 10.58 to Tejas Power Corporation's Registration Statement, Registration No. 33-55578). 10.23 - Tejas Power Corporation Employee Stock Ownership Plan and Trust (incorporated by reference to Exhibit 10.37 to Tejas Power Corporation's Annual Report on Form 10-K for fiscal year ended December 31, 1992). 10.24 - Purchase Agreement By and Between MB Acquisition Corporation, Tejas Power Corporation, Moss Bluff Gas Storage Company, Inc., Phibro Gas Properties, Inc., and Phibro Energy USA, Inc. dated July 30, 1993 (incorporated by reference to Exhibit 2 to Tejas Power Corporation's Current Report of Form 8-K dated October 15, 1993 for an event occurring on October 1, 1993). 10.25 - Purchase Agreement between MB Acquisition Corporation and CMS Gulf Coast Storage Company, dated March 11, 1994 (incorporated by reference to Exhibit 2 to Tejas Power Corporation's Current Report on Form 8-K dated March 25, 1994 for an event occurring on March 11, 1994). 10.26 - Letter dated March 30, 1994, from GDF US Incorporated to Tejas Power Corporation (incorporated by reference to Exhibit 7.9 to Tejas Power Corporation's Current Report on Form 8-K dated April 15, 1994 for an event occurring on March 31, 1994).
72
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.27 - Agreement of Limited Partnership of Market Hub Partners, L.P. dated as of December 15, 1994 (incorporated by reference to Exhibit 1 to Tejas Power Corporation's Current Report on Form 8-K dated January 4, 1995 for an event occurring on December 21, 1994). 10.28 - Formation Agreement dated as of December 20, 1994 by and between Tejas Power Corporation, Market Hub Partners, L.P. and the MHP subsidiaries (incorporated by reference to Exhibit 2 to Tejas Power Corporation's Current Report on Form 8-K dated January 4, 1995 for an event occurring on December 21, 1994). 10.29 - Technical Cooperation Agreement dated as of April 1, 1994, between Tejas Power Corporation and GDF Technology US Incorporated. 10.30 - Tejas Power Corporation Non-Management Directors Stock Option Plan (incorporated by reference to Exhibit 4.13 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). 10.31 - Tejas Power Corporation 1994 Stock Option Plan (incorporated by reference to Exhibit 4.15 to Exhibit 4.15 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). 10.32 - Tejas Power Corporation 1995 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.16 to Exhibit 4.15 to Tejas Power Corporation's Registration Statement, Registration No. 33-98924). *11 - Computation of Earnings Per Share *21 - Subsidiaries of TPC Corporation *23.1 - Consent of Arthur Andersen LLP *24 - Power of Attorney *27 - Financial Data Schedule *99 - Financial Statements of Market Hub Partners Report of Independent Public Accountants Combined Balance Sheets as of December 31, 1996 and 1995 Combined Statements of Operations for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994 Combined Statements of Capital for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994 Combined Statements of Cash Flows for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994 Notes to Combined Financial Statements
- --------------- * Filed herewith EX-3.11 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.11 CERTIFICATE OF AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TEJAS POWER CORPORATION Tejas Power Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That a meeting of the Board of Directors of Tejas Power Corporation resolutions were duly adopted setting forth a proposed amendment to the Amended and Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, That the Amended and Restated Certificate of Incorporation of this corporation be amended as follows: The name of the corporation is changed to "TPC Corporation." SECOND: That thereafter, pursuant to the resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Tejas Power Corporation has caused this certificate to be signed by Marilyn I. Eckersley, its Assistant Secretary, this 6th day of May, 1996. /s/ Marilyn I. Eckersely -------------------------------- Name: Marilyn I. Eckersley Title: Assistant Secretary EX-4.6 3 3RD AMEND. TO FIRST RESTATED CREDIT AGREEMENT 1 EXHIBIT 4.6 THIRD AMENDMENT TO FIRST RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT TO FIRST RESTATED CREDIT AGREEMENT (this "Amendment") made as of the 30th day of October, 1996, by and among TPC Corporation, a Delaware corporation ("Borrower"), Internationale Nederlanden (U.S.) Capital Corporation ("ING Capital"), as Agent ("Agent"), CIBC Inc., as Co-Agent ("Co-Agent") and the Lenders under the Credit Agreement ("Lenders"), W I T N E S S E T H: WHEREAS, Borrower, Agent, Co-Agent and Lenders entered into that certain First Restated Credit Agreement dated as of September 25, 1995, as amended by that certain First Amendment to First Restated Credit Agreement, effective as of September 25, 1995, and that certain Second Amendment to First Restated Credit Agreement dated as of December 28, 1995 (as amended, the "Original Agreement") for the purpose and consideration therein expressed, whereby ING Capital and CIBC Inc. became obligated to make Loans and have made Loans to Borrower as therein provided; and WHEREAS, Borrower, Agent, Co-Agent and Lenders desire to amend the Original Agreement (i) to increase the Commitment, and (ii) for the other purposes set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement and in consideration of the Loans which may hereafter be made by Lenders to Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. -- Definitions and References Section 1.1. Terms Defined in the Original Agreement. Unless the context otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. Section 1.2. Other Defined Terms. Unless the context otherwise requires, the following terms when used in this Amendment shall have the meanings assigned to them in this Section 1.2. "Amendment" shall mean this Third Amendment to First Restated Credit Agreement. "Amendment Documents" means this Amendment and the Renewal Notes. "Credit Agreement" means the Original Agreement as amended hereby. "Effective Date" has the meaning given it in Section 3.1. "Original Notes" means the "Notes" referred to and defined as such in the Original Agreement. "Renewal Notes" has the meaning given it in Section 3.1(ii). 1 2 ARTICLE II. -- Amendments to Original Agreement Section 2.1. Defined Terms. The definitions of "Borrowing Base", "Borrowing Base Report", "Eligible Inventory" and "Eligible Receivables" in Section 1.1 of the Original Agreement are hereby deleted. The definitions of "Borrower", "Commitment", "Commitment Termination Date" and "Required Hedges" in Section 1.1 of the Original Agreement are hereby amended in their entirety to read as follows: "Borrower" means TPC Corporation (f/k/a Tejas Power Corporation), a Delaware corporation. "Commitment" means the amount of $40,000,000. "Commitment Termination Date" means January 1, 1999, provided, Borrower may, by written request to Agent, Co-Agent and each Lender at any time not less than thirty days prior to the Commitment Termination Date (whether the initial Commitment Termination Date or such date as previously extended by Lenders in their sole discretion pursuant to this proviso), request Lenders to extend the Commitment Termination Date upon the same terms and conditions as set forth herein, and Lenders may, in their individual sole discretion and upon their unanimous agreement, extend the Commitment Termination Date for a period of up to one year. "Required Hedges" means for each Fiscal Quarter listed below, forward, future, swap or hedging contracts, with a Hedging Rate capped at eight percent (8%) per annum, entered into by Borrower pursuant to Section 5.2(p)(ii), in an aggregate notional amount not less than the amount listed below for each such Fiscal Quarter:
Fiscal Quarter Hedged Amount of Indebtedness -------------- ----------------------------- July 1, 1996 to September 30, 1996 $38,500,000 (commencing August 19, 1996) October 1, 1996 to December 31, 1996 $36,500,000 January 1, 1997 to March 31, 1997 $34,500,000 April 1, 1997 to June 30, 1997 $32,500,000 July 1, 1997 to September 30, 1997 $30,500,000 October 1, 1997 to December 31, 1997 $29,500,000 January 1, 1998 to March 31, 1998 $28,500,000 April 1, 1998 to June 30, 1998 $27,500,000 July 1, 1998 to September 30, 1998 $26,500,000 October 1, 1998 to December 31, 1998 $25,500,000
For purposes of this definition, "Hedging Rate" means the rate per annum reported on each day on Telerate Access Service Page 3750 (British Bankers Association Settlement Rate) as the London Interbank Offered Rate for dollar deposits having a three-month term and in an amount of $1,000,000 or more (or, if such Page shall cease to be publicly available or if the information contained on such Page, in Agent's sole judgment, shall cease to accurately reflect such London Interbank 2 3 Offered Rate, such rate as reported by any publicly available source of similar market data selected by Agent that, in Agent's sole judgment, accurately reflects such London Interbank Offered Rate). Section 2.2. Deletion of Borrowing Base Provisions. The following references to "Borrowing Base" are hereby amended to refer instead to "Commitment": Clause (b) of the first sentence of Section 2.1 of the Original Agreement; Second sentence of Section 2.1 of the Original Agreement; First sentence of Section 2.2(b) of the Original Agreement; Last sentence of Section 2.2(b) of the Original Agreement; First sentence of Section 2.7(a) of the Original Agreement; Clause (i) of the first sentence of Section 2.9 of the Original Agreement; and Section 2.9(e). Sections 2.28, 2.29 and 5.1(b)(vii) of the Original Agreement are hereby deleted. Section 2.3. Requests for Advances. The first sentence of Section 2.2(a) of the Original Agreement is hereby amended in its entirety to read as follows: Borrower must give to Agent written notice, or telephonic notice promptly confirmed in writing, of any requested Advances, which notice must be received by Agent not later than 11:00 a.m., New York, New York time, on the date of the requested Advances (or three Business Days prior to the date of the requested Advances if Borrower is desires for all or any part of such Advances to make up a Tranche of LIBOR Rate Portions on such date). Section 2.4. Mandatory Prepayments. Section 2.7(b) of the Original Agreement is hereby deleted. Section 2.5. Letters of Credit. The first sentence of Section 2.11 of the Original Agreement is hereby amended in its entirety to read as follows: Letters of Credit shall be issued solely for Borrower's general corporate purposes, including without limitation for margin call purposes relating to forward, future, swap or hedging contracts as permitted by Section 5.2(p). 3 4 Section 2.6. Limitation on Credit Extensions. Section 5.2(h) of the Original Agreement is hereby amended by adding a new clause (v) at the end thereof, to read as follows: (v) other extensions of credit, advances or loans, so long as the aggregate amount of such extensions of credit, advances and loans made by Borrower and all Restricted Subsidiaries does not exceed $1,000,000. Section 2.7. EBITAD. Section 5.2(o)(ii) of the Original Agreement is hereby amended in its entirety to read as follows: (ii) The ratio of (A) Borrower's and Restricted Subsidiaries' EBITAD to (B) the sum of Debt Service plus scheduled payments of principal (including the principal component of rentals or capitalized leases) on Restricted Debt plus $1,000,000 maintenance capital expenditures for each four-Fiscal Quarter period will not be less than (1) 1.10 to 1 for the four-Fiscal Quarter period ending December 31, 1996; (2) 1.15 to 1 for the four-Fiscal Quarter periods ending on each of March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997; and (3) 1.20 to 1 for the four-Fiscal Quarter period ending March 31, 1998 and each four-Fiscal Quarter period thereafter. Section 2.8. Name Change of Borrower. As of May 6, 1996, Borrower changed its name from Tejas Power Corporation to TPC Corporation. All references to "Borrower" in any Loan Document shall as of such date and thereafter refer to "TPC Corporation, a Delaware corporation". Section 2.9. Consent and Waiver re: Prism; Limited Waiver of EBITAD. Agent, Co-Agent and Lenders hereby (i) consent to the extension of credit by Borrower to PRISM Information I, LLC in the amount of $380,000, as evidenced by a promissory note dated September 13, 1996, secured by certain collateral and maturing on September 13, 1998, and (ii) waive Borrower's breach of Section 5.2(h) of the Credit Agreement thereby and any related Default or Event of Default under Section 7.1(c) of the Credit Agreement. Agent, Co-Agent and Lenders hereby waive (i) Borrower's breach of Section 5.2(o) of the Credit Agreement for the Fiscal Quarter ending September 30, 1996 and (ii) any related Default or Event of Default under Section 7.1(c) of the Credit AgreemeAgent, Co-Agent and Lenders hereby waive (a) Borrower's failure to maintain the Required Hedges, as set forth in Section 5.1(l) of the Credit Agreement, prior to the date hereof and (b) any related Default or Event of Default under Section 7.1(c) of the Credit Agreement. Section 2.10. Exhibits. Exhibits A and B to the Original Agreement are hereby amended in their entirety to read as set forth in Exhibits A and B attached hereto. Exhibit H to the Original Agreement is hereby deleted. ARTICLE III. -- Conditions of Effectiveness Section 3.1. Effective Date. This Amendment shall become effective as of the date first above written (the "Effective Date") when, and only when, (i) Agent shall have 4 5 received, at Agent's office, a counterpart of this Amendment executed and delivered by Borrower and each Lender, (ii) Borrower shall have issued and delivered to Agent, for subsequent delivery to each Lender, a Note with appropriate insertions in the form attached hereto as Exhibit A payable to the order of such Lender on or before January 1, 1999 (the "Renewal Notes"), duly executed on behalf of Borrower, dated the date hereof, and in a principal amount equal to such Lender's Percentage Share, set forth opposite such Lender's name on the signature pages hereto, of the Commitment, and (iii) Agent shall have additionally received all of the following documents, each document (unless otherwise indicated) being dated the date of receipt thereof by Agent, duly authorized, executed and delivered, and in form and substance satisfactory to Agent: (a) Opinion of Counsel for Borrower. Agent shall have received (i) the written opinion of M. Scott Jones, Esq., general counsel of Borrower, dated as of the date of this Amendment, addressed to Agent, Co-Agent and Lenders, substantially in the form of that certain opinion dated September 25, 1995 by M. Scott Jones, Esq. to Agent and Lenders, to the effect that, among other things, this Amendment and each Renewal Note have been duly authorized, executed and delivered by Borrower, and (ii) the written opinion of Baker & Botts, L.L.P., special New York counsel to Borrower, dated as of the date of this Amendment, addressed to Agent, Co-Agent and Lenders, substantially in the form of that certain opinion dated September 25, 1995 by Baker & Botts, L.L.P. to Agent and Lenders, to the effect that, among other things, the Credit Agreement and each Renewal Note constitute the legal, valid and binding obligations of Borrower, enforceable in accordance with their terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and similar laws and to moratorium laws and other laws affecting creditors' rights generally from time to time in effect). (b) Officer's Certificate. Agent shall have received a certificate of a duly authorized officer of Borrower to the effect that all of the representations and warranties set forth in Article IV hereof are true and correct at and as of the time of such effectiveness. (c) Supporting Documents. Agent shall have received (i) a certificate of the Secretary of Borrower dated the date of this Amendment certifying that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of Borrower authorizing the execution, delivery and performance of this Amendment and each Renewal Note and certifying the names and true signatures of the officers of Borrower authorized to sign this Amendment and each Renewal Note, and (ii) such supporting documents as Agent may reasonably request. ARTICLE IV. -- Representations and Warranties Section 4.1. Representations and Warranties of Borrower. In order to induce each Lender to enter into this Amendment, Borrower represents and warrants to Agent, Co-Agent and each Lender that: (a) The representations and warranties contained in Section 4.1 of the Original Agreement are true and correct at and as of the Effective Date. 5 6 (b) Borrower is duly authorized to execute and deliver this Amendment and each Renewal Note and is and will continue to be duly authorized to borrow monies and to perform its obligations under the Credit Agreement. Borrower has duly taken all corporate action necessary to authorize the execution and delivery of this Amendment and each Renewal Note and to authorize the performance of the obligations of Borrower hereunder and thereunder. (c) The execution and delivery by Borrower of this Amendment and each Renewal Note, the performance by Borrower of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby do not and will not conflict with any provision of law, statute, rule or regulation or of the certificate of incorporation and bylaws of Borrower, or of any material agreement, judgment, license, order or permit applicable to or binding upon Borrower, or result in the creation of any lien, charge or encumbrance upon any assets or properties of Borrower. Except for those which have been obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by Borrower of this Amendment and each Renewal Note or to consummate the transactions contemplated hereby and thereby. (d) When duly executed and delivered, each of this Amendment, the Credit Agreement and the Renewal Notes will be a legal and binding obligation of Borrower, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and by equitable principles of general application. (e) The audited annual Consolidated financial statements of Borrower dated as of December 31, 1995 and the unaudited quarterly Consolidated financial statements of Borrower dated as of June 30, 1996 fairly present the Consolidated financial position at such dates and the Consolidated statement of operations and the changes in Consolidated financial position for the periods ending on such dates for Borrower. Copies of such financial statements have heretofore been delivered to Agent, Co-Agent and each Lender. Since December 31, 1995, no material adverse change has occurred in the financial condition or businesses or in the Consolidated financial condition or businesses of Borrower. ARTICLE V. -- Miscellaneous Section 5.1. Ratification of Agreements. The Original Agreement as hereby amended is hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Loan Document shall be deemed to be a reference to the Original Agreement as hereby amended. Any reference to the Notes in any other Loan Document shall be deemed to be a reference to the Renewal Notes issued and delivered pursuant to this Amendment. The execution, delivery and effectiveness of this Amendment and the Renewal Notes shall not, except as expressly provided herein or therein, operate as a waiver of any right, power or remedy of Lenders under the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes or any other Loan Document. 6 7 Section 5.2. Survival of Agreements. All representations, warranties, covenants and agreements of Borrower herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Loans and the issuance and delivery of the Renewal Notes, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by any Related Person hereunder or under the Credit Agreement to any Lender shall be deemed to constitute representations and warranties by, and/or agreements and covenants of, Borrower under this Amendment and under the Credit Agreement. Section 5.3. Delivery of Original Notes. Each Lender shall promptly deliver to Agent, for subsequent delivery to Borrower, the Original Note heretofore delivered to it under the Original Agreement. Section 5.4. Loan Documents. This Amendment and each Renewal Note are each a Loan Document, and all provisions in the Credit Agreement pertaining to Loan Documents apply hereto and thereto. Section 5.5. Governing Law. This Amendment shall be governed by and construed in accordance the laws of the State of New York and any applicable laws of the United States of America in all respects, including construction, validity and performance. Section 5.6. Counterparts. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 7 8 IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. TPC CORPORATION By: /s/ Robert D. Kincaid ------------------------------------------- Robert D. Kincaid, Treasurer Percentage Share INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION, as Agent and a 50% Lender By: /s/ Trond O. Rokholt ------------------------------------------- Trond O. Rokholt, Senior Vice President Percentage Share CIBC INC., as Co-Agent, Issuing Bank and a Lender 50% By: /s/ Robert E. Long ------------------------------------------- Name: Robert E. Long Title: Managing Director Address: 2 Houston Center, Suite 1200 900 Fannin Street Houston, Texas 77010 Attention: Mr. Robert Long Phone: (713) 658-8400 Fax: (713) 658-9922 with a copy to: Canadian Imperial Bank of Commerce Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, Georgia 30339 Attention: Ms. Joan Moseley Phone: (770) 319-4828 Fax: (770) 319-4950
8 9 EXHIBIT A PROMISSORY NOTE 20,000,000 New York, New York October 30, 1996 FOR VALUE RECEIVED, the undersigned, TPC Corporation, a Delaware corporation (herein called "Borrower"), hereby promises to pay to the order of ____________________________________________ (herein called "Lender"), the principal sum of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000), or, if greater or less, the aggregate unpaid principal amount of the Loan made under this Note by Lender to Borrower pursuant to the terms of the Credit Agreement (as hereinafter defined), together with interest on the unpaid principal balance thereof as hereinafter set forth, both principal and interest payable as herein provided in lawful money of the United States of America at the offices of Lender, 135 East 57th Street, New York, New York or at such other place within New York County, New York, as from time to time may be designated by the holder of this Note. This Note (a) is issued and delivered under that certain First Restated Credit Agreement dated September 25, 1995 among Borrower, Internationale Nederlanden (U.S.) Capital Corporation, as Agent, and the lenders named therein (herein, as from time to time supplemented, amended or restated, called the "Credit Agreement"), and is a Note as defined therein, and (b) is subject to the terms and provisions of the Credit Agreement, which contains provisions for payments and prepayments hereunder and acceleration of the maturity hereof upon the happening of certain stated events. Payments on this Note shall be made and applied as provided herein and in the Credit Agreement. Reference is hereby made to the Credit Agreement for a description of certain rights, limitations of rights, obligations and duties of the parties hereto and for the meanings assigned to terms used and not defined herein. For the purposes of this Note, the following terms have the meanings assigned to them below: "Maximum Rate" means at the particular time in question the maximum rate of interest which, under applicable law, may then be charged on this Note. If such maximum rate of interest changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to Borrower from time to time as of the effective time of each change in such maximum rate. If applicable law ceases to provide for such a maximum rate of interest, the Maximum Rate shall be a per annum rate of interest equal to twenty-five percent (25.0%) plus the Base Rate from time to time in effect. "Base Rate Payment Date" means (i) the last day of each March, June, September and December of each year, beginning December 31, 1996, and (ii) any day on which past due interest or principal is owed hereunder and is unpaid. If the terms hereof or of the Credit Agreement provide that payments of interest or 1 10 principal hereon shall be deferred from one Base Rate Payment Date to another day, such other day shall also be a Base Rate Payment Date. "LIBOR Rate Payment Date" means, with respect to any LIBOR Rate Portion: (i) the day on which the related Interest Period ends (and, if such Interest Period is longer than three months, the three-month anniversary of the first day of such Interest Period), and (ii) any day on which past due interest or past due principal is owed hereunder with respect to such LIBOR Rate Portion and is unpaid. If the terms hereof or of the Credit Agreement provide that payments of interest or principal with respect to such LIBOR Rate Portion shall be deferred from one LIBOR Rate Payment Date to another day, such other day shall also be a LIBOR Rate Payment Date. The principal amount of this Note, together with all unpaid accrued interest hereon, shall be due and payable in full on January 1, 1999. The Base Rate Portion of the Loan (exclusive of any past due principal or interest) from time to time outstanding shall bear interest on each day outstanding at the Base Rate in effect on such day. On each Base Rate Payment Date Borrower shall pay to the holder hereof all unpaid interest which has accrued on the Base Rate Portion to but not including such Base Rate Payment Date. Each LIBOR Rate Portion of the Loan (exclusive of any past due principal or interest) shall bear interest on each day during the related Interest Period at the related LIBOR Rate in effect on such day. On each LIBOR Rate Payment Date relating to such LIBOR Rate Portion Borrower shall pay to the holder hereof all unpaid interest which has accrued on such LIBOR Rate Portion to but not including such LIBOR Rate Payment Date. All past due principal and past due interest owed under this Note shall bear interest on each day outstanding at the Late Payment Rate in effect on such day, and such interest shall be due and payable daily as it accrues. Notwithstanding the foregoing provisions of this paragraph, if at any time the rate at which interest is payable on this Note (considering together all portions of the Loan and the interest payable thereon) exceeds the Maximum Rate, this Note shall bear interest at the Maximum Rate only but shall continue to bear interest at the Maximum Rate until such time as the total amount of interest accrued hereon equals (but does not exceed) the total amount of interest which would have accrued hereon had there been no Maximum Rate applicable hereto. Notwithstanding the foregoing paragraph and all other provisions of this Note, in no event shall the interest payable hereon, whether before or after maturity, exceed the maximum interest which, under applicable law, may be charged on this Note, and this Note is expressly made subject to the provisions of the Credit Agreement which more fully set out the limitations on how interest accrues hereon. If this Note is placed in the hands of an attorney for collection after default, or if all or any part of the indebtedness represented hereby is proved, established or collected in any court or in any bankruptcy, receivership, debtor relief, probate or other court proceedings, Borrower and all endorsers, sureties and guarantors of this Note jointly and severally agree to pay reasonable attorneys' fees and collection costs to the holder hereof in addition to the principal and interest payable hereunder. 2 11 Borrower and all endorsers, sureties and guarantors of this Note hereby severally waive demand, presentment, notice of demand and of dishonor and nonpayment of this Note, protest, notice of protest, notice of intention to accelerate the maturity of this Note, declaration or notice of acceleration of the maturity of this Note, diligence in collecting, the bringing of any suit against any party and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any trustee or any holder hereof, whether before or after maturity. THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW), EXCEPT TO THE EXTENT THE SAME ARE GOVERNED BY APPLICABLE FEDERAL LAW. This Note is given in renewal, extension and increase, but not in novation or extinguishment, of that certain Promissory Note dated December 28, 1995 by Borrower in the aggregate original principal amount of $15,000,000, payable to the order of Lender. TPC CORPORATION By: ---------------------------- Robert D. Kincaid, Treasurer 3 12 EXHIBIT B REQUEST FOR ADVANCES Reference is made to that certain First Restated Credit Agreement dated as of September 25, 1995 (as from time to time amended, the "Agreement"), by and among TPC Corporation ("Borrower"), Internationale Nederlanden (U.S.) Capital Corporation, as Agent, and the Lenders named therein. Terms which are defined in the Agreement are used herein with the meanings given them in the Agreement. Pursuant to the terms of the Agreement Borrower hereby requests Lenders to make Advances to Borrower in the aggregate principal amount of $__________ and specifies ____________, 199__, as the date Borrower desires for Lenders to make such Advances and to deliver to Borrower the proceeds thereof. To induce Lenders to make Advances, Borrower hereby represents, warrants, acknowledges, and agrees that: (a) The officer of Borrower signing this instrument is the duly elected, qualified and acting officer of Borrower as indicated below such officer's signature hereto having all necessary authority to act for Borrower in making the request herein contained. (b) The representations and warranties of Borrower set forth in the Agreement and the other Loan Documents are true and correct on and as of the date hereof (except to the extent that the facts on which such representations and warranties are based have been changed by the transactions contemplated by the Agreement), with the same effect as though such representations and warranties had been made on and as of the date hereof. (c) There does not exist on the date hereof any condition or event which constitutes a Default or Event of Default which has not been waived in writing as provided in Section 9.1(a) of the Agreement; nor will any such Default or Event of Default exist upon Borrower's receipt and application of the Advances requested hereby. Borrower will use the Advances hereby requested in compliance with Section 2.3 of the Agreement. (d) Except to the extent waived in writing as provided in Section 9.1(a) of the Agreement, Borrower has performed and complied with all agreements and conditions in the Agreement required to be performed or complied with by Borrower on or prior to the date hereof, and each of the conditions precedent to an Advance contained in the Agreement remains satisfied. (e) The Loan Documents have not been modified, amended or supplemented by any unwritten representations or promises, by any course of dealing, or by any other means not provided for in Section 9.1(a) of the Agreement. The Agreement and the other Loan Documents are hereby ratified, approved, and confirmed in all respects. (f) The outstanding Utilized Credit, after the making of the Advances requested hereby, will not be in excess of the Commitment on the date requested for the making of such Advances. The officer of Borrower signing this instrument hereby certifies that, to the best of his knowledge after due inquiry, the above representations, warranties, acknowledgements, and agreements of Borrower are true, correct and complete. IN WITNESS WHEREOF, this instrument is executed as of ____________, 199__. TPC CORPORATION By: -------------------------------------- Name: Title: 4 EX-4.7 4 4TH AMEND. TO TERM FACILITY CREDIT AGREEMENT 1 EXHIBIT 4.7 FOURTH AMENDMENT TO TERM FACILITY CREDIT AGREEMENT This FOURTH AMENDMENT TO TERM FACILITY CREDIT AGREEMENT (this "Amendment") made as of the 30th day of October, 1996, by and among TPC CORPORATION, a Delaware corporation ("Borrower"), INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION, a Delaware corporation, as Term Agent ("Term Agent"), and the Term Lenders under the Original Term Agreement ("Term Lenders"). W I T N E S S E T H: WHEREAS, Borrower, Term Agent and Term Lenders have entered into that certain Term Facility Credit Agreement dated as of September 25, 1995, as amended by that certain First Amendment to Term Facility Credit Agreement, effective as of September 25, 1995 that certain Second Amendment to Term Facility Credit Agreement dated December 6, 1995, and that certain Third Amendment to Term Facility Credit Agreement dated August 19, 1996 (as so amended, the "Original Term Agreement"), for the purpose and consideration therein expressed, whereby Term Lenders made loans to Borrower as therein provided; and WHEREAS, Borrower, Term Agent and Term Lenders desire to amend the Original Term Agreement for the purposes described herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Term Agreement and in consideration of the loans which may hereafter be maintained by Term Lenders to Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. Definitions and References Section 1.1. Terms Defined in the Original Term Agreement. Unless the context otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Term Agreement shall have the same meanings whenever used in this Amendment. Section 1.2. Other Defined Terms. Unless the context otherwise requires, the following terms when used in this Amendment shall have the meanings assigned to them in this Section 1.2. "Amendment" shall mean this Fourth Amendment to Term Facility Credit Agreement. "Term Agreement" shall mean the Original Term Agreement as amended hereby. 1 2 ARTICLE II. Amendments to Original Term Agreement Section 2.1. Repayment of Term Loans. Section 2.7(a) of the Original Term Agreement is hereby amended in its entirety to read as follows: (a) Repayment of Facility A Term Loans. Borrower shall repay the principal of the Facility A Term Loans in installments on the last day of each March, June, September and December, commencing December 31, 1996, with the final installment being due and payable on or before June 30, 2000. Each such installment shall be the lesser of (i) the remaining outstanding principal of the Facility A Term Loans on such date or (ii) the following amounts: December 31, 1996 $2,500,000 March 31, 1997 $2,500,000 June 30, 1997 $2,500,000 September 30, 1997 $2,500,000 December 31, 1997 $2,500,000 March 31, 1998 $2,500,000 June 30, 1998 $2,500,000 September 30, 1998 $2,500,000 December 31, 1998 $2,500,000 March 31, 1999 $2,500,000 June 30, 1999 $2,500,000 September 30, 1999 $2,500,000 December 31, 1999 $2,500,000 March 31, 2000 $2,500,000 June 30, 2000 $9,017,648
In any event all unpaid principal and interest on the Facility A Term Notes shall be due and payable in full on the final maturity of June 30, 2000. Section 2.2. Restricted Debt. Section 5.2(a)(v) of the Original Term Agreement is hereby amended in its entirety to read as follows: (v) Debt under the Revolving Credit Agreement, and renewals, refinancings or extensions thereof; provided, the principal amount of such Debt shall not at any time exceed $40,000,000 and such Debt shall at all times be on an unsecured basis. Section 2.3. Limitation on Credit Extensions. Section 5.2(h) of the Original Term Agreement is hereby amended by adding a new clause (v) at the end thereof, to read as follows: (v) other extensions of credit, advances or loans, so long as the aggregate amount of such extensions of credit, advances and loans made by Borrower and all Restricted Subsidiaries does not exceed $1,000,000. 2 3 Section 2.4. EBITAD. Section 5.2(o)(ii) of the Original Term Agreement is hereby amended in its entirety to read as follows: (ii) The ratio of (A) Borrower's and Restricted Subsidiaries' EBITAD to (B) the sum of Debt Service plus scheduled payments of principal (including the principal component of rentals or capitalized leases) on Restricted Debt plus $1,000,000 maintenance capital expenditures for each four-Fiscal Quarter period will not be less than (1) 1.10 to 1 for the four-Fiscal Quarter period ending December 31, 1996; (2) 1.15 to 1 for the four-Fiscal Quarter periods ending on each of March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997; and (3) 1.20 to 1 for the four-Fiscal Quarter period ending March 31, 1998 and each four-Fiscal Quarter period thereafter. Section 2.5. Consent and Waiver re: Prism; Limited Waiver of EBITAD. Term Agent and Term Lenders hereby (i) consent to the extension of credit by Borrower to PRISM Information I, LLC in the amount of $380,000, as evidenced by a promissory note dated September 13, 1996, secured by certain collateral and maturing on September 13, 1998, and (ii) waive Borrower's breach of Section 5.2(h) of the Term Agreement thereby and any related Default or Event of Default under Section 7.1(c) of the Term Agreement. Term Agent and Term Lenders hereby waive (i) Borrower's breach of Section 5.2(o) of the Term Agreement for the Fiscal Quarter ending September 30, 1996 and (ii) any related Default or Event of Default under Section 7.1(c) of the Term Agreement. ARTICLE III. Conditions of Effectiveness Section 3.1. Effective Date. This Amendment shall become effective as of the date first above written when, and only when, (i) Term Agent shall have received, at Term Agent's office, a counterpart of this Amendment executed and delivered by Borrower and each Term Lender and (ii) Term Agent shall have additionally received all of the following documents, each document (unless otherwise indicated) being dated the date of receipt thereof by Term Agent, duly authorized, executed and delivered, and in form and substance satisfactory to Term Agent: (a) Officer's Certificate. Term Agent shall have received a certificate of a duly authorized officer of Borrower to the effect that all of the representations and warranties set forth in Article IV hereof are true and correct at and as of the time of such effectiveness. (b) Supporting Documents. Term Agent shall have received (i) a certificate of the Secretary of Borrower dated the date of this Amendment certifying that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of Borrower authorizing the execution, delivery and performance of this Amendment and certifying the names and true signatures of the officers of Borrower authorized to sign this Amendment and (ii) such supporting documents as Term Agent may reasonably request. 3 4 ARTICLE IV. Representations and Warranties Section 4.1. Representations and Warranties of Borrower. In order to induce each Term Lender to enter into this Amendment, Borrower represents and warrants to each Term Lender that: (a) The representations and warranties contained in Section 4.1 of the Term Agreement are true and correct at and as of the time of the effectiveness hereof. (b) Each Related Person is duly authorized to execute and deliver this Amendment and Borrower is and will continue to be duly authorized to borrow monies and to perform its obligations under the Term Agreement. Each Related Person has duly taken all corporate action necessary to authorize the execution and delivery of this Amendment and to authorize the performance of the obligations of such Related Person hereunder. (c) The execution and delivery by each Related Person of this Amendment, the performance by each Related Person of its obligations hereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or regulation or of the articles or certificate of incorporation and bylaws or partnership agreement of any Related Person, or of any material agreement, judgment, license, order or permit applicable to or binding upon any Related Person, or result in the creation of any lien, charge or encumbrance upon any assets or properties of Related Persons. Except for those which have been obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by each Related Person of this Amendment or to consummate the transactions contemplated hereby. (d) When duly executed and delivered, each of this Amendment and the Term Agreement will be a legal and binding obligation of each Related Person, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and by equitable principles of general application. (e) The audited annual Consolidated financial statements of Borrower dated as of December 31, 1995 and the unaudited quarterly Consolidated financial statements of Borrower dated as of June 30, 1996 fairly present the Consolidated financial position at such dates and the Consolidated statement of operations and the changes in Consolidated financial position for the periods ending on such dates for Borrower. Copies of such financial statements have heretofore been delivered to each Term Lender. Since December 31, 1995, no material adverse change has occurred in the financial condition or businesses or in the Consolidated financial condition or businesses of Borrower. 4 5 ARTICLE V. Miscellaneous Section 5.1. Ratification of Agreements. The Original Term Agreement as hereby amended is hereby ratified and confirmed in all respects. Any reference to the Term Agreement in any Term Loan Document shall be deemed to be a reference to the Original Term Agreement as hereby amended. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Term Lenders under the Term Agreement, the Term Notes, or any other Term Loan Document nor constitute a waiver of any provision of the Term Agreement, the Term Notes or any other Term Loan Document. Section 5.2. Survival of Agreements. All representations, warranties, covenants and agreements of Borrower herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Term Loans, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by any Related Person hereunder or under the Term Agreement to any Term Lender shall be deemed to constitute representations and warranties by, and/or agreements and covenants of, Borrower under this Amendment and under the Term Agreement. Section 5.3. Term Loan Documents. This Amendment is a Term Loan Document, and all provisions in the Term Agreement pertaining to Term Loan Documents apply hereto. Section 5.4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York and any applicable laws of the United States of America in all respects, including construction, validity and performance. Section 5.5. Counterparts. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 5 6 IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. TPC CORPORATION By: /s/ Robert D. Kincaid ----------------------------------- Robert D. Kincaid, Treasurer INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION, as Term Agent and a Term Lender By: /s/ Trond O. Rokholt ----------------------------------- Trond O. Rokholt, Vice President CIBC, INC. By: /s/ Gary C. Gaskill ----------------------------------- Name: Gary C. Gaskill Title: Authorized Signatory BANK OF SCOTLAND By: /s/ Catherine M. Oniffrey ----------------------------------- Name: Catherine M. Oniffrey Title: Vice President 6 7 CREDIT LYONNAIS CAYMAN ISLAND BRANCH By: /s/ Pascal Poupelle ----------------------------------- Name: Pascal Poupelle Title: Authorized Signature THE FIRST NATIONAL BANK OF BOSTON By: /s/ Virginia Ryan ----------------------------------- Name: Virginia Ryan Title: Vice President DEN NORSKE BANK AS By: /s/ Byron L. Cooley ----------------------------------- Name: Byron L. Cooley Title: First Vice President By: /s/ Charles E. Hall ----------------------------------- Name: Charles E. Hall Title: First Vice President WELLS FARGO BANK (TEXAS) NATIONAL ASSOCIATION (f/k/a First Interstate Bank of Texas, N.A.) By: /s/ Ann M. Rhoads ----------------------------------- Ann M. Rhoads, Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED By: /s/ Satoru Otsubo ----------------------------------- Name: Satoru Otsubo Title: Joint General Manager BANK OF SCOTLAND By: /s/ Catherine M. Oniffrey ----------------------------------- Name: Catherine M. Oniffrey Title: Vice President 7 8 CONSENT AND AGREEMENT Each of the undersigned Guarantors hereby consents to the following: 1. The provisions of this Fourth Amendment to Term Facility Credit Agreement, and the transactions contemplated herein and therein. Each of the undersigned Guarantors hereby ratifies and confirms the Guaranty (Term Facility) dated as of September 25, 1995 made by it in favor of ING Capital, individually and as Term Agent, and in favor of Term Lenders, and any and all Security Documents and other Term Loan Documents executed by the undersigned Guarantors in connection therewith, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. SEAHAWK GATHERING & LIQUIDS COMPANY, a Delaware corporation By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President SEAHAWK TRANSMISSION COMPANY, f/k/a Seagull Transmission Company, a Texas corporation By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President SEAHAWK PIPELINE & MARKETING COMPANY, f/k/a Seagull Pipeline & Marketing Company, a Delaware corporation By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President SEAHAWK PROCESSING COMPANY, f/k/a Seagull Processing Company, a Delaware corporation By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President 8 9 SEAHAWK NATURAL GAS COMPANY, f/k/a Seagull Natural Gas Company, a Delaware corporation By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President SEAHAWK INDUSTRIAL PIPELINE COMPANY, f/k/a Seagull Industrial Pipeline Company, a Texas corporation By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President SEAHAWK CAVALLO INVESTMENT COMPANY, f/k/a Amoco Cavallo Investment Company, a Delaware corporation By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President CAVALLO PIPELINE COMPANY, a Texas general partnership By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President of Seahawk Cavallo Investment Company (f/k/a Amoco Cavallo Investment Company), general partner, as representative of Seahawk Cavallo Investment Company to Management Committee of Cavallo Pipeline Company By: /s/ J. Chris Jones --------------------------------------- J. Chris Jones, Vice President of Seahawk Industrial Pipeline Company (f/k/a Seagull Industrial Pipeline Company), general partner, as representative of Seahawk Industrial Pipeline Company to Management Committee of Cavallo Pipeline Company SEAHAWK SHORELINE SYSTEM, f/k/a Seagull Shoreline System, a Texas general partnership By: /s/ Ronald H. Benson --------------------------------------- Ronald H. Benson, President of Seahawk Transmission Company (f/k/a Seagull Transmission Company), general partner, as representative of Seahawk Transmission Company to Management Committee of Seahawk Shoreline System By: /s/ J. Chris Jones --------------------------------------- J. Chris Jones,Vice President of Seahawk Pipeline & Marketing Company (f/k/a Seagull Pipeline & Marketing Company), general partner, as representative of Seahawk Pipeline & Marketing Company to Management Committee of Seahawk Shoreline System 9 EX-4.8 5 AMEND. TO NOTE AGREEMENT DATED 11/15/96 1 EXHIBIT 4.8 ================================================================================ TPC CORPORATION (FORMERLY TEJAS POWER CORPORATION) AMENDMENT TO NOTE AGREEMENT Dated as of November 15, 1996 Re: Note Agreement Dated as of March 15, 1994 and $35,000,000 Aggregate Principal Amount of Senior Notes Due March 15, 2004 ================================================================================ 2 TPC CORPORATION (FORMERLY TEJAS POWER CORPORATION) AMENDMENT TO NOTE AGREEMENT Re: Note Agreement Dated as of March 15, 1994 and $35,000,000 Aggregate Principal Amount of Senior Notes Due March 15, 2004 Dated as of November 15, l996 To the Purchasers Named on Schedule I hereto Ladies and Gentlemen: Reference is made to the Note Agreement dated as of March 15, l994, as heretofore amended, (the "Note Agreement") between TPC Corporation, a Delaware corporation (formerly Tejas Power Corporation) (the "Company"), and you, under and pursuant to which $35,000,000 aggregate principal amount of Senior Notes Due March 15, 2004 (the "Notes") were originally issued. The Company desires to have the Holders of the Notes (the "Holders") waive certain Defaults under the Note Agreement and consent to the amendment of certain provisions of the Note Agreement as set forth below in the manner herein provided. SECTION 1. WAIVER. Section 1.1. Waiver The Holders hereby waive (a) any Default or Event of Default which may exist under Section 5.7(a) of the Note Agreement (i) for the fiscal quarter ended September 30, 1996; provided that the ratio of Income Available for Debt Service to Debt Service for such period shall have been not less than 1.12 to 1; and (ii) for the fiscal quarter ending December 31, 1996; provided that the ratio of Income Available for Debt Service to Debt Service for such period shall be not less than 1.15 to 1; and (b) any Default or Event of Default which may exist but for the amendments to the Note Agreement hereinafter set forth. 3 SECTION 2. AMENDMENT TO EXHIBIT B OF THE NOTE AGREEMENT. Section 2.1. Amendment to Exhibit B of the Note Agreement. Paragraph 14 of Exhibit B to the Note Agreement shall be amended by inserting the phrase "to the extent the same would result in a violation of Regulation G." at the end of the second sentence. SECTION 3. AMENDMENTS TO SECTION 5 OF THE NOTE AGREEMENT. Section 3.1. Amendment to Section 5.9. Section 5.9 of the Note Agreement shall be amended by the addition thereto of a new clause "(i)" which shall read as follows: (i) Liens on the Seagull Collateral pursuant to the Seagull Loan Agreements. Section 3.2. Amendment to Section 5.12. Section 5.12 of the Note Agreement shall be amended by the addition thereto of a new clause "(i)" which shall read as follows: (i) Investments by TPC Gathering & Transmission Company in Seahawk Gathering & Liquids Company represented by the Seahawk Notes. Section 3.3. Amendment to Section 5.13. Clause "(b)" of Section 5.13 of the Note Agreement shall be amended in its entirety to read as follows: (b) Guaranties by the Seahawk Subsidiaries of the obligations incurred by the Company, the Seahawk Subsidiaries and TPC Gathering and Transmission Company in connection with the Seagull Acquisition under the Seagull Loan Agreements. Section 3.4. Amendment to Section 5.15. Section 5.15 of the Note Agreement shall be amended by addition thereto of the phrase hereinafter set forth immediately following the word "Affiliate" in the last line thereof: or if no such comparable transaction exists, then on terms which are fair and equitable to the Company. SECTION 4. AMENDMENTS TO SECTION 8.1 OF THE NOTE AGREEMENT. Section 4.1. Amendment to Definition of "Subsidiary". The second sentence of the definition of "Subsidiary" shall be amended in its entirety to read as follows: "Subsidiary" shall mean a subsidiary of the Company whose financial statements are consolidated with the financial statements of the Company in accordance with GAAP. -2- 4 Section 4.2. Amendment to Definition of "Unrestricted Subsidiary". The definition of "Unrestricted Subsidiary" shall be amended by the addition thereto of a new sentence which shall read as follows: For purposes of determinations pursuant to Section 5.12, Market Hub Partners, L.P. shall be deemed to be an Unrestricted Subsidiary. Section 4.3. Amendment to Definition of "Debt Service". The definition of "Debt Service" shall be amended by adding the following sentence after the last sentence of the definition: For purposes of determinations pursuant to clause (ii) above, Debt Service shall not include (i) any principal payments on Debt which by the terms of the agreement pursuant to which such Debt has been issued may be reborrowed; or (ii) any scheduled payments or prepayments on Debt made with the sale of equity or the issuances of new Debt (including any renewal or extension of outstanding Debt). Section 4.4. Additional Definitions. Section 8.1 of the Note Agreement shall be amended by inserting the following definitions in Section 8.1 in the correct alphabetical order: "Seagull Collateral" shall mean property of any kind (whether now existing or hereafter acquired) and which was generally or specifically described in the Seagull Loan Agreement and the related Security Documents as in effect on September 25, 1995. Capitalized terms used in this definition shall have the meaning set forth in the Seagull Loan Agreements. "Seahawk Notes" shall mean collectively, (i) that certain Intercompany Note (Term A Facility) dated as of September 25, 1995, made by Seahawk Gathering & Liquids Company payable to the order of TPC Gathering & Transmission Company in the original principal amount of $60 million; and (ii) that certain Intercompany Note (Term B Facility) dated as of September 25, 1995, made by Seahawk Gathering & Liquids Company payable to the order of TPC Gathering & Transmission Company in the original principal amount of $60 million. SECTION 5. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants that all representations and warranties set forth in Exhibit A to this Amendment to Note Agreement are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. SECTION 6. CONDITIONS PRECEDENT. The effectiveness and validity of this Amendment is subject to the satisfaction of the following conditions precedent: (a) Each Holder shall have received the following, all of which must be satisfactory in form and substance to such Holder: -3- 5 (i) this Amendment to Note Agreement, duly executed by the Company; and (ii) an opinion of Baker & Botts, L.L.P., counsel to the Company, to the effect that this Amendment to Note Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). (b) This Amendment to Note Agreement shall have been executed and delivered by the Holders of 51% in the aggregate principal amount of outstanding Notes. SECTION 7. MISCELLANEOUS. Section 7.1. Effective Date; Ratification. The amendments contemplated by this Amendment to Note Agreement shall be effective as of the date (the "Effective Date") upon which (a) all conditions set forth in Section 6 hereof have been satisfied, (b) the Company consummates the proposed amendment of its credit facilities with certain lenders, (c) each Purchaser shall have received a copy of such amendment entered into by the Company and those certain lenders, and (d) the fees and expenses of Chapman and Cutler shall have been paid by the Company. Except as amended herein, the terms and provisions of the Note Agreement are hereby ratified, confirmed and approved in all respects. Section 7.2. Successors and Assigns. This Amendment to Note Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Holders and to the benefit of their successors and assigns, including each successive holder or holders of any Notes. Section 7.3. Counterparts. This Amendment to Note Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together one and the same instrument. Section 7.4. Fees and Expenses. Whether or not the Effective Date occurs, the Company agrees to pay all reasonable fees and expenses of the Holders and special counsel to the Holders in connection with the preparation of this Amendment to Note Agreement. Section 7.5. No Legend Required. Any and all notices, requests, certificates and other instruments including, without limitation, the Notes, may refer to the Note Agreement or the Note Agreement dated as of March 15, l994 without making specific reference to this Amendment to Note Agreement, but nevertheless all such references shall be deemed to include this Amendment to Note Agreement unless the context shall otherwise require. -4- 6 Section 7.6. Governing Law. THIS AMENDMENT TO NOTE AGREEMENT AND THE NOTES SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Section 7.7. Waivers by the Company. THE COMPANY WAIVES (A) THE RIGHT TO TRIAL BY JURY (WHICH EACH HOLDER OF NOTES HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AMENDMENT TO NOTE AGREEMENT, THE NOTE AGREEMENT OR THE NOTES; (B) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON-PAYMENT, INTENT TO ACCELERATE, ACCELERATION, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL DOCUMENTS, INSTRUMENTS, AND GUARANTIES AT ANY TIME HELD BY THE HOLDERS OF NOTES (OR ANY AGENT THEREFOR) ON WHICH THE COMPANY MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER THE HOLDERS OF NOTES MAY DO IN THIS REGARD; AND (C) NOTICE OF ACCEPTANCE HEREOF. THE COMPANY ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO THE HOLDERS' ENTERING INTO THIS AMENDMENT TO NOTE AGREEMENT AND THAT THE HOLDERS ARE RELYING UPON THE FOREGOING WAIVERS IN THEIR FUTURE DEALINGS WITH THE COMPANY. THE COMPANY WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AMENDMENT TO NOTE AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. -5- 7 IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Note Agreement as of the day and year first above written. TPC CORPORATION By /s/ Robert D. Kincaid ----------------------------------- Robert D. Kincaid Its Treasurer Accepted as of November 15, l996 MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By /s/ Richard C. Morrison ----------------------------------- Richard C. Morrison Its Managing Director THE TRAVELERS INSURANCE COMPANY By /s/ Robert M. Mills ----------------------------------- Robert M. Mills Its Investment Officer -6- 8 SCHEDULE I
NAME OF NOTEHOLDER PRINCIPAL AMOUNT OF NOTES OUTSTANDING Massachusetts Mutual Life Insurance Company $20,000,000 The Travelers Insurance Company $15,000,000
SCHEDULE 1 (to Amendment to Note Agreement) 9 REPRESENTATIONS AND WARRANTIES The Company represents and warrants to each Purchaser as follows: 1. Corporate Organization and Authority. The Company, and each Restricted Subsidiary, is a corporation or partnership, as the case may be, duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. 2. Transaction is Legal and Authorized. The execution, delivery and performance of the Amendment to Note Agreement and compliance by the Company with all of the provisions of the Amendment to Note Agreement: (a) are within the corporate powers of the Company; (b) will not violate any provisions of any law or any order of any court or governmental authority or agency and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under the Certificate of Incorporation or By-laws of the Company or any indenture or other agreement or instrument to which the Company is a party or by which it may be bound or result in the imposition of any Liens or encumbrances on any property of the Company; and (c) have been duly authorized by proper corporate action on the part of the Company (no action by the stockholders of the Company being required by law, by the Certificate of Incorporation or By-laws of the Company or otherwise), executed and delivered by the Company and the Amendment to Note Agreement constituted the legal, valid and binding obligation, contract and agreement of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 3. No Defaults. On the Effective Date of the Amendment to the Note Agreement (after giving effect thereto) no Default or Event of Default (as defined in the Note Agreement) has occurred and is continuing. Neither the Company nor any Restricted Subsidiary is in default in the payment of principal or interest on any Debt or is in default under any instrument or instruments or agreements under and subject to which any Debt has been issued, and no event has occurred and is continuing under the provisions of any such instrument or agreement which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. 4. Governmental Consent. No approval, consent or withholding of objection on the part of any regulatory body, state, Federal or local, is necessary in connection with the execution and delivery by the Company of the Amendment to Note Agreement or compliance by the Company with any of the provisions of the Amendment to Note Agreement. EXHIBIT A (to Amendment to Note Agreement) EX-11 6 COMPUTATION OF EARNINGS PER SHARE 1 TPC CORPORATION AND SUBSIDIARIES EXHIBIT 11: COMPUTATION OF EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 ----------- ----------- Average common shares outstanding ............................................ 18,072,851 14,424,257 Net effect of dilutive stock options - based on the treasury stock method using average market price .......................................... 621,753 1,184,653 ----------- ----------- Weighted average shares outstanding .......................................... 18,694,604 15,608,910 =========== =========== Income Before Extraordinary Item ............................................. $ 5,044,000 $ 494,000 Extraordinary Item, net of income tax provision of $107,000 in 1995 .......... -- 207,000 ----------- ----------- Net income ................................................................... $ 5,044,000 $ 701,000 =========== =========== Income per Common Share Before Extraordinary Item ............................ $ .27 $ .04 Extraordinary Item ........................................................... -- .01 ----------- ----------- Net income per common share .................................................. $ .27 $ .05 =========== ===========
EX-21 7 SUBSIDIARIES OF TPC CORPORATION 1 TPC CORPORATION AND SUBSIDIARIES EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
NAME JURISDICTION - ---- ------------ TPC Electric Corporation ................................... Delaware Evangeline Development Company ........................... Delaware Allison Development Company .............................. Delaware TPC Facilities, Inc. ....................................... Delaware TPC Pipeline, Inc. ......................................... Texas TPC Information, Inc. ...................................... Delaware Matagorda Island Area Gathering System ..................... Texas TPC Services, Inc. ......................................... Delaware TPC Gathering & Transmission Company ....................... Delaware Seahawk Gathering & Liquids Company ...................... Delaware Seahawk Cavallo Investment Company ..................... Delaware Seahawk Pipeline & Marketing Company ................... Delaware Seahawk Natural Gas Company .......................... Delaware Seahawk Industrial Pipeline Company .................. Texas Seahawk Cavallo Pipeline Company ................... Texas Seahawk Transmission Company ......................... Texas Seahawk Shoreline System ........................... Texas Seahawk Processing Company ........................... Delaware TPC Gas Storage Services, Inc. ............................. Delaware Moss Bluff Development Corporation ....................... Delaware MB Acquisition Corporation ............................... Delaware Farmington Properties, Inc. .............................. Pennsylvania Wolverine Land & Development Corporation ................. Michigan Tioga Gas Storage Company ................................ Delaware Market Hub Partners, Inc. .............................. Delaware Moss Bluff Hub Partners, Inc. ....................... Delaware Egan Hub Partners, Inc. ............................. Delaware Mistex Hub Partners, Inc. ........................... Delaware Grands Lacs Hub Partners, Inc. ...................... Delaware NE Hub Partners, Inc. ............................... Delaware TPC Gas Storage Services, L.P. ........................... Delaware Market Hub Partners, L.P. .............................. Delaware Moss Bluff Hub Partners, L.P. ....................... Delaware Egan Hub Partners, L.P. ............................. Delaware Mistex Hub Partners, L.P. ........................... Delaware Copiah County Storage Company ................... Texas MS-1 Distribution & Storage Corporation ......... Mississippi Grands Lacs Hub Partners, L.P. ...................... Delaware NE Hub Partners, L.P. ............................... Delaware
EX-23.1 8 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into TPC Corporation's previously filed Registration Statement on Form S-8 File No. 33-98924. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Houston, Texas March 10, 1997 EX-24 9 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY Each of the undersigned directors of TPC Corporation, a Delaware corporation (the "Corporation"), hereby constitutes and appoints D. Hughes Watler, Jr. and J. Chris Jones, and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution in the premises, for him and on his behalf in his name, place, and stead, in his capacity as a director of the Corporation, to sign, execute, and file an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, under the Securities Exchange Act of 1934, as amended, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any state or other regulatory authority, and granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing required and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the 10th day of March, 1997. Name and Signature /s/ Jean P. Abiteboul /s/ Roger L. Jarvis - ---------------------------------- ------------------------------------------ Jean P. Abiteboul Roger L. Jarvis /s/ Larry W. Bickle /s/ Thomas M. Jenkins - ---------------------------------- ------------------------------------------ Larry W. Bickle Thomas M. Jenkins /s/ Bernard Brelle /s/ Michael E. McMahon - ---------------------------------- ------------------------------------------ Bernard Brelle Michael E. McMahon /s/ W. Jack Bowen /s/ James S. Pignatelli - ---------------------------------- ------------------------------------------ W. Jack Bowen James S. Pignatelli /s/ Robert Cosson - ---------------------------------- Robert Cosson
EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,536 0 107,028 0 13,451 124,527 220,292 49,464 348,611 104,455 138,532 0 0 185 102,695 348,611 617,292 617,292 593,190 593,190 (3,210) 0 13,386 7,506 2,462 5,044 0 0 0 5,044 0.27 0.27
EX-99 11 FINANCIAL STATEMENTS OF MARKET HUB PARTNERS 1 EXHIBIT 99 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Partners of Market Hub Partners: We have audited the accompanying combined balance sheets of Market Hub Partners (see Note 1) as of December 31, 1996 and 1995, and the related combined statements of operations, capital and cash flows for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994. These financial statements are the responsibility of the management of Market Hub Partners. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Market Hub Partners as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the two years ended December 31, 1996 and for the period from inception (December 21, 1994) to December 31, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 6, 1997 2 MARKET HUB PARTNERS COMBINED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1996 1995 ----------- --------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 638 $ 872 Restricted cash 721 1,172 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 3,121 1,549 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,031 1,774 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . 270 188 -------- -------- Total Current Assets . . . . . . . . . . . . . . . . . 6,781 5,555 -------- -------- Property and Equipment: Natural gas storage facilities . . . . . . . . . . . . . . . . . 124,968 83,107 Construction in progress . . . . . . . . . . . . . . . . . . . . 26,493 16,087 Less accumulated depreciation . . . . . . . . . . . . . . . . (5,525) (1,634) -------- -------- 145,936 97,560 -------- -------- Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,018 2,970 -------- -------- $156,735 $106,085 ======== ======== LIABILITIES AND CAPITAL Current Liabilities: Current portion of long-term debt . . . . . . . . . . . . . . . . $ 4,200 $ 1,350 Accounts payable: Trade and other . . . . . . . . . . . . . . . . . . . . . . . 15 2,371 Partners and affiliates (including accrued interest on note payable to TPC) 1,818 8,989 Note payable to TPC . . . . . . . . . . . . . . . . . . . . . . . 8,800 25,021 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . -- 94 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,239 2,681 -------- -------- Total Current Liabilities . . . . . . . . . . . . . . . 17,072 40,506 Note payable to TPC . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 -- Long-Term Debt, net of current portion . . . . . . . . . . . . . . . 53,492 8,464 Capital 74,171 57,115 -------- -------- $156,735 $106,085 ======== ========
The accompanying Notes to Combined Financial Statements are an integral part of these statements. 2 3 MARKET HUB PARTNERS COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION ----------------------- (DECEMBER 21, 1994) 1996 1995 TO DECEMBER 31, 1994 ---------- --------- --------------------- (IN THOUSANDS) Revenues: Salt cavern storage ......................................... $ 15,670 $ 7,528 $ -- Pipeline storage and transportation ......................... 1,804 2,700 115 Other revenue ............................................... 3,043 436 -- -------- -------- -------- Total revenue ............................................... 20,517 10,664 115 -------- -------- -------- Operating Expense: Operations and maintenance .................................. 3,970 3,586 49 Plant administrative expense ................................ 2,082 1,802 -- Depreciation and amortization ............................... 4,138 1,875 21 -------- -------- -------- Total costs and expenses .................................... 10,190 7,263 70 -------- -------- -------- Operating Income .............................................. 10,327 3,401 45 Other Income (Expense): General and administrative expense .......................... (2,094) (1,717) (703) Interest expense (including an extraordinary loss of $452,000 on early extinguishment of debt in 1996) .......... (3,589) (1,267) (18) Interest income ............................................. 172 512 14 -------- -------- -------- Net Income (Loss) ............................................. $ 4,816 $ 929 $ (662) ======== ======== ========
The accompanying Notes to Combined Financial Statements are an integral part of these statements. 3 4 MARKET HUB PARTNERS COMBINED STATEMENTS OF CAPITAL
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION --------------------------------- (DECEMBER 21, 1994) 1996 1995 TO DECEMBER 31, 1994 --------------- --------------- --------------------- (IN THOUSANDS) Contributions of assets by TPC ........... $ -- $ (139) $ 24,227 Cash contributions by other partners ..... 12,240 19,760 13,000 Net Income (Loss) ........................ 4,816 929 (662) --------------- --------------- --------------- Net Increase in Capital .................. 17,056 20,550 36,565 Balance, Beginning of Period ............. 57,115 36,565 -- --------------- --------------- --------------- Balance, End of Period ................... $ 74,171 $ 57,115 $ 36,565 =============== =============== ===============
The accompanying Notes to Combined Financial Statements are an integral part of these statements. 4 5 MARKET HUB PARTNERS COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION ---------------------------------------- (DECEMBER 21, 1994) 1996 1995 TO DECEMBER 31, 1994 ------------------ ------------------ --------------------- (IN THOUSANDS) Cash Flows from Operating Activities: Net Income (Loss) .................................... $ 4,816 $ 929 $ (662) Depreciation and amortization ..................... 4,138 1,875 21 Adjustments to reconcile net income to net cash flows from operating activities: Decrease (increase) in Restricted Cash ............ 451 (146) -- Decrease (increase) in Accounts Receivable ........ (1,572) (981) -- (Increase) decrease in Inventory and Prepaid ...... (339) (1,799) -- Expenses Increase (decrease) in Trade Payables and Other ... (2,798) (2,425) -- Liabilities Increase (decrease) in payable to partners and .... (7,171) 8,326 655 affiliates Other ............................................. 40 (135) -- ------------------ ------------------ ------------------ Net Cash Provided by (Used in) Operating ..... (2,435) 5,644 14 ------------------ ------------------ ------------------ Activities Cash Flows from Investing Activities: Capital and Other Asset additions .................... (43,770) (39,186) -- ------------------ ------------------ ------------------ Cash Flows from Financing Activities: Capital contributions ................................ 12,240 19,760 13,000 Net increase (decrease) in Note Payable to TPC ....... (4,221) 2,799 227 Issuance of long-term debt (net of expenses of ....... 58,407 -- -- Repayments of long-term debt ......................... (20,455) (1,386) -- ------------------ ------------------ ------------------ Net Cash Provided by Financing Activities .... 45,971 21,173 13,227 ------------------ ------------------ ------------------ Net Increase (Decrease) in Cash and Cash ............. (234) (12,369) 13,241 Equivalents Cash and Cash Equivalents at Beginning of Period ..... 872 13,241 -- ------------------ ------------------ ------------------ Cash and Cash Equivalents at End of Period ........... $ 638 $ 872 $ 13,241 ================== ================== ================== Supplemental Disclosure: Cash paid during the period for interest, net of ..... $ 4,549 $ 1,068 $ -- amounts capitalized
The accompanying Notes to Combined Financial Statements are an integral part of these statements. 5 6 MARKET HUB PARTNERS NOTES TO COMBINED FINANCIAL STATEMENTS (1) ORGANIZATION AND CONTROL The accompanying financial statements of Market Hub Partners ("MHP") is a combined presentation of the balance sheets and statements of operations and cash flows of Market Hub Partners, Inc. ("MHI"), a Delaware corporation, and Market Hub Partners, L.P. ("MHL"), a Delaware limited partnership, each formed on December 21, 1994. MHP was formed to own, construct and operate underground caverns capable of storing natural gas and related facilities capable of injecting and withdrawing stored gas at high rates of delivery. TPC Corporation ("TPC"), a Delaware corporation, formed MHP with subsidiaries of NIPSCO Industries, Inc., New Jersey Resources Corporation, DPL Inc., and Public Service Enterprise Group, Incorporated. Subsidiaries of TPC and these four companies, on a pro rata basis, own the stock of MHI, the 1% general partner of MHL, and are the limited partners of MHL. TPC contributed its interests in five market center projects (in varying stages of operation or development) to MHP through a series of mergers between the TPC subsidiaries, through which it previously conducted its gas storage business, and subsidiaries of MHP. The interests contributed by TPC include its market center facilities, market center locations, development plans, permits, leases and signed storage service contracts, as well as associated long-term debt and other liabilities, relating to its five market center projects as of March 31, 1994 (herein referred to as the "Effective Date"). See Note 5 - Long-term Debt and Note Payable to TPC for a description of advances made by TPC after the Effective Date. TPC's four partners committed to contribute $45,000,000 to MHP over a period extending from 1994 to 1996, all of which was contributed by July 1996. TPC's interest in net income is approximately 61% at commencement of MHP operations and will increase to approximately 70% at such time as two of the initial partners with reversionary interests receive distributions from MHP equal to 150% of their cumulative capital contributions. MHP owns and operates natural gas market centers located in Texas and Louisiana and it is anticipated that MHP will construct, own and operate up to three such additional natural gas market centers. The services that MHP markets or anticipates marketing include "unbundled" high deliverability storage services, cash market trading, real time title tracking and other hub services. The customers for these "unbundled" services include natural gas producers, marketers, pipelines, local distribution companies and end users. MHP's revenue, profitability and future rate of growth are substantially dependent upon the supply and demand for natural gas, the pace of natural gas industry deregulation at both the federal and state levels, and the current and future positions regarding expiration of customer contractual commitments for both firm transportation and storage services. Such factors are largely beyond MHP's control. MHP has a small administrative staff located in Leesburg, Virginia, near Washington, D.C., which is responsible for managing the business affairs of MHP. Through June 30, 1996, many of the day-to-day operating activities at each of the market centers and storage locations were performed under contract by employees of TPC and its affiliates and were governed by various service agreements covering project development services, construction management services, field operating services, storage sales services, gas title information and administration services, financing support services, business support services and technology access services. Effective July 1, 1996, MHP established another office in Houston, Texas, and the TPC employees who were previously involved in providing project development services, construction management services, storage sales services and gas title information and administrative services to MHP became employees of MHP. Accordingly, the contracts between TPC and MHP relating to those services were canceled. The remaining service contracts between TPC and MHP for accounting, financial, field operating and technology access services were not affected. Under the terms of the Agreement of Limited Partnership, certain decisions require the approval of TPC and at least two other partners. Such matters principally focus on decisions involving financing, acquisitions or divestitures and approval of operating budgets. 6 7 MARKET HUB PARTNERS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRESENTATION AND PRINCIPLES OF COMBINATION - The accompanying financial statements include the combined accounts of MHI and MHL and their respective subsidiaries. MHP's interests in various gas storage joint ventures have been proportionately consolidated. Material intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of demand deposits and highly liquid investments purchased with an original maturity of three months or less. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject MHP to concentration of credit risk consist primarily of temporary cash investments and trade receivables derived principally from uncollateralized sales to customers in the pipeline and natural gas utility industries. The concentration of credit risk in these industries affects MHP's overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. INVENTORIES - Inventories of natural gas are carried at the lower of weighted average cost or market value. PROPERTY AND EQUIPMENT - Property and equipment contributed to MHP was contributed at the historical cost basis net of related accumulated depreciation at the date of contribution. Depreciation of storage facilities and equipment (whether contributed or subsequently acquired) is provided using the straight-line method over estimated useful lives of the assets ranging from fifteen to thirty years. Other property is depreciated on the straight-line method over applicable estimated useful lives. Additions, renewals, and betterments that materially add to productive capacity or extend the life of an asset are capitalized. Expenditures for routine maintenance, repairs, and renewal costs are expensed as incurred. Interest is capitalized during the construction period of major facilities and amounted to $1,868,100 and $1,966,300 in the years ended December 31, 1996 and 1995, respectively. In 1996, MHP adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Since adoption, SFAS No. 121 has had no impact on MHP's financial statements. INCOME TAXES - MHI has various wholly-owned incorporated subsidiaries and interests in related limited partnerships. Because no stockholder owns more than 80% of MHI, the corporation files a separate federal income tax return and as such is responsible for its own income tax liabilities. The tax liabilities of MHI are immaterial. MHL is a limited partnership, and the applicable tax liability or benefit is the responsibility of the individual general or limited partners. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements relate primarily to the depreciable lives of property and equipment. (3) DESCRIPTION OF MARKET CENTER PROJECTS MOSS BLUFF FACILITY. This facility, which is located near Houston, Texas, began operations in 1990, prior to TPC's formation of MHP. Through July 3, 1996, Moss Bluff Gas Storage Systems ("MBGSS"), was the partnership that owned the facility, with MHP having a 50% partnership interest in MBGSS. On July 3, 1996, MHP acquired the 50% partnership interest in MBGSS owned by CMS Energy Corporation ("CMS") for a net cash payment of approximately $26.6 million and the transfer by MHP to CMS of MHP's 50% interest in a market hub project in Michigan (see Midwest Area below). Financing for this transaction was provided through the issuance of $60 million of senior secured notes by MHP in a private placement (see Note 5). MBGSS was effectively dissolved upon MHP's acquisition of CMS's partnership interest. 7 8 MARKET HUB PARTNERS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The Moss Bluff Facility has three storage caverns that provide approximately 7.8 Bcf of working storage capacity and a maximum 200 million cubic feet per day ("MMcf/d") and 900 MMcf/d of injection and withdrawal capacities, respectively. During 1994, an estimated 0.6 Bcf of storage capacity was added to the second cavern at the Moss Bluff Facility by using technology developed by TPC for leaching natural gas storage caverns while in operation. The third cavern with a working storage capacity of 2.25 Bcf was placed in service on September 18, 1995. Total construction expenditures related to this cavern were approximately $13.5 million. EGAN FACILITY. The Egan Facility is located in Acadia Parish, Louisiana. Construction began in 1994, following the signing of long term service contracts with two major local distribution companies in the Midwest as well as TPC. Initial service of 3.6 Bcf of working storage capacity (current capacity is 4.7 Bcf) with 185 MMcf/d of injection capacity and 750 MMcf/d of withdrawal capacity began September 1, 1995, while construction continued on a new pipeline interconnection. Total construction expenditures for the initial cavern, the pipeline interconnection and the facility infrastructure were $60.7 million. In 1996, MHP began construction of a second cavern at Egan with an initial planned working storage capacity of 2.0 Bcf. Cumulative construction expenditures of $3.9 million were incurred on this cavern through December 31, 1996. COPIAH COUNTY PROJECT. This project includes the planned development of salt caverns at a storage site located in Copiah County, Mississippi. The project was originally owned 75% by MHP and 25% by a third party, however, in the first quarter of 1996, TPC purchased the third party's interest in the project at the partner's cost. It is expected that the general partnership owning the project site will ultimately be dissolved and that MHP and TPC will each receive a proportionate share of the project site acreage in order to enable them to pursue separate (but possibly related) projects in the respective areas of natural gas storage and compressed air energy storage. A total of $2.7 million (net to MHP) had been incurred in development related expenditures through December 31, 1996. TIOGA PROJECT. The Tioga project is a market area project located in Tioga County, Pennsylvania, near the New York border. MHP has received bids from potential customers for natural gas storage services at the facility which is expected to initially have 2.5 Bcf of storage capacity. The first phase of the facility is targeted to begin operations in 1999. A total of $19.7 million has been incurred in development expenditures through December 31, 1996. MIDWEST AREA. In the Midwest area, TPC and CMS originally proposed to develop the Grands Lacs Project in southeastern Michigan, with each company owning a 50% interest in the project. Service in a third party facility began under an interim contract in the second quarter of 1995. On July 3, 1996, MHP conveyed the interest in the Grands Lacs Project to CMS in conjunction with the acquisition by MHP of the 50% interest in the Moss Bluff Facility held by CMS. MHP is presently exploring other potential sites for a midwestern area market hub. (4) OTHER ASSETS Other assets consist primarily of formation costs of MHP and deferred financing fees related to a private placement financing transaction completed in July 1996 (see Note 5). The formation costs include legal, accounting and other services and are being amortized over a period of five years. The deferred financing fees related to the private placement transaction include legal, placement agency and other services and are being amortized over the life of the underlying loan. (5) LONG-TERM DEBT AND NOTE PAYABLE TO TPC MOSS BLUFF FINANCING. MHP, through its half interest in MBGSS, was party to a project financing agreement with a bank for an original amount of $25,000,000 of debt through July 3, 1996 (see Note Payable to TPC below). Borrowings under the agreement provided for construction financing of the first two salt caverns and related surface facilities. The outstanding loan balance at the time of payoff on July 3, 1996, including assumption of the 50% attributable to CMS' former interest, was $16,695,000 (a $452,000 loss was incurred on the early extinguishment of the 8 9 MARKET HUB PARTNERS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) debt). The loan bore interest, at the option of MHP and its partner, at the prime rate plus 1% or a Eurodollar index rate plus 1.65% ("Interest Index Margin"). Prior to June 30, 1996, terms of the loan required MBGSS to deposit to accounts controlled by the lender certain amounts from operating cash flow to equal certain future principal and interest payments. NOTE PAYABLE TO TPC. Under the terms of the Agreement of Limited Partnership, MHP has assumed an obligation to TPC for advances made by TPC to the gas storage projects after the effective date of the formation in order to fund construction activities. Additional advances were made to MHP by TPC to fund construction and development activities during 1995 and the first quarter of 1996 such that cumulative advances at that date totaled $31,020,000. Interest on the outstanding balance was accrued through December 1996 at the prime rate stated by Wells Fargo Bank, which was a weighted average of 8.25% and 8.83% for the years ended December 31, 1996 and 1995; a total of $2,037,700 and $2,261,300 of interest was accrued on the advances during the years ended December 31, 1996 and 1995, and the unpaid portions of such amounts are included as a current payable to TPC in the accompanying combined balance sheet. SENIOR SECURED NOTES. On July 3, 1996, two of MHP's subsidiaries completed the issuance of $60 million of senior secured notes in a private placement transaction. The senior secured notes bear interest at a rate of 8.10% per annum and are due in varying amounts through December 31, 2006. Proceeds of the private placement were used by MHP to acquire the remaining 50% interest in the Moss Bluff Facility owned by a third party, to retire an outstanding bank loan on the Moss Bluff Facility, to repay a portion of the promissory note owed by MHP to TPC, and to pay the costs of the financing transaction. The portion of the promissory note repaid by MHP to TPC with proceeds of the private placement amounted to approximately $14,100,000. The remaining $16,900,000 balance of the promissory note payable by MHP to TPC, which was originally due in December 1996, was extended through March 31, 1997 at an annual interest rate of 12%; an additional $3,900,000 was also loaned by TPC to MHP on the same terms in December 1996. Repayment of approximately $8,800,000 of the promissory note is expected to be made from the proceeds of a new MHP private placement debt financing that is anticipated to close on or around March 31, 1997 (commitments from the lenders have been obtained for this financing). Accordingly, such portion of the promissory note has been classified as a current payable and the balance, which is expected to be refinanced on a long-term basis, has been classified as a non-current payable at December 31, 1996. The MHP subsidiaries which issued the senior secured notes are required to maintain a specified balance in a cash reserve account at a trustee bank and to meet certain debt service coverage ratios on a combined basis. At December 31, 1996, the subsidiaries were in compliance with such coverage ratios. Maturities of the senior secured notes for the five fiscal years following December 31, 1996 are as follows:
AMOUNT ------------- (IN THOUSANDS) 1997............................................... $ 4,200 1998............................................... 4,449 1999............................................... 4,667 2000............................................... 3,437 2001............................................... 3,331 Thereafter......................................... 37,608 -------- Total minimum payments required.................... $ 57,692 ========
9 10 MARKET HUB PARTNERS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (6) FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK The following table presents the carrying amount and estimated fair value of MHP's financial instruments at December 31, 1996 and 1995.
DECEMBER 31, 1996 DECEMBER 31, 1995 -------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ----- (IN THOUSANDS) Assets: Cash and cash equivalents ......... $ 638 $ 638 $ 872 $ 872 Interest rate cap agreements ...... -- -- 111 36 Liabilities: Long-term debt .................... 57,692 57,692 9,814 9,814 Note payable to TPC ............... 20,800 20,800 25,021 25,021
The following methods and assumptions were used to estimate the fair value of the financial instruments summarized in the above table. The carrying value of restricted cash, trade receivables and trade payables included in the accompanying balance sheet approximated fair value at December 31, 1996 and 1995. CASH AND CASH EQUIVALENTS - The carrying amounts of cash and cash equivalents approximated fair value due to their short-term nature. INTEREST RATE CAP AGREEMENT - The fair value of interest rate caps at December 31, 1995 represented the amount at which they could be settled, based on quotes from dealers. The risk of nonperformance by the counterparties to the interest rate cap agreements was not considered significant. In conjunction with the private placement financing transaction and repayment of the MBGSS project finance loan (see Note 5), MHP sold the interest rate caps to TPC at fair value in September 1996. A loss of $112,000 was recorded on this transaction and was included in the $452,000 loss on the early extinguishment of the MBGSS project finance loan. DEBT AND NOTE PAYABLE TO TPC - The fair value of long-term debt is estimated using discounted cash flow analysis, based on the borrowing rate currently available to MHP for loans with similar terms and maturities. (7) RELATED PARTY TRANSACTIONS For the period from the Effective Date of the formation of MHP (March 31, 1994) to December 21, 1994, TPC incurred certain internal costs related to the development and construction of the individual market center projects. These costs totaled $641,000 and were charged to MHP as general and administrative expenses in the accompanying combined statements of operations. Subsequent to the formation of MHP, TPC has received natural gas storage services from MHP, and in turn, provides certain administrative, financial and other services to MHP. Storage fees paid by TPC to MHP are at contractual rates which are comparable to those rates reflected in MHP's third party storage contracts and amounted to $3,177,000 and $1,888,000 in the years ended December 31, 1996 and 1995, respectively. Charges for services provided by TPC to MHP are based substantially upon contracts approved by TPC and MHP and are meant to approximate the market rate for such services. Contracts covering a substantial portion of such services were canceled by mutual agreement between TPC and MHP effective July 1, 1996 and the TPC employees who were previously 10 11 MARKET HUB PARTNERS NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) involved in providing these services to MHP became employees of MHP at that date. The aggregate charges for contractual services provided by TPC to MHP in the years ended December 31, 1996 and 1995 were as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 ------ ------ (IN THOUSANDS) Services provided by TPC which were continued subsequent to July 1, 1996..... $1,641 $4,292 Services provided by TPC which were discontinued on July 1, 1996............. 774 1,158 ------ ------ $2,415 $5,450 ====== ======
(8) COMMITMENTS MHP leases its main office space in Leesburg, Virginia, from a third party. In addition, since July 1, 1996, MHP has occupied office space in Houston, Texas, leased by a TPC subsidiary from a third party; MHP has reimbursed the TPC subsidiary for this space at the subsidiary's cost, however, the subsidiary remains primarily liable on the lease with the third party. MHP's total office lease expense for the years ended December 31, 1996 and 1995 were $62,000 and $38,000, respectively. Future minimum rental payments required to be made by MHP under the Leesburg, Virginia, office lease are as follows:
AMOUNT ------------ (IN THOUSANDS) 1997.................................................. $ 40 1998.................................................. 42 1999.................................................. 44 2000.................................................. 4 2001.................................................. -0- Thereafter............................................ -0- ----- Total minimum payments required....................... $ 130 =====
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