-----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, DSlbUqluYDcRtxqgKnhJC95NQ5gdYS6PrteRlmqBHSnFGaufeyc/EtT/huEiQsba 18ZABVaSYAmLp9D4yK+tEQ== 0000899243-97-000568.txt : 19970401 0000899243-97-000568.hdr.sgml : 19970401 ACCESSION NUMBER: 0000899243-97-000568 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NGC CORP CENTRAL INDEX KEY: 0000879215 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 943248415 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-68842 FILM NUMBER: 97571480 BUSINESS ADDRESS: STREET 1: 13430 NORTHWEST FREEWAY STREET 2: SUITE 1200 CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7133677600 MAIL ADDRESS: STREET 1: 13430 NORTHWEST FREEWAY STREET 2: SUITE 1200 CITY: HOUSTON STATE: TX ZIP: 77040-6095 FORMER COMPANY: FORMER CONFORMED NAME: TRIDENT NGL HOLDING INC DATE OF NAME CHANGE: 19930916 10-K 1 FORM 10-K ================================================================================ UNITED STATES 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 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ COMMISSION FILE NUMBER: 1-11156 NGC CORPORATION (Exact name of registrant as specified in its charter) AND EACH OF THE SUBSIDIARY GUARANTORS OF CERTAIN DEBT SECURITIES Delaware 94-3248415 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Louisiana, Suite 5800 Houston, Texas 77002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 507-6400 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class: on which registered: Common Stock, par value $.01 per share New York Stock Exchange Series A Participating Preferred Stock ---- 6.75% Debt Securities due 2005 ---- 7.625% Senior Notes due 2026 ---- 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 the filing requirements for the past 90 days. Yes X No ---- ---- The aggregate value of Common Stock held by non-affiliates of the registrant was approximately $352,960,508 on March 27, 1997 (based on $15.375 per share, the last sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape on such date). 150,358,638 shares of the registrant's Common Stock were outstanding as of March 27, 1997. DOCUMENTS INCORPORATED BY REFERENCE. PORTIONS OF PARTS I, II AND IV IN THE ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. AS TO PART III (ITEMS 10, 11, 12 AND 13), NOTICE AND PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS TO BE FILED NOT LATER THAN 120 DAYS AFTER DECEMBER 31, 1996. 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. [ ] ================================================================================ NGC CORPORATION FORM 10-K TABLE OF CONTENTS
PAGE PART I Item 1. Business........................................................................ 1 Item 1A Executive Officers.............................................................. 12 Item 2. Properties...................................................................... 14 Item 3. Legal Proceedings............................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders............................. 20 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters....... 20 Item 6. Selected Financial Data......................................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................... 22 Item 8. Financial Statements and Supplementary Data..................................... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................................................... 22 PART III Item 10. Directors and Executive Officers of the Registrant............................. 22 Item 11. Executive Compensation......................................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management................. 22 Item 13. Certain Relationships and Related Transactions................................. 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 23 Signatures................................................................................. 30
For definitions of certain terms used herein, see "Item 1. BUSINESS --DEFINITIONS." PART I ITEM 1. BUSINESS THE COMPANY GENERAL NGC Corporation ("NGC" or the "Company") is a leading North American marketer of natural gas, natural gas liquids, crude oil and power and is engaged in natural gas gathering, processing and transportation through ownership and operation of natural gas processing plants, fractionators, storage facilities and pipelines. Acting in the role of a large-scale aggregator, processor, marketer and reliable supplier of multiple energy products and services, NGC has evolved into a reliable energy commodity and service provider. Through joint ventures in both Canada and the United Kingdom, the Company has expanded geographically its vision of providing customers with multiple energy commodity needs combined with cost-effective products and value added services. For the year ended December 31, 1996, the Company reported revenues of $7.3 billion and net income of $113.3 million. The Company is a holding company that conducts principally all of its business through its subsidiaries. From inception of operations in 1984 until 1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances with certain of its shareholders. In 1994, Clearinghouse initiated gas gathering, processing and marketing operations in Canada through Novagas Clearinghouse Ltd. ("NCL"), a joint venture with NOVA Corporation ("NOVA"), and energy marketing operations in the United Kingdom through Accord Energy Limited ("Accord"), a joint venture originally with British Gas plc ("British Gas") but now with Centrica plc ("Centrica") following that company's demerger from what is now called BG plc ("BG"). NOVA and BG are both major NGC shareholders. Effective March 1, 1995, Clearinghouse and Trident NGL Holding, Inc. ("Holding"), a fully integrated natural gas liquids company, merged and the combined entity was renamed NGC Corporation ("Trident Combination"). On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron"), whereby substantially all of Chevron's midstream assets were merged with NGC ("Chevron Combination"). By virtue of the growth of NGC's core businesses combined with the synergies derived from the aforementioned transactions, NGC has established itself as an industry leader providing quality, competitively priced energy products and services to customers throughout North America and in the United Kingdom. The principal executive office of the Company is located at 1000 Louisiana, Suite 5800, Houston, Texas 77002, and the telephone number of that office is (713) 507-6400. NGC and its affiliates maintain marketing and/or regional offices in Boston, Massachusetts; Phoenix, Arizona; Englewood, Colorado; Rosemont, Illinois; Tulsa, Oklahoma; Oklahoma City, Oklahoma; Louisville, Kentucky; Atlanta, Georgia; Tampa, Florida; Kansas City, Kansas; Dallas, Texas; San Francisco, California; Pleasenton, California; Pittsburgh, Pennsylvania; Mexico City, Mexico; London, England and Calgary, Canada. ________________________________________________________________________________ DEFINITIONS As used in this Form 10-K, the abbreviations listed below are defined as follows: BBL. 42 U.S. gallons, the basic unit for measuring crude oil and natural gas condensate. MBBLS/D. Volume of one thousand barrels per day. MMCF/D. Volume of one million cubic feet per day. BCF. Volume of one billion cubic feet. BPD. Barrels per day. NGL. Natural Gas Liquids. SPOT. The Henry Hub cash price posting for natural gas per the inside FERC publication. NYMEX New York Mercantile Exchange. BUSINESS The Company reports operations under two business segments: (i) the natural gas and power marketing segment and (ii) the natural gas liquids, crude oil and gas transmission segment. NATURAL GAS AND ELECTRIC POWER MARKETING The Company's natural gas marketing activities consist of contracting to purchase specific volumes of natural gas from suppliers at various points of receipt to be supplied over a specific period of time; aggregating natural gas supplies and arranging for the transportation of these gas supplies through proprietary and third-party transmission systems; negotiating the sale of specific volumes of natural gas over a specific period of time to local distribution companies, utilities, power plants and other end-users; and matching natural gas receipts and deliveries based on volumes required by customers. The Company is also a provider of power products and services in the United States through its wholly owned subsidiary Electric Clearinghouse, Inc. ("ECI"). ECI provides its customers with a 24-hour-a-day, real-time resource for the sale and purchase of power through access to wholesale markets throughout North America. ECI helps customers remarket their fuel, optimize generation assets and capacity utilization and maximize energy conversion and tolling opportunities. In addition, ECI provides market aggregation and sales assistance and offers risk-management services and strategies, which complement its marketing activities. NATURAL GAS PURCHASES. The Company purchases natural gas from a variety of suppliers under contracts with varying terms and conditions intended to ensure a stable supply of natural gas. When purchasing natural gas, the Company considers price, location, liquids content and quantities available. In 1996, the Company purchased natural gas in every major producing basin in the United States and Canada from over 700 suppliers, ranging from major producers to small independent companies. Pursuant to an ancillary agreement(s) entered into as part of the Chevron Combination, NGC acquired the right to purchase and/or market substantially all of the natural gas produced or controlled by Chevron in the United States (except Alaska). The Chevron relationship provides the Company with a significant stable supply of natural gas which, when combined with gas supplies available from its network of other supply sources, allows it to effectively manage gas supplies and reduces the risk of short-term supply shortages during periods of peak demand. TRANSPORTATION. The Company arranges for transportation of the natural gas it markets from the supplier receipt point to the delivery point requested by the purchaser by utilizing its proprietary management information system to schedule and nominate pipeline transportation and monitor transportation availability. The Company generally retains title to the natural gas from the receipt point to the delivery point and obtains transportation on unaffiliated pipelines. The Company believes that its understanding of the United States' pipeline network, along with the scale and geographic reach of its gas marketing efforts, are important to the Company's success as a gas marketer. These factors, as well as its efficiency in utilizing the gas transportation network, allow the Company to provide its suppliers with multiple outlets for their natural gas and, in times of significant changes in demand or supply due to weather or other factors, to route gas to areas of the United States where it is most needed. The Company attempts to reduce transportation charges by taking advantage of its broad array of transportation agreements and by negotiating competitive discounts. The Company uses a variety of transportation arrangements to move its customers' volumes, including short-term and long-term firm and interruptible agreements with pipelines and brokered firm contracts with its customers. NATURAL GAS SALES. The Company sells natural gas under sales agreements that have varying terms and conditions intended to match seasonal and other changes in demand. The Company's customer base consists primarily of gas and electric utilities and industrial and commercial end-users. In 1996, sales were made to over 1,050 customers located throughout the United States and parts of Canada. For the year ended December 31, 1996, the Company's North American operations sold an aggregate average of 7.4 Bcf per day of natural gas and during the fourth quarter of 1996 sold an aggregate 9.4 Bcf of natural gas per day. As part of the Chevron Combination's ancillary agreement(s), NGC acquired the right to supply natural gas feedstocks to Chevron refineries and chemical plants in the United States providing the Company with a significant stable purchaser of monthly physical gas volumes. 2 NATURAL GAS STORAGE, MARKETING HUBS AND MANAGEMENT INFORMATION SYSTEMS. Natural gas storage capacity plays an important role in the Company's ability to act as a full-service natural gas marketer by allowing it to manage relatively constant gas supply volumes with uneven demand levels. Through the use of its storage capabilities, the Company offers peak delivery services to satisfy winter heating and summer electric-generating demands. Storage inventories also provide performance security or "backup" service to the Company's customers. The Company at various times leases short-term and long-term firm and interruptible storage across the country. The Company, together with three major gas utilities, maintains three natural gas market area hubs to allow customers to manage short-term prices and help solve imbalance and transportation problems. These strategic market hubs, located where regional interstate pipelines converge, are designed to bring buyers and sellers together over a broad geographic area. Services offered by the hubs include wheeling, loaning, parking and title transfer, which complement existing natural gas supply, transportation and storage services, and contribute to a more efficient, reliable, cost-effective marketplace. Wheeling refers to the simultaneous transfer of natural gas from one pipeline to another, while loaning occurs when one party allows another party to borrow natural gas. Parking services allow a customer to store natural gas in a hub for future redelivery, while title transfer services allow a customer to assign title to natural gas that is in storage. The Company has developed an administrative, accounting and management information system for its natural gas marketing and transportation businesses and a complementary risk management information system. The Company believes these proprietary systems provide it with a competitive advantage in its natural gas marketing business. FOREIGN MARKETS. In 1994, the Company formed joint ventures with two of its principal stockholders, NOVA and British Gas for the purpose of providing energy marketing services in Canada, the United Kingdom and Western Europe. At December 31, 1996, the Company owned an approximate 50 percent interest in NCL and a 49 percent interest in Accord and jointly controled each of these ventures. In 1997, the Company, along with NOVA and Centrica, have announced their intent to restructure the ownership and operations of both NCL and Accord (see "STRATEGIC BUSINESS COMBINATIONS AND RECENT DEVELOPMENTS"). NCL, formed by the Company and NOVA, is a full-service gas gathering, processing, storage and marketing company operating in Canada. By combining the Company's marketing and risk management capabilities with NOVA's established operations and technical expertise, NCL strategically positioned itself to provide Canadian producers and consumers with comprehensive, value-added services. NCL supplies natural gas and provides related services to customers in the utility, industrial, commercial and other core marketing segments across Canada. During 1996, NCL marketed an average of 3.1 Bcf per day of natural gas. Accord was formed by the Company and British Gas to develop energy marketing and trading opportunities in the United Kingdom and, ultimately, Western Europe. Accord is an active participant in the U.K. wholesale natural gas and crude oil markets and purchases products from a wide assortment of producers, including BG. During 1996, Accord sold an average 0.6 Bcf per day of natural gas. ELECTRIC POWER MARKETING. The Company formed ECI in February 1994 to pursue electric power marketing opportunities created as the domestic electric power industry deregulates. On January 1, 1995, ECI's trading center began real-time operations, trading and scheduling power 24 hours a day, 365 days a year. ECI functions as an electricity risk management market maker, providing products and services similar to those that are currently used in the natural gas industry to manage customers' price risks and offers customers an individually tailored package of services to manage fuel supply and power generation assets. The Company sold 14.9 million megawatts of electricity during 1996 as compared with 3.5 million megawatts during 1995. As power becomes deregulated and thus commoditized, its value relative to natural gas will continue to become more closely intertwined. Complexity in the marketplace will be ever-increasing and management of customer power requirements will require a multi-commodity focus. NGC believes that participation in the physical asset side of the power industry, achieved through ownership of strategically located generating assets, will enable the Company to expand services and to integrate the electric power marketing business more fully into the Energy Store. As a result and as discussed further in STRATEGIC BUSINESS COMBINATIONS AND RECENT 3 DEVELOPMENTS, the Company has announced its intent to acquire Destec Energy , Inc. a leading independent power producer. NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION The Company's natural gas liquids, crude oil and gas transmission segment includes natural gas gathering and processing, fractionation, NGL marketing, natural gas transmission and crude oil marketing and transportation operations. The Company's natural gas liquids business complements its natural gas marketing and power businesses by providing the Company's customers with a full range of NGL products and related services. NATURAL GAS GATHERING AND PROCESSING. The natural gas processing industry is a major segment of the oil and gas industry, providing the necessary service of refining raw natural gas into marketable pipeline quality natural gas and NGLs. The Company currently owns interests in 57 gas processing plants, including 42 plants which it operates, and operates approximately 17,000 miles of natural gas gathering pipeline systems. These assets are primarily located in the key producing areas of Texas, Louisiana, Oklahoma and Kansas. During the year ended December 31, 1996, the Company processed an average of more than 2.5 Bcf per day of natural gas and produced an average of 94.3 thousand barrels per day of NGLs. As part of the Chevron Combination's ancillary agreement(s), NGC acquired the right to process substantially all of Chevron's processable natural gas in those geographic areas where it is economically feasible for NGC to provide such service. Principally as a result of this arrangement, the Company increased its volume activity during the fourth quarter of 1996 to an average of more than 3.2 Bcf per day of natural gas processed and an average of 140.9 thousand barrels per day of NGLs produced. FRACTIONATION. The NGLs removed from the natural gas stream at gas processing plants are generally in the form of a commingled stream of liquid hydrocarbons (raw product). The commingled NGLs are separated at fractionation facilities into the component products ethane, propane, normal butane, isobutane and natural gasoline. At December 31, 1996, the Company had ownership interests in three fractionation facilities, including the industry's largest, and received 169.1 thousand barrels per day of product for fractionation during the year. On January 1, 1997, the Company divested itself of the Mont Belvieu I fractionator in accordance with an agreement reached with the Federal Trade Commission ("FTC") related to the Chevron Combination. The Company realized a small after- tax gain in 1997 relating to the sale. The Company is planning to construct a fractionation facility in Louisiana that will have a production capacity of 55,000 barrels per day. The facility is expected to be operational in the fall of 1998. NGL MARKETING. The Company maintains a diversified NGL marketing program and is the nation's leading service provider to propane retail marketers throughout North America. The Company markets its own NGL production and also purchases NGLs from third parties for resale. Through the Company's strategic combination of pipeline connections, terminals, rail cars, trucks, barges and storage facilities, the Company moves NGL products from producing regions in the Gulf Coast and Midwest to most major domestic and international markets. The Company operates large-scale marine terminals in Texas, Florida and Louisiana, which can be used for both exporting and importing NGLs. These terminals offer importers a variety of methods for transporting products to the marketplace. In addition, Warren has access to over 60 million barrels of underground NGL storage providing customers with the ability to store, trade, buy and sell specification products. In 1996, the Company began utilizing Warren's storage, terminalling and shipping assets and services to conduct international deepwater LPG business. Management intends to expand these operations in 1997 through the Company's wholly owned subsidiary NGC Global Energy, Inc. During 1996, the Company sold approximately 245 thousand barrels per day of NGLs to over 1,000 customers and, during the fourth quarter of 1996, sold an approximate 431.5 thousand barrels per day of NGLs reflecting the material impact the Chevron Combination had on this business. TRANSMISSION OPERATIONS. The Company's transportation network is connected to all of the nation's major gas liquids and natural gas pipeline systems. NGC owns a 50 percent interest in a partnership which operates the West Texas Pipeline, a pipeline capable of delivering 160,000 barrels per day of liquids to fractionation facilities at Mont Belvieu, Texas. In addition, Warren's 12-inch bi-directional Lake Charles, Louisiana, pipeline transports 50,000 barrels per day of liquids and finished products between Lake Charles and Mont Belvieu. Warren's extensive Houston-area gathering system provides market access to refiners and chemical plants on the Houston 4 Ship Channel. The Ozark Gas Transmission System ("Ozark"), acquired in mid-1995, expanded the Company's natural gas transmission capabilities providing throughput capacity of 170 million cubic feet of gas per day. Ozark gathers gas from eastern Oklahoma and transports it to central Arkansas, where the system interconnects with interstate pipelines that serve the Midwest and Northeast markets. The Company also operates an intrastate natural gas pipeline system in south-central Kansas, which serves markets in the Wichita area and throughout the Midwest and Mid-Continent areas on interconnected intrastate and interstate pipelines. CRUDE OIL MARKETING. The Company provides a full range of crude oil marketing services to producers, and serves the United States refining community as a regionally diversified supplier of crude oil. Through its participation in major trading centers in the Mid-Continent, Rocky Mountain and Gulf Coast areas, the Company has established itself as a dependable source of competitively priced crude oil. During 1996, the Company continued to utilize the 1,300-mile crude oil gathering pipeline system acquired in 1995 to facilitate aggregation and delivery of product to market, which further established NOTTI as a dependable source of crude oil supply. Through acquisitions during 1996, the Company's crude oil marketing business has positioned itself to expand operations in the Gulf Coast area and in Canada. In May 1996, NGC Oil Trading and Transportation, Inc. ("NOTTI") acquired the Grand Lakes Liquids System crude and condensate operations in Cameron Parish, Louisiana, which included a 20-mile crude oil gathering pipeline, a 100,000 barrel storage facility and truck-unloading and barge loading capabilities. Also in 1996, NOTTI acquired Wilmar Energy Marketing, a Calgary, Canada-based crude oil marketer and established NOTTI- Canada. NOTTI-Canada's initial focus will be on expanding marketing and gathering services within Canadian markets. INTERNATIONAL OPPORTUNITIES NGC's strategic investors, British Gas, NOVA and Chevron, provide excellent international business opportunities. By combining NGC's multi-commodity energy trading expertise with these business partners' international asset positions and understanding of local governments, markets and customer needs, NGC Global, Inc., a wholly owned subsidiary of NGC, will focus on bringing the Energy Store's multi-commodity concept to new markets. As countries privatize or deregulate their energy industries, NGC will work closely with its business partners to explore opportunities that optimize value in selected overseas markets. RISK MANAGEMENT ACTIVITIES The natural gas and power marketing segment's operations, exclusive of risk- management activities, is relatively insensitive to commodity price fluctuations since most of the segment's purchases and sales contracts do not contain fixed- price provisions. Operating margins associated with the natural gas liquids, crude oil and gas transmission segment are sensitive to changes in NGL prices principally as a result of the contractual terms under which products are sold by this segment. However, this segment's operating margin is relatively insensitive to changes in natural gas prices as a result of the mitigating impact of fuel costs and residue gas sales. The Company attempts to manage its exposure to commodity price fluctuations through its risk-management activities. NGC utilizes certain types of fixed-price contracts in connection with its natural gas, NGL and crude oil marketing lines of business. These contracts include contracts which commit the Company to purchase or sell energy commodities at fixed prices in the future (i.e., fixed-price forward purchase and sales contracts), futures and options contracts traded on the NYMEX and swaps and options traded in the over-the-counter financial markets. The availability and use of these types of contracts allow NGC to manage and hedge its fixed-price purchase and sales commitments, to provide fixed-price commitments as a service to its customers and suppliers, to reduce its exposure relative to the volatility of cash market prices and to protect its investment in storage inventories. The Company may, at times, have a bias in the market, within established limits, resulting from the management of its portfolio. In addition, by utilizing exchange for physical transactions allowed by the NYMEX, which enable entities to take delivery of, or sell, a physical quantity of natural gas in exchange for a futures position, NGC is able to secure additional sources of physical natural gas supply, or create additional markets for existing supply, through the use of natural gas futures contracts. These fixed- price activities are referred to herein as risk management activities. Although the Company generally attempts to balance its fixed-price physical and financial purchase and sales contracts in terms of contract volumes and the timing of performance and delivery obligations, net open positions 5 often exist or are established due to the origination of new transactions and the assessment of, and response to, changing market conditions. NGC will take advantage of its bias in the market when it believes, based upon competitive information gained from its energy marketing activities, that future price movements will be consistent with its net open position. To the extent net open positions exist, NGC is exposed to the risk that fluctuating market prices may adversely impact its financial position or results of operations. In addition to the risk associated with price movements, credit risk is also inherent in the Company's risk management activities. Credit risk relates to the risk of loss resulting from the nonperformance of contractual obligations by a counterparty. NGC maintains credit policies with regard to its counterparties which the Company believes significantly minimizes its overall credit risk. NGC has established a risk management committee which oversees its risk management activities. This committee meets regularly to establish the Company's overall risk management strategy and to monitor and ensure compliance with risk management limitations, policies and procedures. STRATEGIC BUSINESS COMBINATIONS AND RECENT DEVELOPMENTS STRATEGIC BUSINESS COMBINATIONS CHEVRON COMBINATION. On August 31, 1996, NGC completed the Chevron Combination with Chevron pursuant to which Chevron contributed substantially all of its midstream assets (the "Contribution"), including substantially all of the assets comprising Warren Petroleum Company and Chevron's Natural Gas Business Unit and an undivided interest in those assets that constitute the West Texas LPG Pipeline, into Midstream Combination Corp. ("Midstream"), a Delaware corporation formed for purposes of the transaction. NGC which was formed effective March 1, 1995, pursuant to the Trident Combination, was merged with and into Midstream immediately following the Contribution and Midstream was renamed NGC Corporation. In exchange for the Contribution, Chevron received approximately 38.6 million shares of NGC common stock and approximately 7.8 million shares of NGC's Series A Participating Preferred Stock and NGC assumed approximately $283 million of indebtedness. Immediately following closing of the Chevron Combination, NGC paid approximately $128 million to Chevron and funded such payment under the NGC Corporation Credit Agreement ("Credit Agreement"). In connection with the Chevron Combination, NGC and Chevron entered into certain ancillary supply, sales and service agreements with respect to natural gas, natural gas liquids and electricity. Pursuant to these ancillary agreements, NGC has the right to, among other things, purchase and/or market substantially all of the natural gas and natural gas liquids produced or controlled by Chevron in the United States (except Alaska), to process substantially all of Chevron's processable natural gas in those geographic areas where it is economically feasible for NGC to provide such service, to supply natural gas feedstocks to Chevron refineries and chemical plants in the United States and to participate in existing and future opportunities to provide electricity to Chevron's United States facilities as well as to purchase or market excess electricity generated by those facilities. TRIDENT COMBINATION. On March 14, 1995, NGC and Holding consummated the Trident Combination. Pursuant to the terms of the Trident Combination, Holding, the legally surviving corporation in the Combination, was renamed NGC Corporation and (i) acquired through a tender offer (the "Tender Offer") 14.2 million shares of Holding common stock (representing approximately 50 percent of the Holding common stock outstanding immediately prior to the consummation of the Trident Combination) for $11.75 per share, net to the seller in cash; (ii) acquired directly and indirectly, all of the outstanding general partnership interests in Clearinghouse; (iii) the former owners of the partners of Clearinghouse (the "Clearinghouse Owners") acquired 82 percent of the then outstanding shares of NGC common stock (giving effect to the issuance, but not allocation, of the "Contingent Shares" (as defined below)), and (iv) the stockholders of Holding prior to consummation of the Combination retained shares of common stock representing approximately 13 percent of the then outstanding shares of NGC common stock (giving effect to the issuance, but not allocation, of the Contingent Shares). The Contingent Shares totaled 5,461,538 shares of NGC common stock and represented approximately 5 percent of the outstanding shares of NGC common stock after giving effect to the issuance of such shares. Such shares were allocated in March 1996 in a ratio of 17 percent to the former stockholders of Holding and 83 percent to the Clearinghouse Owners. 6 RECENT DEVELOPMENTS On February 18, 1997, NGC announced that it had signed a merger agreement to acquire Destec Energy, Inc. ("Destec"), a leading independent power producer ("IPP"), in a deal valued at $1.27 billion, or $21.65 per share of Destec common stock. Simultaneous with this merger, NGC will sell Destec's international facilities and operations to The AES Corporation for $407 million, inclusive of cash and monetizable assets. Closing of this transaction is expected to occur by the end of the second quarter of this year. NGC intends to finance the transaction with interim financing provided by commercial banks from its existing bank-credit group and existing cash. The balance of the interim financing is expected to be retired from a combination of sales of non-strategic domestic Destec assets within six to 12 months of closing of the merger, long- term debt and a common and/or preferred stock issuance. Destec currently operates 20 power generation facilities in key energy markets across the United States as well as five international projects. On January 1, 1997, the Company divested itself of the Mont Belvieu I fractionator in accordance with an agreement reached with the FTC related to the Chevron Combination. The Company realized a small after-tax gain in 1997 relating to the sale. In early 1997, British Gas completed a restructuring with Centrica being demerged from British Gas with the latter being renamed BG. Centrica became the Company's joint venture partner in Accord while BG now holds the approximate 26 percent stake in NGC's common stock formerly held by British Gas. Effective March 2, 1997, Centrica and the Company signed an agreement in which they stated their intent to restructure Accord by converting certain common stock interests in Accord to participating preferred stock interests. After closing, which is expected to occur in the second quarter of 1997, Centrica and the Company will own 75 percent and 25 percent, respectively, of the participating preferred stock of Accord. The participating preferred stock will have (a) the right to receive cumulative dividends on a priority basis to other corporate distributions by Accord, and (b) limited voting rights. In addition, Centrica will have the option to purchase the Company's participating preferred stock interest at any time after July 1, 2000, and the Company will have the right to acquire Centrica's participating preferred interest during the period from January 1, 2001, through March 1, 2001, at formula based prices as defined in the agreement. As part of the reorganization, NGC UK Limited ("NGC UK") will assume control of Accord's existing crude oil marketing business. The restructuring is contingent upon certain U.K. regulatory approvals. NGC intends to expand its multi-commodity, energy-marketing concept in the UK through NGC UK which will market natural gas, natural gas liquids and crude oil as well as provide international LPG trading and transportation. In October 1996, the Company and NOVA jointly announced their intent to restructure the companies' Canadian natural gas operations. Under the agreement, NGC will assume full control of NCL's gas and gas liquids marketing business. NGC and NOVA will pursue separate midstream asset businesses in Canada, with NOVA assuming full ownership of NCL's existing gathering and processing business. The restructuring may also result in amendments to or termination of various agreements between NCL and the Company or NOVA, including their respective affiliates. NOVA will also own 100 percent of Pan-Alberta, which is currently a subsidiary of NCL. NGC will operate its Canadian businesses under the name NGC Canada, Inc. The transaction is expected to close by April 30, 1997. COMPETITION All phases of the businesses in which NGC is engaged are highly competitive. In connection with both domestic and foreign operations, the Company encounters strong competition from companies of all sizes, having varying levels of financial and personnel resources. NGC competes in its gas marketing business with other natural gas merchants, producers and pipelines for sales based on its ability to aggregate competitively priced supplies from a variety of sources and locations and to efficiently utilize transportation through third-party pipelines. In past years, the spot marketing business had a low cost barrier to entry; therefore, a number of the Company's competitors were privately owned and relatively small in size and may have been comparatively undercapitalized to meet the increasing financial requirements of the natural gas industry. However, with respect to its marketing operations, NGC believes that market customers will increasingly scrutinize the financial condition of their suppliers to assure that contract obligations will be 7 met; suppliers and transporters will demand more stringent credit terms to secure the performance of natural gas merchants; the increased role of storage and other risk management tools will add to the financial costs of doing business; the increasing availability of pricing information to participants in the natural gas industry will continue to exert downward pressure on per-unit profit margins in the industry; suppliers will have to be multi-fuel marketers; and large competitors, such as megamarketer alliances, will create competition from entities having significant liquidity and other resources. As a result, NGC believes its financial condition and its access to capital markets will play an increasing role in distinguishing the Company from many of its competitors. Operationally, NGC believes its ability to remain a low cost merchant and effectively combine value-added services, competitively priced supplies and price risk management will determine the level of success in its natural gas marketing operations. NGC's electric power business is similar to its gas marketing business in that it provides natural gas contract services to electric utilities, markets and supplies electricity and invests in power-related assets and joint ventures. As a result, the competition issues incumbent upon the Company's gas marketing operations similarly impact the Company's power marketing business. As with its gas marketing operations, the Company believes it has the ability to establish itself as a low cost and dependable merchant providing competitively priced supplies and a variety of services which will differentiate NGC from the competition. The Company's natural gas liquids, NGL and crude oil marketing and gas transmission businesses face significant competition from a variety of competitors including major integrated oil companies, major pipeline companies and their marketing affiliates and national and local gas gatherers, processors, brokers, marketers and distributors of varying sizes and experience. The principal areas of competition include obtaining gas supplies for gathering and processing operations, obtaining supplies of raw product for fractionation, the marketing of NGLs, crude oil, residue gas, helium, condensate and sulfur, and the transportation of natural gas, NGLs and crude oil. Competition typically arises as a result of the location and operating efficiency of facilities, the reliability of services and price and delivery capabilities. The Company believes it has the infrastructure, long-term marketing abilities, financial resources and management experience to enable it to compete effectively. REGULATION GENERAL. The Company is subject to the laws, rules and regulations of the countries in which it conducts its operations. Domestically, numerous departments and agencies at federal, state and local levels have issued rules and regulations affecting the energy industry, some of which carry substantial penalties for non-compliance. Internationally, environmental and other regulatory matters are evolving as detailed rules and procedures are established and their application and interpretation defined. The regulatory burden on the energy industry increases its cost of doing business and, consequently, affects its profitability. Inasmuch as these rules and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. These rules and regulations affect the industry as a whole; therefore, the Company does not believe that it is affected in a significantly different manner from its competitors. REGULATORY MATTERS. The transportation and sale for resale of natural gas is subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938, as amended ("NGA") and, to a lesser extent, the Natural Gas Policy Act of 1978, as amended ("NGPA"). Interstate transportation and storage services by natural gas companies, including interstate pipeline companies, and the rates charged for such services, are regulated by the FERC. Certain of the Company's pipeline activities and facilities are involved in interstate transportation of natural gas, crude oil and NGLs, and are subject to these or other federal regulations. Legislative and regulatory changes began in 1978 with the passage of the NGPA, which initiated the process of price deregulation of gas sold at the wellhead. Since 1978, various federal laws have been enacted which have resulted in the termination on January 1, 1993 of all price and non-price controls for natural gas sold in "first sales." Commencing in 1985, the FERC promulgated a series of orders and regulations adopting changes that significantly altered the business of transporting and marketing natural gas by fostering competition. The thrust of these regulations was to induce interstate pipeline companies to provide nondiscriminatory transportation services to producers, distributors and other shippers. The effect of the foregoing regulations has been the creation of a more open access market for natural gas purchases and sales and the creation of a business environment which 8 has fostered the evolution of various unregulated, privately negotiated natural gas sales, purchase and transportation arrangements. Order 636, issued in April 1992, as amended by Order 636-A (issued in August 1992) and Order 636-B (issued in November 1992), was a continuation of the FERC's efforts to improve the competitive structure of the pipeline industry and to maximize consumer benefits resulting from a competitive structure of the pipeline industry and a competitive wellhead gas market. The FERC's goal, as stated in Order 636, "is to recognize the current characteristics of the natural gas industry -- and to create a regulatory framework that will accommodate the meeting of as many gas sellers and gas buyers as possible." In Order 636, the FERC required interstate pipelines that perform open access transportation under blanket certificates to "unbundle" or separate their traditional merchant sales services from their transportation and storage services and to provide comparable transportation and storage services with respect to all gas supplies whether purchased from the pipeline or from other merchants such as marketers or producers. The pipelines must now separately state the applicable rates for each unbundled service (i.e., for the gas commodity, transportation and storage). The unbundling and separate pricing of services has significantly affected the pipelines' merchant function and required a major restructuring of the relationships between pipeline companies and their customers. Certain segments of the industry opposed aspects of Order 636, and many parties sought judicial review of Order 636. Order 636 was substantially upheld on appeal, with only a few issues being successfully challenged. While Supreme Court review is certainly possible, it is not very likely that the Court will hear an appeal from the D.C. Circuit. In addition, parties have sought judicial review of most of the FERC orders approving individual pipeline restructuring plans that were authorized pursuant to Order 636. While it appears that the overall structure of Order 636 will remain intact, NGC cannot predict how certain aspects of implementation by individual pipelines will fare. On February 28, 1997, the FERC issued a Notice of Public Conference and Opportunity to Comment relating to the natural gas industry. The FERC will take public comment in both written and oral form on what its role should be in the post Order 636 era. The FERC's Notice includes a broad array of subjects on which it requests comment, portending a vibrant debate, but no particular outcome. GAS PROCESSING. The primary function of NGC's gas processing plants is the extraction of NGLs and not natural gas transportation. The FERC has traditionally maintained that a processing plant is not a facility for transportation or sale for resale of natural gas in interstate commerce and therefore is not subject to jurisdiction under the NGA. Even though the FERC has made no specific declaration as to the jurisdictional status of the Company's gas processing operations or facilities, NGC believes its gas processing plants are primarily involved in removing NGLs and therefore exempt from FERC jurisdiction. Nonetheless, certain facilities downstream of processing plants are being considered for use in transporting gas between pipelines, which may invoke FERC's jurisdiction. Such jurisdiction will apply to the downstream facility as a pipeline, however, and not to the plants themselves. GATHERING. The NGA exempts gas gathering facilities from the jurisdiction of the FERC. Interstate transmission facilities, on the other hand, remain subject to FERC jurisdiction. The FERC has historically distinguished between these two types of facilities on a fact-specific basis. NGC believes its gathering facilities and operations meet the current tests used by the FERC to determine a nonjurisdictional gathering facility status. Some of the recent cases applying these tests in a manner favorable to the determination of NGC's nonjurisdictional status are still subject to rehearing and appeal. In addition, the FERC's articulation and application of the tests used to distinguish between jurisdictional pipelines and nonjurisdictional gathering facilities have varied over time. While the Company believes current definitions create nonjurisdictional status for NGC's gathering facilities, no assurance can be given that such facilities will remain classified as gas gathering facilities and the possibility exists that the rates, terms, and conditions of the services rendered by those facilities, and the construction and operation of the facilities will be subject to regulation by the FERC or by the various states in the absence of FERC regulation. PRORATION. The states of Texas and Oklahoma have adopted changes to oil and gas production and proration regulations, as well as other regulatory changes, that could affect volumes of gas available for purchase by NGC. To date, the Company has not experienced any material reductions in available supplies due to proration. 9 Nevertheless, these or future proration regulation revisions may materially affect NGC's ability to purchase gas supplies. MARKET HUBS. The market hubs for which Hub Services, Inc., a wholly owned subsidiary of NGC, serves as hub administrator are combined gas storage, transportation and interchange facilities. To the extent the market hubs provide services in intrastate commerce, the rates, terms and conditions of service are regulated by the applicable state public utility commissions. To the extent the market hubs provide service in interstate commerce subject to the NGA or NGPA, the FERC has overlapping regulatory authority with respect to rates, terms and conditions of service. STATE REGULATORY REFORMS. State versions of Order 636 are proceeding. To date, most programs are limited in scope. As these programs mature, they may impact NGC's traditional wholesale customers' ability to sell gas. These customers could be replaced with other sellers of gas as a wholesale market for NGC sales. In addition, some states are considering regulating retail marketers. At this point, the regulation appears restricted to retail sellers and is not price regulation, but instead oriented towards terms and conditions of service. NGC presently makes only limited retail sales. Other state regulatory reforms impacting the Company's processing and gathering operations and other businesses are proceeding. While the ultimate impact of such legislation on the Company's businesses cannot be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect on the Company's operations or competitiveness. ELECTRIC REGULATION. Federal law, specifically the Federal Power Act, regulates the transmission of electric power in interstate commerce and sales for resale of that power. Through ECI, NGC makes wholesale power sales to utilities. The FERC has asserted jurisdiction over these sales, but allows ECI, as well as others, to make sales at market-based rates. In 1996, the FERC issued Order 888, which provides that utilities subject to its jurisdiction must allow access to others to sell power at wholesale. ECI utilizes this open-access transmission to make wholesale power sales. Order 888 was upheld by the FERC in March of 1997, and is now destined to be appealed in the U.S. Courts of Appeal on numerous grounds. NGC cannot predict the outcome of such appeals. Meanwhile, second generation implementation issues arising out of Order 888 abound. These include issues relating to power pool structures and transmission pricing. These too will likely find their way to the courts, and their outcome cannot be predicted. State regulation over the electric industry is also changing. Various state regulatory authorities and legislatures are moving towards allowing retail customers access to the transmission grid. Each state differs in its preferred pace and scope of retail transmission access. OTHER REGULATORY ISSUES. The Company's gas purchases and sales are generally not regulated by the FERC; however, as a gas merchant, the Company depends on the gas transportation and storage services offered by various interstate and intrastate pipeline companies to enable the sale and delivery of its gas supplies. Additionally, certain other pipeline activities and facilities of the Company are involved in interstate and intrastate transportation and storage services and are subject to various federal and state regulations which generally regulate rates, terms and conditions of service. ENVIRONMENTAL MATTERS NGC's operations are subject to extensive federal, state and local statutes, rules and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Compliance with these statutes, rules and regulations requires capital and operating expenditures including those related to monitoring and permitting at various operating facilities and remediation obligations. The Company's environmental expenditures have not been prohibitive in the past, but are anticipated to increase in the future with the trend toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the number of assets operated by the Company subject to environmental regulation. The vast majority of federal environmental remediation provisions are contained in the Superfund laws -- the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and the Superfund 10 Amendments and Reauthorization Act ("SARA") and in the corrective action provisions of the Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the Environmental Protection Agency ("EPA") acts pursuant to Superfund legislation to remediate facilities that are abandoned or inactive or whose owners are insolvent; however, the legislation may be applied to sites still in operation. Superfund law imposes liability, regardless of fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the current or previous owner and operator of a site and companies that disposed, or arranged for the disposal, of the hazardous substance found at a site. CERCLA also authorizes the EPA and, in certain instances, private parties to take actions in response to threats to public health or the environment and to seek recovery from such responsible party. RCRA provisions apply to facilities that have been used to manage or are currently managing hazardous waste and which are either still in operation or have recently been closed. As amended, RCRA requires facilities to remedy any releases of hazardous wastes or hazardous waste constituents at waste treatment, storage or disposal facilities. NGC is subject to the environmental risks normally incident to the operation and construction of storage facilities, pipelines, plants and other facilities for gathering, processing, treating, storing and 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. These activities are subject to environmental and safety regulation by federal authorities and state authorities residing in those states in which the Company owns assets or conducts business. In addition, the design, construction, operation and maintenance of the Company's 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 ("NGPSA"), or by state regulations meeting the requirements of the NGPSA. In connection with the Chevron Combination, Chevron agreed to indemnify NGC against certain environmental liabilities related to the gathering, processing and transportation assets that comprised a part of the Contribution. In each case, the indemnification was limited to the extent that such liabilities relate to such assets' operations prior to August 31, 1996. This indemnity is limited and, among other things, expires August 31, 2001, and only covers liabilities under environmental laws and regulations in effect at August 31, 1996. The Company believes that Chevron has sufficient financial resources to satisfy its environmental indemnity obligations. In connection with the acquisition of substantially all of the natural gas liquids business of OXY USA, Inc. ("OXY USA") by Holding in 1991, OXY USA agreed to indemnify Holding for any liability, claims, damages, costs, duties of remediation or loss of use resulting from certain claims or assessments (as defined in that Acquisition Agreement) associated with periods prior to the acquisition date generally for a period of ten years from the acquisition date. The Acquisition Agreement provided, however, that Holding would contribute 30 percent of the first $25 million (i.e., up to a maximum of $7.5 million) of any such liabilities, claims, damages, costs, duties of remediation or loss of use resulting from or relating to any such emissions of environmental contaminants. Such indemnity inured to the Company at the date of the Trident Combination. The Company believes that OXY USA has sufficient financial resources to satisfy its environmental indemnity obligations. In acquiring other operating assets from third parties, NGC has often been required to indemnify the seller against losses arising from pre-closing environmental liabilities, although in other instances it has been indemnified against such losses by the seller. To minimize its exposure for such liabilities, environmental audits of the assets NGC wishes to acquire are made, either by NGC personnel, outside environmental consultants, or a combination of the two. The Company has not heretofore incurred any material environmental liabilities arising from its acquisition activities. The incurrence of a material environmental liability, and/or the failure of an indemnitor to meet its indemnification obligations with respect thereto, could have a material adverse effect on NGC's operations and financial condition. To the Company's knowledge, it is in substantial compliance with, and is expected to continue to comply in all material respects with, applicable environmental laws, regulations, orders and rules. Further, to the best of the Company's knowledge, there are no existing, pending or threatened actions, suits, investigations, inquiries, proceedings or clean-up obligations by any governmental authority or third party relating to any violations of any environmental laws with respect to the Company's assets which would have a material adverse effect on the 11 Company's operations and financial condition. NGC's aggregate expenditures for compliance with laws and regulations related to the discharge of materials into the environment or otherwise related to the protection of the environment totaled $3.7 million in 1996. Total environmental expenditures for both capital and operating maintenance and administrative costs are not expected to exceed $15.6 million in 1997. The Company's operations are subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and other comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of SARA and similar state statutes require that information be organized and maintained about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local government authorities and citizens. The Company believes it is in substantial compliance with these rules and regulations. OPERATIONAL RISKS AND INSURANCE NGC is subject to all risks inherent in the various businesses in which it operates. These risks include, but are not limited to, explosions, fires and product spillage, which could result in damage to or destruction of operating assets and other property, or could result in personal injury, loss of life or pollution of the environment, as well as curtailment or suspension of operations at the affected facility. NGC maintains general public liability, property and business interruption insurance in amounts that it considers to be adequate for such risks. Such insurance is subject to deductibles that the Company considers reasonable and not excessive. The occurrence of a significant event not fully insured or indemnified against, and/or the failure of a party to meet its indemnification obligations, could materially and adversely affect NGC's operations and financial condition. Moreover, no assurance can be given that NGC will be able to maintain insurance in the future at rates it considers reasonable. In 1996, one of the Company's subsidiaries, NIPC, Inc., was designated to assist the Company in the management of certain liabilities principally relating to environmental, litigation and credit reserves. Together with the involvement of a third party whose primary consideration will be based on the realization of savings by the Company, the subsidiary will attempt to find new ways to handle these costs in a more efficient manner. EMPLOYEES The Company employs approximately 722 employees at its administrative offices and approximately 1,171 employees at its operating facilities. Approximately 131 employees at Company-operated facilities are subject to collective bargaining agreements with the Oil, Chemical and Atomic Workers International Union or the Lake Charles Metal Trades Council. Management considers relations with both union and non-union employees to be satisfactory. ITEM 1A. EXECUTIVE OFFICERS Set forth below are the names and positions of the current executive officers of the Company, together with their ages, position(s) and years of service with the Company. 12 SERVED WITH THE COMPANY NAME AGE* POSITION(S) SINCE C. L. Watson 47 Chairman of the Board, 1985 Chief Executive Officer, and a Director of the Company Thomas M. Matthews 53 President of the Company 1996 Stephen W. Bergstrom 39 Senior Vice President and a 1986 Director of the Company; President of Clearinghouse Stephen A. Furbacher 49 Senior Vice President of the 1996 Company and President of Warren Petroleum Limited Partnership James H. Current, Sr. 52 Senior Vice President of the 1996 Company and President of NGC Global Energy Inc. Kenneth E. Randolph 40 Senior Vice President, 1984 General Counsel and Secretary of the Company ___________________________________________ * As of April 1, 1997. The executive officers named above will serve in such capacities until the next annual meeting of the Company's Board of Directors, or until their respective successors have been duly elected and have been qualified, or until their earlier death, resignation, disqualification or removal from office. C. L. Watson serves as Chairman of the Board, Chief Executive Officer and a Director of the Company. He also served as President of NGC from March 1995 to December 1996. Mr. Watson served as Chairman and as a member of the Clearinghouse Management Committee from May 1989 and through March 1995, and as Chief Executive Officer and President of Clearinghouse from September 1985 through March 1995. Prior to his employment with Clearinghouse, Mr. Watson served as Director of Gas Sales for the Western United States for Conoco Inc. Thomas M. Matthews joined the Company in December 1996 as President of NGC. Prior to joining the Company, Mr. Matthews served as President and Chief Executive Officer of Texaco Natural Gas from January 1996 through November 1996 and Vice President of Texaco, Inc. from November 1993 through November 1996. Mr. Matthews also served as President of Texaco Refining and Marketing, Inc. from December 1993 through December 1995. He joined Texaco U.S.A. as Vice President-Gas in 1989. Prior to joining Texaco, Mr. Matthews spent eight years with Tenneco as President of Tennessee Gas pipeline Company and Executive Vice President of Tenneco Gas and sixteen years with Exxon in various domestic and international engineering, management and executive positions, having last served as Vice President-Exxon Gas. Stephen W. Bergstrom serves as Senior Vice President and a Director of the Company and as President of Clearinghouse. He served as Executive Vice President of Clearinghouse and as a member of the Clearinghouse Management Committee from May 1989 through March 1995. In addition, Mr. Bergstrom served as Senior Vice President Gas Marketing and Supply of Clearinghouse from May 1987 through May 1990 and as Vice President Gas Supply of Clearinghouse from July 1986 through May 1987. Prior to his employment with the Clearinghouse, Mr. Bergstrom served as Vice President Gas Supply of Enron Gas Marketing, a subsidiary of Enron Corporation. Stephen A. Furbacher serves as President of Warren Petroleum Limited Partnership and Senior Vice President of NGC Corporation and is a member of the Management Committee. Mr. Furbacher manages the operations of NGC's natural gas liquids fractionation, storage, transportation, terminalling and marketing services. Prior to joining the Company in September 1996, Mr. Furbacher served as President of Warren Petroleum Company, a division of Chevron U.S.A. Inc. 13 James H. Current, Sr. serves as President of NGC Global Energy Inc., NGC's international subsidiary, and is a Senior Vice President of the Company. Mr. Current is responsible for expanding NGC's Energy Store concept worldwide through the direction of non-U.S. natural gas, natural gas liquids and power marketing businesses. Mr. Current also manages the Company's crude oil marketing business worldwide. Prior to joining NGC in April 1996, Mr. Current retired from Shell Oil Company as General Manager, Shell Gas Products and Services. Kenneth E. Randolph serves as Senior Vice President, General Counsel and Secretary of the Company. He has served as Senior Vice President and General Counsel of NGC (or its predecessor, Clearinghouse) since July 1987. In addition, he served as a member of the Clearinghouse Management Committee from May 1989 through February 1994 and managed Clearinghouse's marketing operations in the Western and Northwestern United States from July 1984 through July 1987. Prior to his employment with the Company, Mr. Randolph was associated with the Washington, D.C. office of Akin, Gump, Strauss, Hauer & Feld, L.L.P. ITEM 2. PROPERTIES All of the Company's operating assets are held through wholly owned subsidiaries. The Company's operations are principally located in Texas, Oklahoma, Louisiana, Kansas, Arkansas, Utah, western Canada and the United Kingdom. Current year activity conducted in these areas is discussed under "Item 1. BUSINESS -- General." Following is a description of such properties owned by the Company at December 31, 1996. GATHERING SYSTEMS AND PROCESSING FACILITIES NGC's natural gas processing services are provided at two types of gas processing plants, referred to as field plants and straddle plants. Field plants aggregate volumes from multiple producing wells into quantities that can be economically processed to extract NGLs and to remove water vapor, solids and other contaminants. Straddle plants are situated on third-party mainline natural gas pipelines and serve to provide flexibility to changing market conditions by allowing operators to extract NGLs from a natural gas stream when the market value of NGLs separated from the natural gas stream is higher than the market value of the same unprocessed natural gas. NGC owns an interest in 40 field plants which are each associated with a gas gathering system that collects and transports natural gas from individual wells to the plant. The Company owns an interest in 35 of the gas gathering systems associated with its field plants. The gathering systems associated with the other 5 field plants are owned entirely by third parties. The remaining 17 gas processing plants in which NGC owns an interest are straddle plants. The Company owns an interest in the gas gathering systems associated with 2 of these straddle plants, with the remainder being owned entirely by third parties. The following table provides certain information, including operational data for the year ended December 31, 1996, concerning the gathering systems and gas processing plants in which NGC owns an interest.
Location Total Plant ---------------------- ------------------------------ COUNTY/ PRACTICAL 1996 INLET GAS NGL GAS PROCESSING FACILITIES % OWNED PARISH STATE CAPACITY(3) THROUGHPUT PRODUCTION (MMCFD)(1) (BPD)(2) COMPANY OPERATED: *Ambrose(4)(10)(12)..................... 100.00 Kay OK 400 0.0 0.0 Arbuckle............................... 100.00 Murray OK 2 0.9 39.9 *Barracuda(8)........................... 100.00 Cameron LA 190 132.0 3,815.8 Binger(4).............................. 100.00 Caddo OK 10 7.1 714.4 Breckenridge(4)(12).................... 100.00 Stephens TX 15 8.2 1,343.5 Bridger Lake(9)........................ 100 - 33.33 Summit UT 25 18.1 543.5 Canadian/Tonkawa(4)(14)................ 100.00 Hemphill TX 25 20.8 666.9 *Cameron(4)(12)(13)..................... 50.00 Cameron LA 425 114.0 2,444.4 *Cheney(12)............................. 100.00 Kingman KS 85 69.3 3,896.4 Chico(4)(12)........................... 100.00 Wise TX 100 65.8 10,140.0 East Texas(4)(12)...................... 100.00 Gregg TX 34 26.2 4,641.0 Eunice(4)(14).......................... 100.00 Lea NM 68 52.3 2,096.4 Eustace(4)(12)......................... 100.00 Henderson TX 70 37.1 2,497.1 Fashing(4)(14)......................... 44.74 Atascosa TX 65 35.1 101.6 Haynesville I.......................... 96.00 Claiborne LA 35 29.0 1,019.8 Haynesville II......................... 100.00 Claiborne LA 50 46.0 2,546.9 *Jayhawk(12)............................ 100.00 Grant KS 480 407.8 11,955.0
14
Location Total Plant ---------------------- ------------------------------- COUNTY/ PRACTICAL 1996 INLET GAS NGL GAS PROCESSING FACILITIES % OWNED PARISH STATE CAPACITY(3) THROUGHPUT PRODUCTION (MMCFD)(1) (BPD)(2) Kellerville(4)(12)..................... 100.00 Wheeler TX 10 6.8 1,417.5 Leedy(4)(12)........................... 100.00 Roger Mills OK 50 35.7 1,116.2 Lefors(4)(12).......................... 100.00 Gray TX 12 6.3 1,562.7 *Lowry(12)(4)........................... 100.00 Cameron LA 265 136.7 3,751.1 Madill(4)(12).......................... 100.00 Marshall OK 25 18.0 1,002.5 Moores Orchard(4)(14).................. 100.00 Fort Bend TX 7 4.4 45.8 Monahans/Worsham(4)(14)................ 100.00 Ward TX 31 26.0 857.5 Monument(4)(14)........................ 100.00 Lea NM 80 67.8 2,300.4 New Hope(16)........................... 100.00 Franklin TX 30 14.8 110.2 Ringwood(4)(11)........................ 100.00 Major OK 62 58.1 3,910.1 Roberts Ranch(4)(12)................... 56.25 Midland TX 82 24.1 2,477.9 Rodman(4)(12).......................... 100.00 Garfield OK 50 51.0 3,729.1 Sand Hills(4)(14)...................... 100.00 Crane TX 100 137.5 2,258.7 Saunders/Vada/Bluitt(4)(14)............ 100.00 Lea NM 47 37.0 1,762.1 Shackelford(4)(12)..................... 100.00 Shackelford TX 15 10.2 1,442.9 Sherman(4)(14)......................... 100.00 Grayson TX 33 5.0 237.9 Sligo.................................. 100.00 Bossier LA 40 35.9 706.2 Spivey(5)(6)(12)....................... 3.87 Harper KS 66 0.5 28.2 *Stingray(8)............................ 100.00 Cameron LA 300 259.2 2,991.8 Texarkana(4)........................... 100.00 Miller AR 22 12.8 440.0 Waskom................................. 50.00 Harrison TX 52 0.0 0.0 West Seminole(4)(12)................... 40.14 Gaines TX 15 5.3 443.9 *Yscloskey(6)(12)(15)................... 30.40 St. Bernard LA 1,750 170.6 3,006.6 OUTSIDE OPERATED: *Bluewater (14)......................... 16.72 Acadia LA 725 60.0 396.2 *Calumet (6)(12)(15).................... 21.91 St. Mary's LA 1,400 33.9 1,141.7 Corney Bayou(12)....................... 10.05 Union LA 50 0.4 8.2 Diamond M (4).......................... 7.67 Scurry TX 25 0.4 109.0 Dover Hennessey (4).................... 7.36 Kingfisher OK 80 2.7 141.9 *Grand Chenier (6)(12)(15).............. 6.46 Cameron LA 450 11.3 176.1 Indian Basin (4)(14)................... 14.19 Eddy NM 210 33.7 433.8 *Iowa (14).............................. 9.92 Jefferson Davis LA 500 31.5 156.1 *Laverne (12)(15)....................... 13.75 Harper OK 190 7.4 480.5 Maysville (4)(12)(15).................. 44.00 Garvin OK 135 32.9 4,233.9 *North Terrebone Robin (14)............. 0.83 Terrebone LA 1,200 7.8 60.2 *Patterson (14)......................... 1.09 St. Mary LA 400 0.0 0.0 *Sea Robin (14)......................... 18.70 Vermillion LA 1,000 39.5 1,053.2 Snyder (7)(12)......................... 3.25 Scurry TX 60 1.5 128.7 *Toca (14).............................. 8.86 St. Bernard LA 1,050 69.9 1,755.7
- --------------- * Indicates a straddle plant, all other gas processing facilities are field plants. (1) Gross to the facility. (2) Gross production, net to the Company's ownership interest. (3) Capacity data is at practical recovery rates. (4) NGC owns the indicated percentage of an associated gas gathering system. (5) NGC owns 2.19 percent of the associated gas gathering system. (6) NGC ownership is adjustable and subject to periodic (usually annual) redetermination. (7) NGC owns the indicated percentage of the Snyder gas gathering system and 3.98 percent of the Diamond M gas gathering system which also supplies the Snyder plant. (8) This facility has no gathering lines. (9) This facility consists of a 100 percent interest in a processing plant and an NGL pipeline, a 100 percent interest in a crude oil pipeline and a 33.33 percent interest in reserves connected and dedicated to the plant. The gathering system behind the processing plant gathers production from Utah and Wyoming. (10) This facility was shut down in December 1995. (11) Includes Enid facility. (12) These assets, or a portion thereof, were acquired in the Trident Combination. (13) Effective March 1, 1996, NGC no longer acts as operator of this facility. 15 (14) These assets were acquired in the Chevron Combination. Consequently, the "1996 Inlet Gas Throughput" and "NGL Production" statistics are for the four month period ended December 31, 1996. (15) Additional interest in this facility was acquired as part of the Chevron Combination. Consequently, a portion of the "1996 Inlet Gas Throughput" and "NGL Production" statistics are for the twelve months ended December 31, 1996, and a portion are for the four month period ended December 31, 1996. (16) These assets were acquired effective August 1, 1996. Consequently, the "1996 Inlet Gas Throughput" and "NGL Production" statistics are for the five month period ended December 31, 1996. FRACTIONATION FACILITIES NGLs removed from a natural gas stream at gas processing plants are in the form of a commingled stream of liquid hydrocarbons. The commingled hydrocarbons are separated at fractionation facilities into the component NGL products ethane, propane, normal butane, isobutane and natural gasoline. The following table provides certain information concerning the fractionation facilities in which NGC owns an interest, including operational data for the year ended December 31, 1996. LOCATION TOTAL PLANT -------------- --------------------------- COUNTY/ PRACTICAL 1996 INLET GAS FRACTIONATION FACILITIES: % OWNED PARISH STATE CAPACITY(1) THROUGHPUT (MBbls/d) Warren Mont Belvieu (2).. 100.00 Chambers TX 205 163.6 Mont Belvieu I (3)....... 80.00 Chambers TX 110 80.0 Mont Belvieu II.......... 38.75 Chambers TX 110 105.3 _________________ (1) Capacity data is at practical recovery rates. (2) Interest in this facility was acquired as part of the Chevron Combination. Consequently, the "1996 Inlet Gas Throughput" statistics are for the four month period ended December 31, 1996. (3) On January 1, 1997, the Company divested itself of the Mont Belvieu I fractionator in accordance with an agreement reached with the FTC related to the Chevron Combination. The Company realized a small after-tax gain in 1997 relating to the sale. In August 1995, the Company shutdown operations of its Lake Charles fractionation facility principally as a result of operational inefficiencies resulting from the age of the facility. The Company diverted daily production in part to a third-party fractionator and in part to its fractionation facilities at Mont Belvieu. NGC owns the liquids gathering system associated with the Lake Charles facility. STORAGE AND TERMINAL FACILITIES The following table provides information concerning terminal and storage facilities owned by the Company:
LOCATION ------------------- COUNTY/ STORAGE AND TERMINAL FACILITIES: % OWNED PARISH STATE DESCRIPTION Hackberry Storage............... 100.00 Cameron LA NGL storage facility Mont Belvieu Storage............ 100.00 Chambers TX NGL storage facility Hattiesburg Storage............. 100.00 Washington MS NGL storage facility Hackberry Terminal.............. 100.00 Cameron LA Marine import/export terminal Mont Belvieu Terminal........... 100.00 Chambers TX Product terminal facility Warrengas Terminal.............. 100.00 Harris TX LPG import/export terminal Calvert City Terminal........... 100.00 Marshall KY Product transport terminal Greenville Terminal............. 100.00 Washington MS Propane terminal Hattiesburg Terminal............ 50.00 Forrest MS Propane terminal Lampton-Love Terminal........... 100.00 Forrest MS Product transport terminal Pt. Everglades Terminal......... 100.00 Broward FL Marine propane terminal Tampa Terminal.................. 100.00 Hillsborough FL Marine propane terminal Mont Belvieu Transport.......... 100.00 Chambers TX Administrative offices and repair shop Abilene Transport............... 100.00 Taylor TX Raw LPG transport terminal Bridgeport Transport............ 100.00 Jack TX Raw LPG transport terminal Gladewater Transport............ 65.00 Gregg TX Raw LPG transport terminal Grand Lakes Tank Farm........... 100.00 Cameron LA Condensate Storage
16 MARKETING HUBS Effective in June 1995, the Company, through its wholly owned subsidiary Hub Services, Inc. ("HSI"), participated in the formation of Enerchange L.L.C. ("Enerchange") which owns and operates three natural gas market area hubs. These marketing hubs are transportation and interchange facilities located in the vicinity of an interconnection of two or more interstate pipelines. Each hub takes deliveries from a large number of suppliers and provides these suppliers with a wide variety of markets in which to sell their gas. By providing access to a large number of gas buyers and sellers, a hub improves the gas market by reducing transaction costs of matching buyers and sellers of gas, enhances the reliability of gas supply and provides buyers and sellers a wide range of gas marketing services. Each marketing hub provides customers with "wheeling", "loaning", "parking" and "title transfer" services. "Wheeling" refers to the simultaneous transfer of gas from one pipeline to another, while "loaning" occurs when one party allows another party to borrow gas. "Parking" services allow a customer to store gas in a hub for future redelivery and "title transfer" services allow a customer to assign title to gas that is in storage. A fee is charged by the hub for services provided to its customers. The three gas marketing hubs are the Chicago Hub, the California Energy Hub and the Ellisburg-Leidy Northeast Hub. These hubs are each operated by Enerchange and HSI provides administrative services with respect to these hubs. The hub operator generally provides asset management services, such as determining the availability of hub services, confirming all nominations for hub services and providing personnel to operate the hub. The hub administrator typically provides marketing, accounting and administrative services. The accounting and administrative services include performing credit checks on prospective customers, negotiating and executing agreements with hub customers, billing and making collections from customers, distributing revenues to hub partner(s) and maintaining accounting records. Although HSI owns a revenue interest in each hub, HSI provides administrative services independent of any influence of NGC and the Company may only use a hub's services on a non- discriminatory basis in accordance with the mandates of pertinent federal and state regulations and contractual terms with its hub partners. The following table provides information with respect to the marketing hubs in which NGC indirectly owns an interest.
HSI'S REVENUE SERVICE NAMES OF FACILITY NAME HSI'S PARTNERS INTEREST AREA CONNECTING PIPELINES Chicago Hub............ NICOR Hub Services 51% Midwest ANR Pipeline Company, Midwestern Gas Pacific Enerchange Transmission Company, Northern Natural Leidy Hub Inc. Gas Company and Natural Gas Pipeline Company of America Ellisburg-Leidy Northeast Hub........ NICOR Hub Services 51% Northeast Transcontinental Gas Pipeline Corporation, Pacific Enerchange Tennessee Gas Pipeline, CNG Leidy Hub Inc. Company, Columbia Gas Transmission Company and National Fuel Gas Supply Corporation California Energy Hub.. NICOR Hub Services 51% California El Paso Natural Gas Company, Kern River Pacific Enerchange Gas Transmission Company, Mojave Leidy Hub Inc. Pipeline Operating Company, Pacific Gas
NATURAL GAS AND CRUDE OIL PIPELINES NGC owns interests in various interstate and intrastate pipelines and gathering systems, the more significant of which include: (i) the Ozark Gas Transmission System, a 266-mile interstate natural gas pipeline with design capacity of 170 MMcf/d that transports gas from eastern Oklahoma to central Arkansas, where the system interconnects with interstate pipelines that serve Midwest and Northeast markets; (ii) a 1,300-mile crude oil system which gathers crude oil in 25 central and southern Oklahoma counties, accessing more than half of the state's production, and serves the U.S. crude oil trading hub in Cushing, Oklahoma and the Wynnewood, Oklahoma refinery; (iii) the Kansas Gas Supply Corporation that owns and operates an approximate 1,200 mile regulated intrastate gas pipeline system in south-central Kansas maintaining current capacity to transport approximately 100 MMcf/d of natural gas; and (iv) an 17 extensive liquids gathering system at the Lake Charles fractionation facility and a 12-inch liquids pipeline that connects the Lake Charles area facilities with the Mont Belvieu fractionation facilities. The following table identifies these and other pipeline and gathering system assets in which NGC owns an interest:
1996 PIPELINE SYSTEMS: % OWNED THROUGHPUT STATE DESCRIPTION Ozark Gas Transmission System.. 100.00 132.7 MMcf/d OK/AR Interstate natural gas pipeline Crude Oil Pipeline System...... 100.00 54.5 MBbls/d OK Intrastate crude oil pipeline Kansas Gas Supply.............. 100.00 70.1 MMcf/d KS/OK Intrastate natural gas pipeline Warren NGL Pipeline............ 100.00 99.0 MBbls/d TX/LA Liquids pipeline between Lake Charles and Mont Belvieu Bridger Lake/Phantex Pipeline.. 100.00 1.6 MBbls/d UT/WY Interstate liquids pipeline Cominco Pipeline............... 100.00 5.9 MMcf/d TX Intrastate natural gas pipeline Pelican Pipeline............... 100.00 40.4 MMcf/d LA Gas gathering pipeline Vermillion Pipeline............ 100.00 46.0 MMcf/d Gulf of Mexico Gas gathering pipeline Western Gas Gathering.......... 100.00 3.4 MMcf/d KS Gas gathering pipeline Pawnee Rock (1)................ 100.00 4.5 MMcf/d KS Gas gathering pipeline Bradshaw Gathering............. 50.00 27.4 MMcf/d KS Gas gathering pipeline Lake Boudreaux................. 100.00 1.3 MMcf/d LA Gas gathering pipeline Grand Lakes Liquids System..... 100.00 0.7 MBbls/d LA Intrastate liquids pipeline
(1) Acquired in July of 1996 in exchange for the Company's interest in the Mesa Pipeline. Throughput information reflects statistics from the acquisition date through the end of 1996. OTHER PROPERTY INVESTMENTS Effective November 1, 1996, the Company and Chevron formed Venice Gas Processing Company, a Texas Limited Partnership ("Partnership"), located in Plaquemines Parish, Louisiana. The Partnership was formed for the purpose of owning and operating the Venice Complex consisting of a 35,000 barrel per day fractionator, gathering systems, a lean oil gas processing plant, NGL storage facilities, a marine terminal and acreage. Expansion to the Venice Complex is expected to include a 300 MMcf/d cryogenic gas processing plant and additional gathering lines to access new Gulf of Mexico production. At December 31, 1996, NGC owned an approximate 37 percent interest in the Partnership. As part of the Contribution, NGC acquired an undivided 50 percent interest in the West Texas Pipeline which is an interstate liquids pipeline capable of transporting 160,000 Bpd from its origin in eastern New Mexico to fractionation facilities in Mont Belvieu, Texas. The pipeline is owned and operated by the West Texas Pipeline Limited Partnership and NGC owns a 50 percent interest in that partnership. TITLE TO PROPERTIES The Company believes it has satisfactory title to its properties in accordance with standards generally accepted in the energy industry, subject to such exceptions which, in the opinion of the Company, in the aggregate would not have a material adverse effect on the use or value of said properties. The operating agreements for certain of the Company's natural gas processing plants and fractionation facilities grant a preferential purchase right to the plant owners in the event any owner desires to sell its interest. Such agreements may also require the consent of a certain percentage of owners before rights under such agreements can be transferred. The Company is subject, as a plant owner under such agreements, to all such restrictions on transfer of its interest. In addition, Warren has granted OXY USA certain rights of first refusal with respect to any future sale of certain assets. Substantially all of NGC's gathering and transmission lines are constructed on rights-of-way granted by the apparent record owners of such property. In some instances, land over which rights-of-way have been obtained may be subject to prior liens that have not been subordinated to the right-of-way grants. Permits have been obtained from public authorities to cross over or under, or to lay facilities in or along, water courses, county roads, municipal streets and state highways, and in some instances, such permits are revocable at the election of the grantor. Permits have also been obtained from railroad companies to cross over or under lands or rights-of-way, many of which are 18 also revocable at the grantor's election. Some such permits require annual or other periodic payments. In a few minor cases, property was purchased in fee. ACQUISITION AND CONSTRUCTION PROJECTS A subsidiary of the Company is committed to contribute approximately $62 million to Venice during 1997. The funds will be used principally for the construction of a cryogenic gas processing plant and an expansion of the existing gas gathering system. NGC, indirectly through subsidiaries, has formed a joint venture to develop the Avoca storage project located in southeastern New York. The Company is committed to contribute its respective share of construction costs of the project. Current cost estimates commit the Company to approximately $10 million of expenditures. A subsidiary of the Company is committed to contribute a total of $10 million to Indeck North American Power Fund, L.P. and Indeck North American Power Partners, L.P. (collectively "Indeck"), two partnerships that are engaged in the acquisition of electric power generating facilities. The contributions represent the Company's pro rata share of funds to be used for selected acquisitions. At December 31, 1996, the Company had paid $3.7 million of this commitment. INDUSTRY SEGMENTS Segment financial information is included in Note 13 of NGC's consolidated financial statements and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS NGC is involved in certain legal proceedings that have arisen in the ordinary course of business. Management believes the outcome of such proceedings, even if adversely determined, will not have a material effect on NGC's business or financial condition. On February 26, 1996, Apache Corporation ("Apache") requested arbitration to resolve issues arising under a gas marketing contract ("Contract") with Clearinghouse pursuant to the arbitration provisions of such Contract. On February 16, 1996, Clearinghouse responded by denying Apache's claims and by alleging several counterclaims of its own with respect to Apache's performance under the Contract. In connection with the arbitration proceedings, on April 9, 1996, Apache filed a lawsuit against Clearinghouse in the 55th Judicial District Court of Harris County, Texas ("Court"). In that lawsuit, Apache alleges that Clearinghouse is intentionally delaying the progress of the arbitration, and it requests relief, pursuant to the Texas General Arbitration Act, in the form of an order appointing a third arbitrator, compelling discovery and requiring Clearinghouse to assign certain contracts allegedly belonging to Apache. Clearinghouse filed a response to the lawsuit on May 6, 1996, asking that the Court dismiss Apache's application for relief or abate the suit pending resolution of all matters by the arbitration panel according to the terms of the Contract. Clearinghouse also requested payment of all attorneys' fees and other litigation expenses incurred in responding to and defending the lawsuit. On September 18, 1996, the arbitration panel granted a revised discovery schedule which moved the hearing previously scheduled for December 1996 to April 7, 1997. On February 8, 1997, the arbitration was further postponed until September 15, 1997. In the arbitration and again in the lawsuit, Apache claims that it is entitled to actual damages in an undetermined amount in excess of $8 million and punitive damages. Clearinghouse intends to vigorously defend the Apache suit and arbitration. Based on review of the facts and through consultation with outside counsel, NGC management believes the ultimate resolution of the Apache suit will not have an adverse impact on the Company's financial position or results of operations, and that any payments eventually made in connection with the arbitration and/or the lawsuit will be substantially less than the amount claimed. The Company assumed liability for various claims and litigation in connection with the Chevron Combination, the Trident Combination and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. NGC believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items, individually or in the aggregate, will not have a material adverse impact on the Company's financial position or results of operations. Further, the Company is 19 subject to various legal proceedings and claims which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's $0.01 par value common stock ("Common Stock") is listed and traded on the New York Stock Exchange under the ticker symbol "NGL". The number of stockholders of record of the Common Stock as of March 27, 1997, was 247. The following table sets forth the high and low closing prices for transactions involving the Company's Common Stock for each calendar quarter, as reported on the New York Stock Exchange Composite Tape and related dividends paid per common share during such periods. High Low Dividend ------- ------- -------- 1996 ---- First Quarter.................. $12.750 $ 8.625 $0.0125 Second Quarter................. 16.125 12.250 0.0125 Third Quarter.................. 17.000 14.250 0.0125 Fourth Quarter................. 24.750 15.625 0.0125 1995 (a) ---- First Quarter.................. $11.500 $ 9.000 $0.0125 Second Quarter................. 10.375 8.750 0.0125 Third Quarter.................. 10.375 9.000 0.0125 Fourth Quarter................. 9.625 8.375 0.0125 ------- ------- ------- _____________________ (a) Stock price and per share dividend rate information relates to Holding for the period commencing on January 1, 1995 and continuing through and including March 13, 1995, and NGC thereafter. The holders of the Common Stock are entitled to receive dividends if, when and as declared by the Board of Directors of the Company out of funds legally available therefor. Consistent with the Board of Directors' intent to establish a policy of declaring quarterly cash dividends, a cash dividend of $0.0125 per share was declared and paid in each of the four quarters of 1996. Beginning in the third quarter of 1996, the Company has paid quarterly cash dividends on its Series A Preferred Stock of $0.0125 per share, or $0.05 per share on an annual basis. The NGC Corporation Credit Agreement and the Company's 7.625% and 6.75% Senior Notes do not contain any specific restrictions on the ability of the Company or any of its subsidiaries to declare and pay dividends in respect of its or their capital stock, although certain financial covenants contained in such credit agreement and in the indenture covering the 7.625% and 6.75% Senior Notes may limit the ability of the Company to do so. The indenture setting forth the terms and conditions of the 14% Senior Subordinated Notes of Warren due 2001 and the 10.25% Subordinated Notes of Warren due 2003 contain restrictions on Warren's ability to pay cash dividends to NGC, which in turn may adversely affect NGC's ability to pay dividends to its shareholders. 20 ITEM 6. SELECTED FINANCIAL DATA The selected financial information presented below was derived from, and is qualified by reference to, the Consolidated Financial Statements of the Company, including the Notes thereto, incorporated herein by reference. Please refer to the Notes to Consolidated Financial Statements for information on transactions and accounting classifications which have affected the comparability of the periods presented below. The selected financial information should be read in conjunction with the Consolidated Financial Statements and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended December 31, ----------------------------------------------------------------- 1996(1) 1995(2) 1994(3) 1993 1992 ---------- --------- ---------- --------- ----------- (in thousands, except per share informaton) STATEMENT OF OPERATIONS DATA: Revenues $7,260,202 $3,665,946 $3,237,843 $2,790,977 $2,492,935 Operating margin 369,500 194,660 99,126 91,850 96,806 General and administrative expenses 100,032 68,057 47,817 36,585 41,103 Depreciation and amortization expense 71,676 44,913 8,378 7,594 7,221 Net income (4) $ 113,322 $ 92,705 $ 42,101 $ 45,997 $ 43,858 Net income per common share (5) $0.83 $0.82 n/a n/a n/a Pro forma income per common share (6) n/a $0.40 $0.28 $0.30 $0.30 Weighted average common and common equivalent shares outstanding 136,099 113,176 97,804 97,804 97,804 CASH FLOW DATA: Cash flows from operating activities $ (30,954) $ 90,648 $ 17,170 $ 20,292 $ 66,869 Cash flows from investing activities (111,140) (310,623) (38,376) (7,911) (21,024) Cash flows from financing activities 176,037 221,022 18,959 (46,418) (19,816) OTHER FINANCIAL DATA: EBITDA (7) $ 289,023 $ 142,538 $ 57,716 $ 57,553 $ 58,299 Dividends or distributions to partners, net 6,740 9,253 14,041 14,118 19,816 CAPEX, acquisitions and investments (8) 859,047 979,603 47,014 16,464 12,197 As of December 31, ----------------------------------------------------------------- 1996(1) 1995(2) 1994 1993 1992 ---------- --------- ---------- --------- ----------- (in thousands) BALANCE SHEET DATA: Current assets $1,936,721 $ 762,939 $ 445,782 $ 402,602 $ 385,334 Current liabilities 1,548,987 705,674 404,144 375,662 357,946 Property and equipment, net (9) 1,691,379 948,511 114,062 84,539 90,037 Total assets 4,186,810 1,875,252 645,471 512,534 480,458 Long-term debt 988,597 522,764 33,000 --- 19,800 Total equity 1,116,733 552,380 152,213 120,689 88,745
_________________ (1) The Chevron Combination was accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of September 1, 1996, the effective date of the Chevron Combination for accounting purposes, and the results of operations include Chevron's operations from September 1, 1996, forward. (2) The Trident Combination was accounted for under the purchase method of accounting and, because the Clearinghouse Owners acquired approximately 82 percent of NGC, for accounting purposes Clearinghouse was considered the acquiring company. Accordingly, the purchase price was allocated to the Trident assets acquired and liabilities assumed based on their estimated fair values as of March 1, 1995, the effective date of the Trident Combination for accounting purposes, and the results of operations include Trident's operations from March 1, 1995, forward. (3) Results for the year ended December 31, 1994, include the effects of a change to mark-to-market accounting for fixed-price natural gas transactions. (4) Net income does not include a provision for federal income taxes, other than minimal amounts on the taxable income of Clearinghouse's corporate subsidiaries, for the years ended December 31, 1994, 1993 and 1992, respectively. (5) Net income per common and common equivalent share is based on reported net income for the period. The weighted average shares outstanding for the year ended December 31, 1995, is based on the parameters discussed in footnote (6). (6) Pro forma net income per common and common equivalent share is based on reported net income for the period adjusted for the incremental statutory federal and state income taxes that would have been provided had Clearinghouse been a taxpaying entity. The weighted average shares outstanding for the year ended December 31, 1995, is based on the weighted average number of common shares outstanding plus the common stock equivalents that would arise from the exercise of outstanding options or warrants, when dilutive. Pro forma weighted average shares outstanding of 97.8 million shares for the years ended December 31, 1994, 1993 and 1992, respectively, give effect to the terms of the Trident Combination and the common stock equivalent shares outstanding as of the effective date of the Trident Combination assuming a common stock market price of $12 in all periods. (7) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is presented as a measure of the Company's ability to service its debt and to make capital expenditures, not as a measure of operating results, and is not presented in the Consolidated Financial Statements. (8) Includes value assigned assets in the Chevron and Trident Combinations. (9) The 1992 amount of $90.0 million includes $16.4 million of property, plant and equipment classified as held for sale. These assets were sold in March 1993. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears on pages 26 through 38 of the Annual Report to Shareholders and is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company appear on pages 39 through 62 of the Annual Report to Shareholders and are incorporated herein by reference. The financial statement schedule and supplementary data of the Company are set forth at pages F-1 through F-5 inclusive, found at the end of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required by this Item 10 will be contained in the definitive Proxy Statement of the Company for its 1997 Annual Meeting of Stockholders (the "Proxy Statement") under the headings "Proposal 1 -- Election of Directors" and "Executive Compensation -- Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996. Reference is also made to the information appearing in Part I of this Annual Report on Form 10-K under the caption "Item 1A. Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation will be contained in the Proxy Statement under the heading "Executive Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of certain of the Company's outstanding securities will be contained in the Proxy Statement under the heading "Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding related party transactions will be contained in the Proxy Statement under the headings "Principal Stockholders", "Proposal 1 -- Election of Directors" and "Executive Compensation -- Indebtedness of Management" and "-- Certain Relationships and Related Transactions" and is incorporated herein by reference. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K ANNUAL FORM REPORT 10-K CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants 39 F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995 40 -- Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 41 -- Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 42 -- Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 43 -- Notes to Consolidated Financial Statements 44 -- FINANCIAL STATEMENT SCHEDULE Condensed Financial Statements of the Registrant -- F-2 FINANCIAL STATEMENTS OF UNCONSOLIDATED AFFILIATE Accord Energy Limited Annual Report for the year ended December 31, 1996 and 1995 -- 1-20 23 EXHIBIT NUMBER DESCRIPTION 2.1 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and between NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(14) 2.2 - Amendment to Combination Agreement, dated as of August 29, 1996, by and among NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(11) +2.3 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow Chemical Company, NGC Corporation and NGC Acquisition Corporation II dated as of February 17, 1997. +2.4 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of February 17, 1997. +3.1 - Restated Certificate of Incorporation of NGC Corporation. +3.2 - Amended and Restated By-Laws of NGC Corporation. 4.1 - Indenture, dated as of September 9, 1993, between Trident NGL, Inc. and Ameritrust Texas National Association, as Trustee.(5) 4.2 - Form of Senior Subordinated Note (included in Exhibit 4.1). 4.3 - Indenture, dated as of August 30, 1991, between Trident NGL, Inc. and Ameritrust Texas National Association, as Trustee.(1) 4.4 - Form of Senior Subordinated Note (included in Exhibit 4.3). 4.5 - Note Purchase Agreement, dated as of August 30, 1991, by and among Trident NGL, Inc. and the Purchasers named therein.(2) 4.6 - Indenture, dated as of April 15, 1993, between Trident NGL, Inc. and The First National Bank of Boston, as Trustee.(3) 4.7 - Form of Subordinated Note (included in Exhibit 4.6). 4.8 - First Supplemental Indenture, dated as of April 15, 1993, between Trident NGL, Inc. and Ameritrust Texas National Association, as Trustee.(3) 4.9 - Second Supplemental Indenture, dated as of September 9, 1993, between Trident NGL, Inc. and Ameritrust Texas National Association, as Trustee.(5) 4.10 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the name of J. Otis Winters.(4) 4.11 - Credit Agreement dated as of March 14, 1995, among NGC Corporation and The First National Bank of Chicago, individually and as agent, The Chase Manhattan Bank National Association and Nations Bank of Texas N.A., individually and as co-agent, and certain other lenders named therein.(9) 4.12 - Indenture, dated as of December 11, 1995, between NGC Corporation, the Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee.(8) 4.13 - Form of Senior Notes (included in Exhibit 4.12). 4.14 - Consent and Second Amendment to Credit Agreement, dated as of July 26, 1996, among NGC Corporation and The First National Bank of Chicago, individually and as agent, The Chase Manhattan 24 EXHIBIT NUMBER DESCRIPTION Bank National Association and NationsBank of Texas, N.A., individually as co-agent, and certain other lenders named therein.(11) 4.15 - Letter of Credit Facility Agreement, dated as of September 1, 1996, by and among NGC Corporation and Canadian Imperial Bank of Commerce, Individually and as Agent, and the Lenders named therein. (11) 4.16 - Indenture, dated as of December 11, 1995, by and among NGC Corporation, the Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee.(8) 4.17 - First Supplemental Indenture, dated as of August 31 1996, by and among NGC Corporation, Midstream Combination Corp., the Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995.(11) 4.18 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation, Electric Clearinghouse, Inc. and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995.(11) 4.19 - Indenture, dated September 26, 1996, among NGC, the Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee.(12) 4.20 - Form of 7 5/8% Senior Debenture due October 15, 2026.(12) 10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as amended on June 6, 1991 and August 30, 1991, by and between OXY USA Inc. and Trident Energy, Inc.(1) 10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between OXY USA Inc. and Trident NGL, Inc.(1) 10.3 - Product Sale and Delivery Agreement between Trident NGL, Inc., OXY NGL Pipeline Company and OXY Petrochemicals, Inc. dated as of August 30, 1991.(1) 10.4 - Right of First Refusal Agreement, dated as of August 30, 1991, by and between OXY USA Inc. and Trident NGL, Inc. (Lake Charles facilities and Trident NGL Pipeline).(1) 10.5 - Right of First Refusal Agreement, dated as of August 30, 1991, by and between OXY USA Inc. and Trident NGL, Inc. (Hackberry storage facilities and terminal).(1) +10.6 - NGC Corporation Amended and Restated 1991 Stock Option Plan. 10.7 - Stock Purchase Agreement between Trident NGL Holding, Inc. and J. Otis Winters.(5) 10.8 - Agreement for the Construction, Ownership and Operation of the Mont Belvieu I Fractionation Facility between Trident NGL, Inc. and Union Pacific Fuels, Inc. dated November 17, 1993.(6) 10.9 - Employment Agreement, dated as of May 19, 1992, between C. L. Watson and Natural Gas Clearinghouse.(7) 10.10 - Employment Agreement, dated as of May 19, 1992, between Stephen W. Bergstrom and Natural Gas Clearinghouse.(7) 10.11 - NGC Corporation Amended and Restated Employee Equity Option Plan.(7) (See Appendix III to the Proxy Statement/Prospectus). 25 EXHIBIT NUMBER DESCRIPTION 10.12 - The Amended and Restated Natural Gas Clearinghouse Deferred Compensation Plan, dated February 28, 1992.(7) 10.13 - Natural Gas Clearinghouse Above Base Incentive Compensation Plan, as amended and restated, effective as of January 1, 1994.(7) 10.14 - Unanimous Shareholder Agreement dated February 25, 1994, among Novacorp International, Inc. (formerly NOVA Gas Services Ltd.), NGC Canada Inc. and Novagas Clearinghouse Ltd.(7) 10.15 - First Amendment to Unanimous Shareholders Agreement, dated May 20, 1994, among Novacorp International, Inc. (formerly NOVA Gas Services Ltd.), NGC Canada Inc. and Novagas Clearinghouse Ltd.(7) 10.16 - Limited Partnership Agreement, dated February 25, 1994, among Novacorp International, Inc. (formerly NOVA Gas Services Ltd.), NGC Canada Inc. and Novagas Clearinghouse Ltd.(7) 10.17 - Amended Contract for Processing Gas, dated January 1, 1995, by and between Amoco Production Company and Trident NGL, Inc.(10) 10.18 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A. Furbacher.(13) 10.19 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant.(13) 10.20 - First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant.(13) 10.21 - Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp.(11) 10.22 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC Corporation.(13) 10.23 - Stockholders Agreement dated, May 22, 1996, among BG Holdings, Inc., NOVA Gas Services (U.S.) Inc. and Chevron U.S.A. Inc.(13) 10.24 - Registration Rights Agreement, dated as of August 31,1996, among NGC Corporation, BG Holdings, Inc., NOVA Gas Services (U.S.) Inc. and Chevron U.S.A. Inc.(11) 10.25 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership, Electric Clearinghouse, Inc. and other NGC Corporation affiliates.(11) *10.26 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A. Inc. and Natural Gas Clearinghouse.(11) *10.27 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership.(11) *10.28 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron U.S.A. Inc.(11) 26 EXHIBIT NUMBER DESCRIPTION *10.29 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products Company and Natural Gas Clearinghouse.(11) 10.30 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron U.S.A. Production Company.(13) 10.31 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Chemical Company.(13) 10.32 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Products Company.(13) *10.33 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership.(11) *10.34 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Products Company.(11) *10.35 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership.(11) *10.36 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Chemical Company.(11) *10.37 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and Warren Petroleum Company, Limited Partnership.(11) *10.38 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Pipe Line Company.(11) 10.39 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Midstream Combination Corp.(11) *10.40 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership.(13) *10.41 - Product Storage Lease and Terminal Access Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership.(13) 10.42 - Lone Star Swap Transaction Confirmation Term Sheet, dated as of September 1, 1996, among Chevron U.S.A. Inc. and NGC Corporation.(11) *10.43 - West Texas LPG Pipeline Limited Partnership Agreement, dated as of September 1, 1996, by and between Chevron Pipe Line Company, or an affiliate thereof, and an affiliate of NGC Corporation.(11) *10.44 - West Texas LPG Pipeline Operating Agreement, dated as of September 1, 1996, by and between Chevron Pipe Line Company, or an affiliate thereof, and the West Texas LPG Pipeline Partnership.(11) *10.45 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and Warren Petroleum Company, Limited Partnership.(11) *10.46 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C., dated as of August 31, 1996, by and between Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership.(11) 27 EXHIBIT NUMBER DESCRIPTION +10.47 - Employment Agreement, dated as of November 15, 1996, between Thomas M. Matthews and NGC Corporation. +13 - Annual Report (portions incorporated by reference in this Form 10-K). +22.1 - Subsidiaries of the Registrant. +23.1 - Consent of Arthur Andersen LLP. ___________________ + Filed herewith * Exhibit omits certain information which the Company has filed separately with the Commission pursuant to a confidential treatment request pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. (1) Incorporated by reference to exhibits to the Registration Statement of Trident NGL, Inc. on Form S-1, Registration No. 33-43871. (2) Incorporated by reference to exhibits to the Registration Statement of Trident NGL, Inc. on Form S-1, Registration No. 33-46416. (3) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 1993 of Trident NGL, Inc., Commission File No. 1-11156. (4) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding, Inc., Commission File No. 1-11156. (5) Incorporated by reference to exhibits to the Registration Statement of Trident NGL Holding, Inc. on Form S-1, Registration No. 33-68842. (6) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1993 of Trident NGL Holding, Inc., Commission File No. 1-11156. (7) Incorporated by reference to exhibits to the Registration Statement of Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907. (8) Incorporated by reference to the Registration Statement of NGC Corporation on Form S-3, Registration No. 33-97368. (9) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, Commission File 1-11156, dated March 14, 1995. (10) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1994, of NGC Corporation, Commission File No. 1-11156. (11) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1996 of NGC Corporation, Commission File No. 1-11156. (12) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, dated October 16, 1996, Commission File No. 1-11156. (13) Incorporated by reference to exhibits to the Registration Statement of Midstream Combination Corp. on Form S-4, Registration No. 333-09419. 28 (14) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, dated May 22, 1996, Commission File No. 1-11156. (b) Reports on Form 8-K of NGC Corporation. Current Report on Form 8-K of NGC Corporation, Commission File No. 1-11156, dated October 9, 1996 (Announcement that the Company planned to record a third-quarter pretax charge to earnings to provide a reserve of approximately $4 million relating to the difference between the cost associated with the Company's then-current lease at its headquarters and the anticipated revenue from subletting that space after the Company's relocation to downtown Houston in the first quarter of 1997). Current Report on Form 8-K on NGC Corporation, Commission File No. 1-11156 dated October 11, 1996 (Announcement of a lawsuit filed on October 11, 1996, in the Queen's Bench of Alberta, Judicial District of Calgary, by a group of Canadian producers against Pan-Alberta Gas Ltd., a 49.9% indirect subsidiary of the Company). Current Report on Form 8-K of NGC Corporation, Commission File No. 1-11156, dated October 16, 1996 (On December 16, 1996, the Company sold $175 million of its 7 5/8% Senior Debentures due October 15, 2026 pursuant to an underwritten public offering). 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NGC CORPORATION Date: March 28,1997 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board, 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Stephen W. Bergstrom ------------------------------------- Stephen W. Bergstrom, Senior Vice President and Director Date: March 28, 1997 By: /s/ Stephen J. Brandon ------------------------------------- Stephen J. Brandon, Director Date: March 28, 1997 By: /s/ David R. Varney ------------------------------------- David R. Varney, Director Date: March 28, 1997 By: /s/ P. Nicholas Woollacott ------------------------------------- P. Nicholas Woollacott, Director Date: March 28, 1997 By: ------------------------------------- C. Kent Jespersen, Director Date: March 28, 1997 By: ------------------------------------- Jeffrey M. Lipton, Director Date: March 28, 1997 By: ------------------------------------- Albert Terence Poole, Director 30 Date: March 28, 1997 By: /s/ Darald W. Callahan ---------------------- Darald W. Callahan, Director Date: March 28, 1997 By: /s/ Donald L. Paul ------------------------------------- Donald L. Paul, Director Date: March 28, 1997 By: /s/ Peter J. Robertson ------------------------------------- Peter J. Robertson, Director Date: March 28, 1997 By: /s/ Daniel L. Dienstbier ------------------------------------- Daniel L. Dienstbier, Director Date: March 28, 1997 By: /s/ J. Otis Winters ------------------------------------- J. Otis Winters, Director 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATURAL GAS CLEARINGHOUSE By: NGC Corporation, its general partner Date: March 28, 1997 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board, Chief Executive Officer and Director of NGC Corporation Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller of NGC Corporation (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Stephen W. Bergstrom ------------------------------------- Stephen W. Bergstrom, Senior Vice President and Director of NGC Corporation Date: March 28, 1997 By: /s/ Stephen J. Brandon ------------------------------------- Stephen J. Brandon, Director of NGC Corporation Date: March 28, 1997 By: /s/ David R. Varney ------------------------------------- David R. Varney, Director of NGC Corporation Date: March 28, 1997 By: /s/ P. Nicholas Woollacott ------------------------------------- P. Nicholas Woollacott, Director of NGC Corporation 32 Date: March 28, 1997 By: ------------------------------------- C. Kent Jespersen, Director of NGC Corporation Date: March 28, 1997 By: ------------------------------------- Jeffrey M. Lipton, Director of NGC Corporation Date: March 28, 1997 By: ------------------------------------- Albert Terence Poole, Director of NGC Corporation Date: March 28, 1997 By: /s/ Daniel L. Dienstbier ------------------------------------- Daniel L. Dienstbier, Director of NGC Corporation Date: March 28, 1997 By: /s/ J. Otis Winters ------------------------------------- J. Otis Winters, Director of NGC Corporation Date: March 28, 1997 By: /s/ Darald W. Callahan ------------------------------------- Darald W. Callahan, Director of NGC Corporation Date: March 28, 1997 By: /s/ Donald L. Paul ------------------------------------- Donald L. Paul, Director of NGC Corporation Date: March 28, 1997 By: /s/ Peter J. Robertson ------------------------------------- Peter J. Robertson, Director of NGC Corporation 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARREN NGL, INC. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Director Date: March 28, 1997 By: /s/ Kenneth E. Randolph ------------------------------------- Kenneth E. Randolph, Senior Vice President and Director 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP By: Warren Energy, Inc., its general partner Date: March 28, 1997 By: /s/ Stephen A. Furbacher ----------------------------------- Stephen A. Furbacher, President and Director of Warren Energy, Inc. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President and Director of Warren Energy, Inc. (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller of Warren Energy, Inc. (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph ------------------------------------- Kenneth E. Randolph, Senior Vice President and Director of Warren Energy, Inc. Date: March 28, 1997 By: /s/ Michael B. Barton ------------------------------------- Michael B. Barton, Vice President and Director of Warren Energy, Inc. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP By: Warren Petroleum G.P., Inc., its general partner Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President and Director of Warren Petroleum G.P., Inc. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President and Director of Warren Petroleum G.P., Inc. (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller of Warren Petroleum G.P., Inc. (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Senior Vice President and Director of Warren Petroleum G.P., Inc. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, Senior Vice President and Director of Warren Petroleum G.P., Inc. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARREN GAS LIQUIDS, INC. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ William A. Zartler ------------------------------------- William A. Zartler, Vice President and Director Date: March 28, 1997 By: /s/ Kenneth E. Randolph ------------------------------------ Kenneth E. Randolph, Senior Vice President and Director 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NGC OIL TRADING AND TRANSPORTATION, INC. Date: March 28, 1997 By: /s/ James H. Current, Sr. ------------------------------------- James H. Current, Sr., President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ James H. Current, Sr. ------------------------------------- James H. Current, Sr., President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph ------------------------------------- Kenneth E. Randolph, Senior Vice President and Director Date: March 28, 1997 By: /s/ Mike Barton -------------------------------------- Mike Barton, Vice President and Director 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NGC UK LIMITED Date: March 28, 1997 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Jacob S. Ulrich ------------------------------------- Jacob S. Ulrich, Director Date: March 28, 1997 By: /s/ Kenneth E. Randolph ------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ James H. Current, Sr. ------------------------------------- James H. Current, Sr., Director 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NGC CANADA, INC. Date: March 28, 1997 By: /s/ Rodney D. Wimer ------------------------------------- Rodney D. Wimer, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Rodney D. Wimer --------------------------------------- Rodney D. Wimer, President (Principal Executive Officer) Date: March 28, 1997 By: /s/ C. L. Watson --------------------------------------- C. L. Watson, Director Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ James T. Bruvall --------------------------------------- James T. Bruvall, Director 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WTLPS, INC. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Senior Vice President and Director Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, Senior Vice President and Director 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WPC LP, INC. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni ------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Charles H. Brownman ---------------------------------------- Charles H. Brownman, Director Date: March 28, 1997 By: /s/ Mark J. Gentile --------------------------------------- Mark J. Gentile, Director Date: March 28, 1997 By: /s/ Jesse A. Finkelstein --------------------------------------- Jesse A. Finkelstein, Director 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NGC FUTURES, INC. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Joel M. Staib --------------------------------------- Joel M. Staib, Director 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELECTRIC CLEARINGHOUSE, INC. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ C.L. Watson --------------------------------------- C.L. Watson, Director Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Dan W. Ryser --------------------------------------- Dan W. Ryser, Director 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HUB SERVICES, INC. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Vincent T. McConnell --------------------------------------- Vincent T. McConnell, Director 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NGC STORAGE, INC. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom ------------------------ Stephen W. Bergstrom, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen W. Bergstrom --------------------------------------- Stephen W. Bergstrom, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Michael B. Barton --------------------------------------- Michael B. Barton, Director 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NGC ANADARKO GATHERING SYSTEMS, INC. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Stephen W. Bergstrom ---------------------------------------- Stephen W. Bergstrom, Director 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARREN GAS MARKETING, INC. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------0------------------ Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Michael B. Barton --------------------------------------- Michael B. Barton, Director 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARREN NGL PIPELINE COMPANY Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Michael B. Barton --------------------------------------- Michael B. Barton, Director 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KANSAS GAS SUPPLY CORPORATION Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher ----------------=---------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Michael B. Barton --------------------------------------- Michael B. Barton, Director 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARREN INSTRASTATE GAS SUPPLY, INC. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President 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 the registrant and in the capacities and on the dates indicated. Date: March 28, 1997 By: /s/ Stephen A. Furbacher --------------------------------------- Stephen A. Furbacher, President and Director (Principal Executive Officer) Date: March 28, 1997 By: /s/ Melinda Tosoni --------------------------------------- Melinda Tosoni, Vice President and Controller (Principal Financial and Accounting Officer) Date: March 28, 1997 By: /s/ Kenneth E. Randolph --------------------------------------- Kenneth E. Randolph, Director Date: March 28, 1997 By: /s/ Michael B. Barton --------------------------------------- Michael B. Barton, Director 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of NGC Corporation: We have audited in accordance with generally accepted auditing standards the financial statements included in NGC Corporation (a Delaware corporation) and subsidiaries' annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated March 14, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas March 14, 1997 F-1 SCHEDULE I NGC CORPORATION CONDENSED BALANCE SHEETS OF REGISTRANT (in thousands, except share data) DECEMBER 31, DECEMBER 31, 1995 1996 ----------- ---------- ASSETS CURRENT ASSETS Cash $ -- $ 6 Accounts receivable 108 -- Intercompany accounts receivable 337,876 450,631 Prepayments and other assets 2,793 5,053 ----------- ----------- 340,777 455,690 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT 8,216 1,287 Less: accumulated depreciation (2,193) (196) ----------- ----------- 6,023 1,091 ----------- ----------- OTHER ASSETS Investments in affiliates 1,219,027 547,866 Intercompany note receivable 237,000 237,000 Deferred taxes and other assets 13,262 36,393 ----------- ----------- $ 1,816,089 $ 1,278,040 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Intercompany accounts payable $ 16,295 $ 390,233 Accrued liabilities 18,914 2,427 ----------- ----------- 35,209 392,660 Long-term debt 644,000 333,000 Deferred taxes 20,147 -- ----------- ----------- 699,356 725,660 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 50,000,000 shares authorized: 8,000,000 shares designated as Series A Participating Preferred Stock, 7,815,363 shares issued and outstanding at December 31, 1996 75,418 -- Common stock, $0.01 par value, 400,000,000 shares authorized: 149,846,503 shares issued and outstanding at December 31, 1996, and 110,493,411 shares issued and 105,031,874 shares outstanding at December 31, 1995 1,498 1,105 Additional paid-in capital 896,432 515,785 Retained earnings 143,385 35,490 ------------ ----------- 1,116,733 552,380 ------------ ----------- $ 1,816,089 $ 1,278,040 ============ ============ See Note to Registrant's Financial Statements. F - 2 SCHEDULE I NGC CORPORATION STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE TEN MONTH PERIOD FROM INCEPTION (MARCH 1, 1995) THROUGH DECEMBER 31, 1995 (in thousands) 1996 1995 ------------- ------------- Depreciation and amortization $ (496) $ (196) General and administrative expenses -- -- ------------- ------------- Operating loss (496) (196) Equity in earnings of affiliates 182,159 60,744 Intercompany interest and other income 17,968 13,570 Interest expense (28,071) (18,152) Other expenses (1,915) (135) ------------- ------------- Income before income taxes 169,645 55,831 Income tax provision 56,323 16,056 ------------- ------------- NET INCOME $ 113,322 $ 39,775 ============= ============= See Note to Registrant's Financial Statements. F - 3 SCHEDULE I NGC CORPORATION STATEMENTS OF CASH FLOWS OF THE REGISTRANT FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE TEN MONTH PERIOD FROM INCEPTION (MARCH 1, 1995) THROUGH DECEMBER 31, 1995 (in thousands)
1996 1995 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 113,322 $ 39,775 Items not affecting cash flows from operating activities: Depreciation and amortization 1,996 196 Equity in earnings of affiliates, net of cash distributions (182,159) (60,744) Deferred taxes 45,896 17,303 Other 7,466 1,475 Change in assets and liabilities resulting from operating activities: Accounts receivable (108) -- Intercompany transactions (298,592) (60,398 Prepayments and other assets 2,260 (5,053) Accrued liabilities 8,487 2,427 Other, net (1,193) 4,150 ------------ ------------ Net cash used in operating activities (302,625) (60,869) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (2,055) -- Acquisition of Trident NGL, Inc. -- (166,900) Other -- (1,333) ------------ ------------ Net cash used in investing activities (2,055) (168,233) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 1,542,000 1,224,039 Repayments of long-term borrowings (1,231,000) (891,039) Intercompany advances -- (237,000) Proceeds from sale of capital stock, options and warrants 858 725 Capital contributions -- 135,000 Dividends and other distributions (7,184) (2,617) ------------ ------------ Net cash provided by financing activities 304,674 229,108 ------------ ------------ Net (decrease) increase in cash and cash equivalents (6) 6 Cash and cash equivalents, beginning of period 6 -- ------------ ------------ Cash and cash equivalents, end of period $ -- $ 6 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid (net of amount capitalized) $ 22,341 $ 16,339 ============ ============ Taxes paid (net of refunds) $ 1,444 $ -- ============ ============ Cash dividends paid to parent by consolidated or unconsolidated subsidiaries $ -- $ -- ============ ============
See Note to Registrant's Financial Statements. F - 4 SCHEDULE I NGC CORPORATION NOTE TO REGISTRANT'S FINANCIAL STATEMENTS Note 1 -- BASIS OF PRESENTATION NGC Corporation ("NGC" or the "Company") is a holding company that principally conducts all of its business through its subsidiaries. The Company is the result of a strategic business combination ("Trident Combination") between Natural Gas Clearinghouse and Trident NGL Holding, Inc. ("Holding"), under which Holding was renamed NGC Corporation. Pursuant to the terms of the Trident Combination, Holding was the legally surviving corporation and Clearinghouse was considered the acquiring company for accounting purposes resulting in a new historical cost basis for Holding beginning March 1, 1995, the effective date of the Trident Combination. The accompanying condensed Registrant Financial Statements were prepared pursuant to rules promulgated by the Securities and Exchange Commission. In accordance with these rules, the accompanying statements reflect the financial position, results of operations and cash flows of NGC, the holding company of NGC Corporation, at December 31, 1996, and for the year then ended, and at December 31, 1995, and for the ten month period from the effective date of the Trident Combination through December 31, 1995. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto of NGC Corporation incorporated by reference into this Form 10-K. F - 5 ACCORD ENERGY LIMITED ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 1996 REGISTERED NO: 2877398 ACCORD ENERGY LIMITED ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 1996 Pages ----- Director's Report...................................... 1-4 Statement of Directors' Responsibilities............... 5 Report of the Auditors................................. 6 Consolidated Profit and Loss Account................... 7 Balance Sheet.......................................... 8 Consolidated Cash Flow Statement....................... 9 Notes to the Financial Statements...................... 10-20 ACCORD ENERGY LIMITED DIRECTORS' REPORT FOR THE YEAR ENDED 31 DECEMBER 1996 The Directors present their report and audited financial statements for the year ended 31 December 1996. PRINCIPAL ACTIVITIES AND REVIEW OF BUSINESS The principal trading activities of the group in the year were the wholesale trading of natural gas and crude oil. There was no trading of electricity carried out in the year but the group has continued to explore opportunities in this area as it sees electricity trading as an integral part of its strategic objective to be a major player in wholesale energy trading markets. The 1996 results represent a significant improvement on last year's performance in terms of growth of the business and financial results. Turnover from gas and oil trading increased by 43% with a corresponding improvement in overall pre-tax profits. The major contribution to these improvements came from the gas trading business which recorded substantial growth in volumes traded during a period which saw growing competition and the entry of more players to the market. The year also saw the introduction of the Network Code and the commencement of flexibility mechanism trading in which the group was actively involved. Volumes traded by the company in this first period of operation were relatively small but provided a marginal contribution to profits. Maintaining the level of performance achieved in the year is likely to become increasingly more difficult in view of the uncertainties in the gas trading market and the several changes taking place in the UK gas market. However, the directors are committed to maximising returns by ensuring that the company remains a major player in the energy trading markets and that is pursues and fully exploits all opportunities and products in both the UK and European markets. In this context, the company sees its trading on the IPE gas futures market as an additional tool for effective risk management and for providing added value to its gas trading activities. FINANCIAL RESULTS AND DIVIDENDS The financial results are set out on pages 7 to 20. An interim dividend of (Pounds) 7.2 million was approved by the Board and paid during the year. A second interim dividend of (Pounds) 14.814 million has been proposed bringing the total dividends for the year ended 31 December 1996 to (Pounds) 22.014 million. The Directors do not recommend the payment of a final dividend and retained profits in the year have been transferred to reserves. DIRECTORS The Directors who served during the period covered by this report are: - NAME DATE APPOINTED DATE RESIGNED - ---- -------------- --------------- RA Gardner (Chairman) 30 January 1997 AW Burgess 30 January 1997 MS Clare JH Current 23 September 1996 02 March 1997 CD Friedlander 12 February 1996 ML Hazelwood 08 July 1996 23 September 1996 P Jungels 12 February 1996 24 September 1996 HK Kaelber 02 March 1997 KE Randolph 02 March 1997 CL Watson 02 March 1997 Mr R A Gardner was appointed Director and Chairman on 1 December 1995. DIRECTORS' INTERESTS At no time during the year did any Director still holding office on 31 December 1996 have any beneficial interest in the shares of the Company or any other company within the Group except for the interests in the shares of the ultimate parent company, British Gas plc, as stated below: - BENEFICIAL HOLDINGS ------------------- 1 JANUARY 1996 31 DECEMBER 1996 -------------- ---------------- AW Burgess 13,052 13,523 MS Clare - 471 Mr Gardner is also a Director of the ultimate parent company, British Gas plc. His interests in the shares of British Gas plc and its subsidiary undertaking are shown in the accounts of that company. Details of options to purchase fully paid ordinary shares that were granted under the parent company's Savings Related and Executive Share Option Schemes and the awards of notional allocations of restricted shares under the parent company's Long Term Incentive Scheme for Directors and other senior executives are as follows: SAVINGS RELATED OPTION SCHEME ----------------------------- At 1 January 1996 Granted Exercised At 31 December 1996 ----------------- ------- -------- ------------------- AW Burgess 8,075 - - 8,075 2 EXECUTIVE OPTION SCHEME ----------------------- At 1 January 1996 Granted Exercised At 31 December 1996 ----------------- ------- --------- ------------------- AW Burgess 108,962 - - 108,962 MS Clare 49,063 - - 49,063 LONG TERM INCENTIVE SCHEME -------------------------- Awards in At 1 January 1996 Year At 31 December 1996 ----------------- ------ ------------------- AW Burgess 10,936 - 10,936 MS Clare 12,833 - 12,833 The awards represent the maximum award possible if performance criteria are met at the end of the performance and retention period of five or six years. All options and awards were granted under the terms of the parent company's Savings Related Share Option Scheme, Executive Share Option Scheme or Long Term Incentive Scheme, details of which are given in that company's report and accounts for the year ended 31 December 1996. DIRECTORS' INSURANCE The Company has through its ultimate parent company, British Gas plc, maintained insurance for the Directors in respect of their duties as Directors of the Company. DONATIONS Provision has been made in the accounts for a net contribution of (Pounds) 126,000 for charitable purposes, which will be paid in 1997. No donations to political organisations were provided for or made during the period. EMPLOYEES The Company depends on the skills and commitment of its employees in order to achieve its long term objectives and is therefore committed to the development of its staff. Employees at all levels are encouraged to actively participate and make the fullest contribution to the growth and success of the Company. The company's recruitment, training and promotion policies, which are based on merit, have been developed to ensure equal opportunities for all employees regardless of gender, race or disability. 3 SHARE CAPITAL The share capital is divided into 51 "A" shares and 49 "B" shares which at the end of the year were held by GB Gas Holdings Limited and NGC Great Britain Limited (formerly known as NGC UK Limited) respectively. The "A" shares held by GB Gas Holdings were previously held by British Gas plc. In October 1996 British Gas transferred legal and beneficial ownership of the "A" shares to GB Gas Holdings Limited as a part of its corporate restructuring in advance of the demerger. Following the demerger, approved in February 1997, the beneficial ownership of the total issued capital of GB Gas Holdings Limited was transferred to Centrica plc. On 3rd March 1997 Centrica plc and NGC Corporation of Houston, Texas announced that the two companies had reached agreement on the future ownership of Accord Energy Limited. Under the terms of the agreement which is consistent with the objectives set out at the time Centrica plc was demerged from British Gas, Centrica plc will take operational control of Accord Energy Limited with NGC Great Britain Limited's 49 shares being converted to participating preference shares and 147 participating preference shares being issued to GB Gas Holdings. The agreement is conditional upon regulatory clearances. The new share capital of Accord Energy Limited will be approved at an Extraordinary General Meeting to be convened once Centrica is satisfied regarding regulatory clearances. Therefore the agreement does not yet have unconditional effect. TAXATION STATUS The close company provisions of the Income and Corporation Taxes Act 1988 do not apply to the Company. AUDITORS Price Waterhouse have expressed their willingness to be re-appointed as Auditors of the Company. A resolution proposing the re-appointment of Price Waterhouse as Auditors to the Company and to authorise the Directors to fix their remuneration will be put to the Annual General Meeting. BY ORDER OF THE BOARD Registered Office: Charter Court 50 Windsor Road Slough Berkshire SL1 2HA Registered in England No 2877398 TERESA FURMSTON COMPANY SECRETARY DATE: 21 March 1997 4 STATEMENT OF DIRECTORS' RESPONSIBILITIES The Directors are required by the Companies Act 1985 to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of the profit or loss for that period. The Directors consider that in preparing the financial statements, appropriate accounting policies have been used and applied consistently. The Directors also consider that reasonable and prudent judgements and estimates have been made and applicable accounting standards have been followed. The Directors are responsible for maintaining adequate accounting records, for safeguarding the assets of the Group and for preventing and detecting fraud and other irregularities. The Directors, having prepared the financial statements, have requested the Auditors to take whatever steps and undertake whatever inspections they consider to be appropriate for the purposes of enabling them to give their audit report. 5 REPORT OF THE AUDITORS TO THE MEMBERS OF ACCORD ENERGY LIMITED We have audited the financial statements on pages 7 to 20 which have been prepared under the historic cost principles and other accounting policies described on pages 10 and 11. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page 5, the Company's Directors are responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary, in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 1996 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Price Waterhouse Chartered Accountants and Registered Auditors Southwark Towers 32 London Bridge Street London SE1 9SY Date: 21 March 1997 6 ACCORD ENERGY LIMITED CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 1996 Year Year to 31 Dec to 31 Dec 1996 1995 Notes (Pounds) 000 (Pounds) 000 TURNOVER 2 426,057 298,619 Cost of Sales (386,785) (270,710) -------- -------- GROSS PROFIT 39,272 27,909 Administration expenses (7,217) (5,689) -------- -------- OPERATING PROFIT 3 32,055 22,220 Net interest 5 1,321 1,063 -------- -------- PROFIT ON ORDINARY ACTIVITIES BEFORE 33,376 23,283 TAXATION Tax on profit on ordinary activities 6 (11,139) (7,708) -------- -------- PROFIT FOR THE FINANCIAL YEAR 22,237 15,575 Dividends 7 (22,014) (15,400) -------- -------- RETAINED PROFIT 223 175 ======== ======== All gains or losses for the year have been derived from continuing operations. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 1996 There are no recognised gains or losses for the period other than those stated in the profit and loss account. The accompanying notes on pages 10 to 20 form part of these accounts. 7 ACCORD ENERGY LIMITED BALANCE SHEETS AS AT 31 DECEMBER 1996
GROUP COMPANY ---------------------------- ---------------------------- 1996 1995 1996 1995 Notes (Pounds) 000 (Pounds) 000 (Pounds) 000 (Pounds) 000 FIXED ASSETS Tangible fixed assets 8 203 100 203 100 Investments 9 - - - - ---------- ---------- ---------- ---------- 203 - 203 - ---------- ---------- ---------- ---------- CURRENT ASSETS Stock 10 2,675 3,838 2,675 3,838 Debtors 11 53,700 38,453 53,700 38,453 (amounts falling due within one year Cash at bank and in hand 22,416 10,184 22,416 10,184 ---------- ---------- ---------- ---------- 78,791 52,475 78,791 52,475 ---------- ---------- ---------- ---------- CREDITORS 12 (78,137) (51,941) (78,137) (51,941) (amounts falling due within one year) NET CURRENT ASSETS 654 534 654 534 ---------- ---------- ---------- ---------- Total assets less current liabilities 857 634 857 634 ---------- ---------- ---------- ---------- CREDITORS 12 - - (414) (414) (amounts falling due after more ---------- ---------- ---------- ---------- than one year) NET ASSETS 857 634 443 220 ---------- ---------- ---------- ---------- CAPITAL AND RESERVES Called up share capital 13 - - - - Profit and loss account 14 857 634 443 220 ---------- ---------- ---------- ---------- SHAREHOLDERS' FUNDS 15 857 634 443 220 ---------- ---------- ---------- ----------
The financial statements on pages 7 to 20 were approved by the Board of Directors on 21 March 1997 and were signed on its behalf by: - MS Clare Director The accompanying notes on pages 10 to 20 form part of these accounts. 8 ACCORD ENERGY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 1996
Year Year to 31 Dec to 31 Dec 1996 1995 Notes (Pounds) 000 (Pounds) 000 NET CASH INFLOW FROM OPERATING ACTIVITIES 16 26,931 26,304 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 1,591 1,105 Interest paid (270) (42) TAXATION (8,695) (2,932) CAPITAL EXPENDITURE Purchase of tangible fixed assets (125) (100) ACQUISITIONS AND DISPOSALS - - EQUITY DIVIDENDS PAID (7,200) (15,400) MANAGEMENT OF LIQUID RESOURCES - - FINANCING - - --------- --------- INCREASE IN CASH 12,232 8,935
9 ACCORD ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS 1. PRINCIPAL ACCOUNTING POLICIES The financial statements have been prepared under the historical cost convention and in accordance with applicable Accounting Standards in the United Kingdom. BASIS OF CONSOLIDATION The consolidated profit and loss account, balance sheet and cash flow statement include the financial statements of the Company and its subsidiary undertakings made up to 31 December 1996. GOODWILL On the acquisition of a subsidiary or associated undertaking, fair values are attributed to the net assets acquired. Goodwill which represents the difference between the purchase consideration and the fair values, is taken to reserves. TANGIBLE FIXED ASSETS Tangible fixed assets are stated at purchase cost together with any incidental costs of acquisition less depreciation. Depreciation, which is charged in the year following the year of acquisition, is calculated on a straight-line basis sufficient to write off the cost of individual assets over their estimated useful lives. The depreciation periods for the principal categories of assets are: Fixtures and fittings : 5 years Computer and office equipment : 5 years INVESTMENTS Investments are stated at cost less any permanent diminution in value. STOCK Stocks are valued at the lower of cost and net realisable value. 10 FOREIGN CURRENCIES Assets and liabilities denominated in foreign currencies are translated into pounds sterling at closing rates of exchange. Income and expenses in foreign currencies are translated into pounds sterling at rates of exchange prevailing at the time of the transactions. TURNOVER Turnover, which excludes value added tax, represents the invoiced value of sales of energy products including gas, oil and electricity to customers plus an estimate of sales not yet invoiced. FORWARD COMMITMENTS There is an exposure to price movements on open contracts and an accrual is made for any potential losses on these contracts. Matched gains on open contracts are recognised at time of delivery. DEFERRED TAXATION Provision is made for deferred taxation on all material timing differences to the extent that it is probable that a liability or asset will crystallise. 2. TURNOVER Turnover of (Pounds)426.1 million (1995 - (Pounds) 298.6 million) comprises sales of energy products. 3. Operating profit The operating profit is stated after charging: - 1996 1995 (Pounds) 000 (Pounds) 000 Auditor's fees (statutory audit) 20 12 Auditor's fees (other non-audit services) - 11 -------- -------- 20 23 -------- -------- 11 4. DIRECTORS AND EMPLOYEES (A) DIRECTORS' REMUNERATION None of the Directors, including the Chairman, received any remuneration in respect of their services to the Company. The total emoluments of the highest paid director for the period of his directorship were (Pounds) nil (1995 - (Pounds) 482,588), which includes salary, allowances and incentive payments relating to the Company's performance. The emoluments of Directors, excluding pension contributions, were in the following bands: Number ----------- 1996 1995 (Pounds) 480,001 to (Pounds) 485,000 - 1 (B) EMPLOYEE INFORMATION The average number of personnel employed by the Group, including executive directors and secondees from the shareholder companies, during the period was 23 (1995 - 20) who were all based in the United Kingdom. Staff costs for these persons were as follows: - 1996 1995 (Pounds) 000 (Pounds) 000 Salaries & wages 1,296 853 Social Security 92 69 Pensions 56 43 -------- -------- 1,444 965 -------- -------- In addition, provisions amounting to (Pounds) 4.7 million which includes social security costs of (Pounds) 0.5 million (1995 - (Pounds) 3.9 million which includes social security costs of (Pounds) 0.3 million) were made in the year for incentive payments relating to company performance. 12 5. NET INTEREST 1996 1995 (Pounds) 000 (Pounds) 000 Interest receivable from Group undertakings 1,561 1,081 Interest receivable from third parties 30 24 Interest payable to Group undertakings (258) (31) Interest payable to third parties (12) (11) -------- -------- Net interest receivable 1,321 1,063 -------- -------- Interest payable is on loans and overdrafts wholly repayable within five years. 6. TAXATION 1996 1995 (Pounds) 000 (Pounds) 000 UK - corporation tax @ 33% 9,208 8,846 - deferred corporation tax 1,899 (1,138) - prior year adjustment 32 - -------- -------- Taxation charge 11,139 7,708 There is no unprovided deferred taxation. 7. DIVIDENDS 1996 1995 (Pounds) 000 (Pounds) 000 Interim dividend 7,200 15,400 Second Interim dividend (proposed) 14,814 - ------- ------- 22,014 15,400 ------- ------- The interim dividend of (Pounds) 7.2 million (1995 - (Pounds) 15.4 million) was paid in September 1996. No final dividend is proposed. 13 8. TANGIBLE FIXED ASSETS
Group Company ------------------ ----------------- 1996 1995 1996 1995 (Pounds) 000 (Pounds) 000 (Pounds) 000 (Pounds) 000 COST Balance at 1 January 1996 100 - 100 - Additions 125 100 125 100 Disposals - - - - ------------ ------------ ----------- ----------- Balance at 31 December 1996 225 100 225 100 ------------ ------------ ----------- ----------- DEPRECIATION Balance at 1 January 1996 - - - - Provision in year 22 - 22 - Disposals - - - - ------------ ------------ ----------- ----------- Balance at 31 December 1996 22 - 22 - ------------ ------------ ----------- ----------- NET BOOK VALUE As at 31 December 1996 203 100 203 100
The additions to tangible fixed assets in the year are computer and office equipment type assets. 9. FIXED ASSET INVESTMENTS Fixed asset investments represent shares in wholly owned subsidiaries and are shown below at cost. Company ------------ 1996 1995 (Pounds) (Pounds) Balance at 1 January 1996 5 5 Additions - - Balance at 31 December 1996 5 5 -------- -------- 14 SUBSIDIARY UNDERTAKINGS Country of registration of Class of Company incorporation shares held holding (%) Accord Electric Limited England Ordinary 100 Accord Gas Limited England Ordinary 100 Accord Oil Limited England Ordinary 100 Accord Power Limited England Ordinary 100 As at 31 December 1996 these subsidiaries were dormant. 10. STOCK Group Company ------------------ ------------------ 1996 1995 1996 1995 (Pounds) 000 (Pounds) 000 (Pounds) 000 (Pounds) 000 Gas in storage 2,675 3,838 2,675 3,838 ----------- ----------- ------------ ----------- 11. DEBTORS
Group Company ----------------- ----------------- 1996 1995 1996 1995 (Pounds) 000 (Pounds) 000 (Pounds) 000 (Pounds) 000 Trade debtors 88 56 88 56 Accrued income 40,529 36,240 40,529 36,240 Amounts owed by group undertakings 13,057 246 13,057 246 Other debtors 26 12 26 12 Deferred corporation tax - 1,899 - 1,899 ------------ ------------ ------------ ------------ 53,700 53,700 38,453 38,453 ------------ ------------ ------------ ------------
15 12. CREDITORS
Group Company ------------------ ------------------ 1996 1995 1996 1995 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 AMOUNTS FALLING DUE WITHIN ONE YEAR:- -Trade creditors - 247 - 247 -Amounts owed to group undertakings 33,401 16,843 33,401 16,843 -Taxation and social security 9,467 6,904 9,467 6,904 -Other creditors 13,007 1,826 13,007 1,826 -Accruals and deferred income 22,262 26,121 22,262 26,121 ----------- ------------ ------------ ------------ 78,137 51,941 78,137 51,941 AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR:- -Amounts owed to subsidiary undertakings - - 414 414 ------------ ------------ ------------ ------------ - - 414 414 ------------ ------------ ------------ ------------
As part of its normal trading operations the company has entered into forward purchase and sales contracts totalling (Pounds) 999 million at 31 December 1996 (1995 - (Pounds) 634 million). It is exposed to market risk of price movements in relation to any unmatched element of the above commitments and included in the accruals amounts shown above is an accrual of (Pounds) nil (1995 - (Pounds) 5.6 million) against potential losses arising out of these contracts. 13. CALLED UP SHARE CAPITAL AUTHORISED 1996 1995 (Pounds)000 (Pounds)000 51 ordinary "A" shares of (Pounds)1 each 51 51 49 ordinary "B" shares of (Pounds)1 each 49 49 ----------- ----------- 100 100 ----------- ----------- ALLOTTED AND FULLY PAID 51 ordinary "A" shares of (Pounds)1 each 51 51 49 ordinary "B" shares of (Pounds)1 each 49 49 ----------- ----------- 100 100 ----------- ----------- 16 With the exception of voting rights which on aggregate are shared equally by the two categories of shares, the amounts payable on a winding up and the rights to dividends are on the basis of the percentage interests in each category of shares. 14. RESERVES Group Company (Pounds) 000 (Pounds) 000 PROFIT AND LOSS ACCOUNT: Balance at 1 January 1996 634 220 Transfer from profit and loss account during the period 223 223 -------- -------- Balance at 31 December 1996 857 443 -------- -------- The Company's profit for the year after taxation was (Pounds) 22.237 million (1995 - (Pounds) 15.575 million). As permitted by Section 230(3) of the Companies Act 1985, no profit and loss account is presented for the Company. 15. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Group Company ---------------------------- ---------------------------- 1996 1995 1996 1995 (Pounds) 000 (Pounds) 000 (Pounds) 000 (Pounds) 000 Profit for the period 22,237 15,575 22,237 15,575 Dividends (22,014) (15,400) (22,014) (15,400) ------------ ----------- ------------ ----------- Net addition to shareholders' funds 223 175 223 175 Shareholders' funds at 1 January 1996 634 459 220 45 ------------ ----------- ------------ ----------- Shareholders' funds at 31 December 1996 857 634 443 220 ------------ ----------- ------------ -----------
17 16. CASH FLOW STATEMENT (a) RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW 1996 1995 (Pounds) 000 (Pounds) 000 Operating profit 32,055 22,220 Depreciation 22 - (Increase)/decrease in stock 1,163 (2,951) (Increase)/decrease in debtors (17,129) (12,254) Increase/(decrease) in creditors 10,820 19,289 ----------- ----------- 26,931 26,304 ----------- ----------- (b) ANALYSIS OF CHANGES IN FINANCING DURING THE PERIOD 1996 1995 (Pounds) (Pounds) Balance at 1 January 1996 100 100 ----------- ----------- Balance at 31 December 1996 100 100 ----------- ----------- (c) ANALYSIS OF CASH 1996 1995 (Pounds)000 (Pounds)000 Balance at 1 January 1996 10,184 1,249 Net increase in cash flow 12,232 8,935 --------- --------- 22,416 10,184 --------- --------- Cash at bank and in hand 22,416 10,184 ========= ========= 18 17. RELATED PARTY TRANSACTIONS As part of its normal trading activities during the year, the group conducted business with the two shareholder companies and companies within their group of companies. All transactions were of a trading nature under arms length commercial arrangements and mainly relate to the purchase/sale of energy products. The net monetary value of related transactions during the year ended 31 December 1996 and the amount of the net outstanding balances at 31 December 1995 and 1996 are as follows:
CHARGED TO AMOUNTS OWED BY ACCORD ENERGY LTD. ACCORD ENERGY ---------------------------------- LTD. IN AT AT YEAR 31 DEC `96 31 DEC `95 (POUNDS) 000 (POUNDS) 000 (POUNDS) 000 British Gas Group 192,054 12,789 16,589 Natural Gas Clearinghouse 465 465 187
18. PENSIONS The company's own defined contribution pension scheme commenced on 1 December 1995. Under the scheme, defined contributions are made by the employer to an independently administered fund and in the case of certain employees, who are not members of the company scheme, to their personal pension arrangements. The assets of the scheme are held separately from those of the company and managed by an external pension fund management organisation appointed by the Trustees. The pensions cost charge for the year includes contributions payable by the company under this scheme amounting to (Pounds) 55,400 (1995 - (Pounds) 31,000), of which (Pounds) 6,600 was payable at year end and is included in creditors. Prior to the commencement of the above scheme, the company made contributions for those employees seconded from the parent company, British Gas plc., in accordance with the pension scheme operated by that company. The details of the scheme are given in that company's report and accounts for the year ended 31 December 1996. The total contributions made by the company for the year under these arrangements amounted to (Pounds) nil (1995 - (Pounds) 12,000). 19 19. ULTIMATE PARENT COMPANY The Directors regard British Gas plc, a company registered in England, as the ultimate parent company as at 31 December 1996 and British Gas plc is in the only company to consolidate the accounts of this Company. Copies of the parent company's consolidated financial statements may be obtained from 100 Thames Valley Park Drive, Reading, Berkshire RG6 1PT. Under the agreement reached between Centrica plc and NGC Corporation of Houston, Texas in March 1997, Centrica plc, which was demerged from British Gas plc, will take operational control of Accord Energy Limited subject to regulatory clearances. As from this date the Directors will regard Centrica plc, a company registered in England, as the ultimate parent company and the only company to consolidate the accounts of the Company. 20 EX-2.3 2 AGREEMENT AND PLAN OF MERGER Exhibit 2.3 ================================================================================ AGREEMENT AND PLAN OF MERGER by and among DESTEC ENERGY, INC., THE DOW CHEMICAL COMPANY, NGC CORPORATION and NGC ACQUISITION CORPORATION II dated as of February 17, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE I THE MERGER Section 1.1 The Merger............................................... 1 Section 1.2 Closing.................................................. 2 Section 1.3 Effective Time........................................... 2 Section 1.4 Certificate of Incorporation; By-Laws.................... 2 Section 1.5 Directors and Officers of the Surviving Corporation...... 3 ARTICLE II CONVERSION OF SHARES Section 2.1 Conversion of Capital Stock.............................. 3 Section 2.2 Exchange of Certificates................................. 4 Section 2.3 Company Equity-Based Awards.............................. 7 Section 2.4 Dissenter's Rights....................................... 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY - DESTEC Section 3.1 Organization............................................. 9 Section 3.2 Capitalization...........................................10 Section 3.3 Authorization; Validity of Agreement.....................11 Section 3.4 No Violations; Consents and Approvals....................12 Section 3.5 SEC Reports and Financial Statements.....................13 Section 3.6 Absence of Certain Changes...............................14 Section 3.7 Absence of Undisclosed Liabilities.......................15 Section 3.8 Proxy Statement..........................................15 Section 3.9 Employee Benefit Plans; ERISA............................16 Section 3.10 Litigation; Compliance with Law..........................20 Section 3.11 Intellectual Property....................................21 Section 3.12 Significant Agreements...................................21 Section 3.13 Taxes....................................................22 Section 3.14 Environmental Matters....................................23 Section 3.15 Required Vote by Company Stockholders....................25 Section 3.16 Brokers..................................................25 Section 3.17 Public Utility Company; Public Utility Regulatory Policies Act. .........................25 Section 3.18 Fairness Opinion.........................................27 Section 3.19 Excluded Subsidiaries....................................27 Section 3.20 No Other Representations or Warranties...................27 A-i ARTICLE IV REPRESENTATIONS AND WARRANTIES OF DOW Section 4.1 Organization.............................................27 Section 4.2 Authorization; Validity of Agreement.....................27 Section 4.3 No Violations; Consents and Approvals....................28 Section 4.4 Title to Shares..........................................29 Section 4.5 Brokers..................................................29 Section 4.6 No Other Representations or Warranties...................29 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Section 5.1 Organization.............................................29 Section 5.2 Authorization; Validity of Agreement.....................30 Section 5.3 No Violations; Consents and Approvals....................30 Section 5.4 Proxy Statement..........................................32 Section 5.5 Interim Financial Condition..............................32 Section 5.6 Financing................................................32 Section 5.7 Surviving Corporation After the Merger...................32 Section 5.8 Beneficial Ownership of Shares; Interested Stockholder........................................32 Section 5.9 Brokers..................................................33 Section 5.10 Public Utility Company; Public Utility Regulatory Policies Act............................33 Section 5.11 Absence of Litigation....................................33 Section 5.12 No Prior Activities......................................34 Section 5.13 No Other Representations or Warranties...................34 ARTICLE VI COVENANTS Section 6.1 Interim Operations of the Company........................34 Section 6.2 Acquisition Proposals....................................36 Section 6.3 Audited Financial Statements.............................38 Section 6.4 Access to Information....................................38 Section 6.5 Further Action; Reasonable Best Efforts..................39 Section 6.6 Employee Benefits........................................40 Section 6.7 Stockholders' Meeting; Proxy Statement...................42 Section 6.8 Directors' and Officers' Insurance and Indemnification....................................43 Section 6.9 Publicity................................................46 Section 6.10 No Solicitation..........................................46 Section 6.11 Certain Arrangements.....................................46 Section 6.12 Voting Agreement.........................................47 A-ii Section 6.13 Employee Benefits Indemnification........................47 Section 6.15 Acquisition Proposals....................................48 Section 6.16 Tax Matters..............................................48 ARTICLE VII CONDITIONS Section 7.1 Conditions to Each Party's Obligation To Effect the Merger..................................53 Section 7.2 Conditions to Parent and Purchaser's Obligations to Effect the Merger..................................53 Section 7.3 Conditions to the Company's Obligation to Effect the Merger..................................54 ARTICLE VIII TERMINATION Section 8.1 Termination..............................................55 Section 8.2 Effect of Termination....................................55 Section 8.3 Fee......................................................56 ARTICLE IX MISCELLANEOUS Section 9.1 Fees and Expenses........................................56 Section 9.2 Specific Performance.....................................56 Section 9.3 Amendment; Waiver........................................56 Section 9.4 Survival.................................................57 Section 9.5 Notices..................................................57 Section 9.6 Interpretation...........................................59 Section 9.7 Headings; Schedules. ...................................59 Section 9.8 Counterparts.............................................59 Section 9.9 Entire Agreement.........................................59 Section 9.10 Severability.............................................60 Section 9.11 Governing Law............................................60 Section 9.12 Assignment...............................................60 Section 9.13 Consent to Jurisdiction..................................60 A-iii LIST OF SCHEDULED DISCLOSURES Disclosure Schedule - ---------- -------- List of Subsidiaries............................................... 3.1 Capital Stock Obligations....................................... 3.2(a) Certain Subsidiaries............................................ 3.2(b) Certain Violations or Terminations.............................. 3.4(a) Certain Notices and Filings..................................... 3.4(b) Certain Actions.................................................... 3.6 Certain Disclosed Liabilities...................................... 3.7 Employee Benefit Plans/ERISA Plans.............................. 3.9(a) Employee Benefit Plans Compliance............................... 3.9(f) Post-Retirement Plans........................................... 3.9(h) Severance Benefits.............................................. 3.9(j) Employee Information............................................ 3.9(k) Pending Proceedings............................................... 3.10 Infringements on Intellectual Property............................ 3.11 Dow Agreements..................................................3.12(a) Significant Agreements in Breach or Default.....................3.12(b) Required Consents...............................................3.12(c) Pending Tax Proceedings........................................... 3.13 Certain Environmental Matters...................................3.14(a) Environmental Claims............................................3.14(b) QF Projects.....................................................3.17(b) EWG Projects....................................................3.17(c) FUCO Projects...................................................3.17(d) Certain Indebtedness............................................ 6.1(d) Interim Benefits and Compensation Changes....................... 6.1(e) Termination of Certain Agreements...............................6.11(a) Release of Dow as Obligor.......................................6.11(b) A-iv TABLE OF DEFINED TERMS Term Section - ---- ------- Acquisition Proposal.................................................. 6.2(d) AES................................................................... 6.2(a) affiliates.............................................................9.6 Allocation Schedule.................................................. 6.16(a) Antitrust Division.....................................................6.5(c) associates.............................................................9.6 Assertion..............................................................6.8(c) Balance Sheet............................................................ 3.5 beneficial ownership...................................................9.6 Board..................................................................3.3(a) Certificate of Merger..................................................1.3 Certificates...........................................................2.2(b) Change in Control..................................................... 6.6(a) Closing................................................................1.2 Closing Date............................................................. 1.2 Code.......................................................3.9(b)(v), 6.16(a) Company............................................................. Recitals Company Common Stock................................................ Recitals Company Employees......................................................6.6(c) Company SEC Documents..................................................3.5 Competition Laws.......................................................6.5(c) Confidentiality Agreements.............................................6.4 Delaware Courts .......................................................9.13 DGCL.................................................................Recitals Disclosure Schedule................................................... 3.1(b) Dissenting Shares......................................................2.4 Dow..................................................................Recitals Dow Agreements........................................................3.12(a) Dow Shares...........................................................Recitals Effective Time........................................................1.3 Environmental Claim................................................3.14(e)(i) Environmental Laws................................................3.14(e)(ii) ERISA.................................................................3.9(a) ERISA Plans...........................................................3.9(a) EWG Projects......................................................... 3.17(c) Exchange Act..........................................................3.4(b) Exchange Fund.........................................................2.2(a) Excluded Subsidiaries.................................................3.1(a) FERC .................................................................3.17(b) Forms................................................................ 6.16(a) FPA ..................................................................3.17(a) FTC...................................................................6.5(c) FUCO Projects........................................................ 3.17(d) GAAP..................................................................3.5 Governmental Entity...................................................3.4(b) Hazardous Substances............................................ 3.14(c)(iii) HSR Act...............................................................6.5(c) Immaterial Subsidiaries...............................................3.1(a) A-v include[s]/[ing]......................................................9.6 Indemnified Liability.................................................6.8(b) Indemnified Parties...................................................6.8(b) Indemnified Party.....................................................6.8(b) Indemnitors...........................................................6.8(c) Intellectual Property.................................................3.11 made available....................................................... 9.6 Material Adverse Effect...............................................3.1(a) Merger................................................................1.1 Merger Consideration..................................................2.1(a) Parent.............................................................. Recitals Parent Plans..........................................................6.6(b) Paying Agent..........................................................2.2(a) Person................................................................3.1(a) Plans.................................................................3.9(a) Preferred Stock.......................................................3.2(a) Proceeding........................................................... 6.16(g) Proxy Statement.......................................................6.7(b) PUHCA ................................................................3.17(a) Purchaser........................................................... Recitals Purchaser Common Stock................................................2.1 QF Projects.......................................................... 3.17(b) Section 338(h)(10) Elections......................................... 6.14(a) Securities Act........................................................3.5 SEC...................................................................3.5 Secretary of State....................................................1.3 Shares.............................................................. Recitals Significant Agreements ...............................................3.12(a) Special Meeting.......................................................6.7(a) Stock Plan............................................................2.3(a) Stock Purchase Agreement ............................................Recitals Stock Purchase Plan...................................................2.3(c) Subscriber............................................................2.3(c) Subsidiary............................................................3.1(a) Surviving Corporation.................................................1.1 Taxes.................................................................3.13 Tax Claim............................................................ 6.16(f) Tax Return............................................................3.13 Tax Sharing Agreement................................................ 6.16(b) Transfer Taxes.................................................. 6.16(c)(iii) Variable Pay Plan......................................................2.3(b) A-vi AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of February 17, 1997, by and among Destec Energy, Inc., a Delaware corporation (the "Company"), The Dow Chemical Company, a Delaware corporation ("Dow"), NGC Corporation, a Delaware corporation ("Parent"), and NGC Acquisition Corporation II, a wholly owned subsidiary of Parent and a Delaware corporation ("Purchaser"). WHEREAS, the Boards of Directors of Parent, Purchaser, Dow and the Company have each approved, and the Boards of Directors of Parent, Purchaser and the Company deem it advisable and in the best interests of their respective stockholders to consummate, the acquisition of the Company by Parent upon the terms and subject to the conditions set forth herein; WHEREAS, in furtherance of such acquisition, the Boards of Directors of Parent, Purchaser and the Company have each approved this Agreement and the merger of Purchaser with and into the Company in accordance with the terms of this Agreement and the General Corporation Law of the State of Delaware (the "DGCL"); and WHEREAS, the number of shares of common stock, $.01 par value of the Company (referred to herein as "Shares" or "Company Common Stock") owned by Dow is set forth on Schedule A hereto (the "Dow Shares") and Dow has agreed to vote all of the Dow Shares in favor of the approval of this Agreement and the Merger. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I THE MERGER Section 1.1 The Merger. Upon the terms and subject to conditions of this Agreement and in accordance with the DGCL, at the Effective Time (as defined in Section hereof), Purchaser shall be merged (the "Merger") with and into the Company and the separate corporate existence of Purchaser shall cease. After the Merger, the Company shall continue as the surviving corporation (sometimes hereinafter referred to as the "Surviving Corporation"). The Merger shall have the effects set forth in the applicable provisions of the DGCL. Without limiting the generality of the foregoing, upon the Merger, all the rights, privileges, immunities, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation and all obligations, duties, debts and liabilities of the Company and Purchaser shall be the obligations, duties, debts and liabilities of the Surviving Corporation. Section 1.2 Closing. The closing of the Merger (the "Closing") will take place at 10:00 a.m., New York time, on the second business day after satisfaction or waiver of all of the conditions set forth in Article hereof, at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, unless an earlier date or place is agreed to in writing by the parties hereto. The date on which the Closing occurs is referred to herein as the "Closing Date." Section 1.3 Effective Time. On or as promptly as practicable following the Closing Date, Purchaser and the Company will cause an appropriate Certificate of Merger (the "Certificate of Merger") to be executed and filed with the Secretary of State of the State of Delaware (the "Secretary of State") in such form and executed as provided in the DGCL. The Merger shall become effective on the date and time on which the Certificate of Merger has been duly filed with the Secretary of State, or such later date and time as shall be agreed upon by Purchaser, Dow and the Company and set forth therein, and such time is hereinafter referred to as the "Effective Time." Section 1.4 Certificate of Incorporation; By-Laws. Pursuant to the Merger, (x) the Amended and Restated Certificate of Incorporation of the Company shall be amended in the form of the Certificate of Incorporation of Purchaser, as in effect immediately prior to the Effective Time, and shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Amended and Restated Certificate of Incorporation, and (y) the By-laws of Purchaser, as in effect immediately prior to the Effective 2 Time, shall be the By-laws of the Surviving Corporation until thereafter amended as provided by law, the Amended and Restated Certificate of Incorporation and such By-laws. Section 1.5 Directors and Officers of the Surviving Corporation. (a) The directors of Purchaser immediately prior to the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors shall have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and By-laws. (b) The officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation until their respective successors are duly elected and qualified, or their earlier death, resignation or removal. ARTICLE II CONVERSION OF SHARES Section 2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the Company, Parent, Purchaser or the holders of any shares of Company Common Stock or the common stock, par value $.01 per share, of Purchaser (the "Purchaser Common Stock"): (a) Each issued and outstanding share of Company Common Stock (other than Shares to be cancelled in accordance with Section and other than Dissenting Shares (as defined herein) covered by Section 2.4) shall be converted into the right to receive $21.65 per share in cash, payable to the holder thereof, without interest (the "Merger Consideration"), upon surrender of the certificate formerly representing such share of Company Common Stock in the manner provided in Section 2.2. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to 3 exist, and each holder of a certificate representing any such Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 2.2. Any payment made pursuant to this Section 2.1(a) shall be made net of applicable withholding taxes to the extent such withholding is required by law. (b) Each issued and outstanding share of Purchaser Common Stock shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation. (c) Each share of Company Common Stock that is held by the Company as treasury stock and each share of Company Common Stock owned by Parent, Purchaser or any other Subsidiary of Parent shall be cancelled and retired and shall cease to exist and no payment of any consideration shall be made with respect thereto. Section 2.2 Exchange of Certificates. (a) Prior to the Effective Time, Parent shall designate the Company's registrar and transfer agent, or such other bank or trust company as agreed in writing by the parties, to act as paying agent for the holders of Shares in connection with the Merger, pursuant to an agreement providing for the matters set forth in this Section 2.2 and such other matters as may be appropriate and the terms of which shall be reasonably satisfactory to the Company (the "Paying Agent"), to receive the funds to which holders of Shares shall become entitled pursuant to Sections 2.1(a) and 2.3. Prior to the Effective Time, Parent will deposit or cause to be deposited in trust with the Paying Agent for the benefit of holders of Company Common Stock the funds necessary to complete the payments contemplated by Section 2.1(a) (the "Exchange Fund") on a timely basis; provided, that no such deposit shall relieve Parent of its obligation to pay the Merger Consideration pursuant to Section 2.1(a). Notwithstand- ing anything to the contrary in this Section 2.2, Parent and the Company will make arrangements with the Paying Agent to the reasonable satisfaction of Dow such that Dow, and any other stockholder of the Company that is present at the office of the Paying Agent in person or through a personal representative (it being understood 4 that Dow need not be present at the office of the Paying Agent because it will be present at the Closing) and gives the Company at least two days prior written notice that it will be present at that office, will receive, as soon as possible after the Effective Time (but in any event on the same date as the Effective Time) in same day funds by wire transfer to such accounts as Dow or such stockholders shall specify with at least two days prior written notice, the Merger Consideration (in the case of Dow without any deduction or offset whatsoever for any purpose, including deductions for withholding taxes so long as Dow has complied with applicable tax law in completing and delivering any required forms) for each of its or their shares of Company Common Stock (provided that Dow and any such stockholders have surrendered the Certificates (as defined below) for their shares of Company Common Stock to the Paying Agent and, with respect to stockholders other than Dow, complied with the terms and conditions of Section 2.2(b) hereof). (b) At the Effective Time, Parent will instruct the Paying Agent to promptly, and in any event not later than five business days following the Effective Time, mail to each holder of record of a certificate or certificates (other than holders who are paid on the Closing Date pursuant to the last sentence of Section 2.2(a)), which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates"), whose Shares were converted pursuant to Section 2.1(a) into the right to receive the Merger Consideration (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by the Company, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each share of Company Common Stock formerly represented by such Certificate, to be mailed (or made available for collection by hand if so elected by the surrendering holder) within 5 three business days of receipt thereof, and the Certificate so surrendered shall forthwith be cancelled. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Paying Agent that such tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate (other than Certificates representing Company Common Stock held by Parent or Purchaser, or any Subsidiary of Parent or Purchaser, or Dissenting Shares (as defined in Section 2.4)) shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration in cash as contemplated by this Section 2.2. Any portion of the Exchange Fund which remains unclaimed by the former holders of Shares for twelve months after the Effective Time shall be delivered to the Surviving Corporation, upon demand, and any former holders of Shares shall thereafter look only to the Surviving Corporation for any cash to which they are entitled as a result of the Merger. The Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable to any former holder of Shares pursuant to this Agreement such amounts as the Surviving Corporation is required to deduct and withhold with respect to making such payment under the Code (as hereinafter defined), or any provision of state, local or foreign tax law. To the extent that such amounts are withheld by or on behalf of the Surviving Corporation, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Shares in respect of which such deduction and withholding was made by the Surviving Corporation. (c) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed, the Paying Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliver- 6 able in respect thereof as determined in accordance with this Article II; provided that the Person to whom the Merger Consideration is paid shall, as a condition precedent to the payment thereof, give the Surviving Corporation a bond in such sum as it may direct or otherwise indemnify the Surviving Corporation in a manner satisfactory to it against any claim that may be made against the Surviving Corporation with respect to the Certificate claimed to have been lost, stolen or destroyed. (d) After the Effective Time, the stock transfer books of the Company shall be closed and there shall be no transfers on the stock transfer books of the Surviving Corporation of Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be cancelled and exchanged for the Merger Consideration as provided in this Article . Section 2.3 Company Equity-Based Awards. (a) Immediately prior to the Effective Time, each option granted by the Company pursuant to the Destec Energy, Inc. 1990 Award and Option Plan, as amended on February 14, 1997 (the "Stock Plan") to purchase shares of Company Common Stock, whether or not exercisable, which is outstanding and unexercised at such time, shall be cancelled to the Company and each grantee thereof shall be entitled to receive immediately prior to the Effective Time, in lieu of the shares of Company Common Stock that would otherwise have been issuable upon exercise, an amount in cash computed by multiplying (i) the excess, if any, of (x) the Merger Consideration over (y) the per share exercise price applicable to such option by (ii) the number of such shares of Company Common Stock then subject to such option. Prior to the Closing, the Company will use its reasonable best efforts to obtain a written acknowledgement by any holder of an option whose per share exercise price is greater than the Merger Consideration that the payment made pursuant to this section 2.3(a) is being made in consideration of the cancellation of such recipient's award and other rights under the Stock Plan. (b) Immediately prior to the Effective Time, each share of Deferred Stock and Restricted Stock awarded 7 under the Stock Plan or awarded or subject to award under the Destec Energy, Inc. 1995 Variable Pay Plan, as amended through February 14, 1997 (the "Variable Pay Plan"), shall become fully vested and nonforfeitable, and shall be cancelled to the Company and each grantee thereof shall be entitled to receive immediately prior to the Effective Time, in lieu of the shares of Company Common Stock that would otherwise have been deliverable, an amount in cash computed by multiplying (i) the Merger Consideration and (ii) the number of such shares of Deferred Stock or Restricted Stock. (c) In accordance with the terms of the Destec Energy, Inc. Employees' Stock Purchase Plan, as amended on February 14, 1997 (the "Stock Purchase Plan"), immediately prior to the Effective Time, (i) each participant (a "Subscriber") in the Stock Purchase Plan shall be entitled to receive a cash lump sum in an amount equal to the cash amounts previously deducted from such Subscriber in respect of the current Plan Year (as defined in the Stock Purchase Plan) and (ii) each Subscriber who is a Subscriber as of the Change in Control Date (as defined in the Stock Purchase Plan) shall be entitled to receive an amount in cash equal to the product of (x) the number of shares subscribed for by such Subscriber in respect of the Plan Year (as defined in the Stock Purchase Plan) and (y) the excess, if any, of the Merger Consideration over the lower of the Plan Price or the Market Price for such Plan Year (as such terms are defined in the Stock Purchase Plan). (d) All payments made pursuant to this Section 2.3 shall be subject to applicable withholding taxes. Section 2.4 Dissenter's Rights. Notwithstanding anything in this Agreement to the contrary, Shares outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has delivered a written demand for appraisal of such shares in accordance with Section 262 of the DGCL, if such Section 262 provides for appraisal rights for such Shares in the Merger ("Dissenting Shares"), shall not be converted into the right to receive the Merger Consideration, as provided in Section 2.1(a) hereof, unless and until such holder fails to perfect or effectively withdraws or otherwise loses his right to appraisal and payment under the DGCL. If, 8 after the Effective Time, any such holder fails to perfect or effectively withdraws or loses his right to appraisal, such Dissenting Shares shall thereupon be treated as if they had been converted as of the Effective Time into the right to receive the Merger Consideration to which such holder is entitled, without interest or dividends thereon. Dow hereby waives any and all rights under the DGCL to make a demand for appraisal in connection with the Merger and covenants and agrees with Parent and Purchaser not to take any action under Section 262 of the DGCL or otherwise that would be inconsistent with Section 6.12 hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Purchaser that: Section 3.1 Organization. (a) The Company and each of its Subsidiaries (as hereinafter defined) is a corporation or other entity duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or organization, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted, and is qualified or licensed to do business as a foreign corporation or Person (as hereinafter defined) and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so organized, existing and in good standing or to have such power and authority, or to be so qualified or licensed would not have a Material Adverse Effect. As used in this Agreement, the term "Material Adverse Effect" shall mean a material adverse effect on the business or financial condition of the Company and its Subsidiaries taken as a whole, but excluding any such effect resulting from general economic conditions and any occurrence or condition affecting generally the independent power industry. The Company has previously delivered to Parent a complete and correct copy of each of its Amended and Restated Certificate of Incorporation and By-Laws, as currently in effect. "Subsidiary" shall mean with respect to any Person, any 9 corporation or other entity of which 50% or more of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such entity is directly or indirectly owned by such Person, other than immaterial or inactive corporations or other entities (together, the "Immaterial Subsidiaries") and, with respect to the Company, other than Hartwell Energy Limited Partnership, Commonwealth Atlantic Limited Partnership and Nevada Cogeneration Associates No. 2 (collectively, the "Excluded Subsidiaries"). "Person" shall mean an individual, partnership, joint venture, trust, corporation, limited liability company or other legal entity or Governmental Entity. (b) Schedule 3.1 of the disclosure schedule delivered by the Company to Parent prior to the date hereof (the "Disclosure Schedule") lists each of the Company's Subsidiaries, together with the jurisdiction of incorporation or organization of each such Subsidiary. (c) None of the Immaterial Subsidiaries have liabilities or obligations that would result in a Material Adverse Effect. Section 3.2 Capitalization. (a) The authorized capital stock of the Company consists of 150,000,000 shares of Company Common Stock and 50,000,000 preferred shares, par value $1.00 per share (the "Preferred Stock"). As of December 31, 1996, (i) 56,079,260 shares of Company Common Stock were issued and outstanding, (ii) 6,170,740 shares of Company Common Stock were issued and held in the treasury of the Company and (iii) there were no shares of Preferred Stock issued and outstanding. Since December 31, 1996, the Company has not issued any shares of capital stock of any class of the Company other than issuances of shares of Company Common Stock pursuant to awards under the Stock Plan, the Variable Pay Plan or the Stock Purchase Plan outstanding as of such date. All the outstanding shares of the Company's capital stock are duly authorized, validly issued, fully paid and non-assessable. Except as set forth in Schedule 3.2(a) of the Disclosure Schedule, as of the date hereof, there are no existing (i) options, warrants, calls, preemptive rights, subscriptions or other rights, convertible securities, agreements or commitments of any 10 character obligating the Company or any of its Subsidiaries to issue, transfer or sell any shares of capital stock or other equity interest in, the Company or any of its Subsidiaries or securities convertible into or exchangeable for such shares or equity interests, (ii) contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any capital stock of the Company or any Subsidiary of the Company or (iii) voting trusts or voting or similar agreements to which the Company is a party with respect to the voting of the capital stock of the Company. As of the date hereof, there are no existing awards of stock appreciation rights under the Stock Plan or the Variable Pay Plan. (b) Except as set forth in Schedule 3.2(b) of the Disclosure Schedule and except for directors qualifying shares or shares issued under similar arrangements, all of the outstanding shares of capital stock (or equivalent equity interests of entities other than corporations) of each of the Company's Subsidiaries are beneficially owned, directly or indirectly, by the Company. (c) Australian Power Partners B.V. owns a 20% partnership interest in the Hazelwood Power Partnership and Destec Australia Energy Finance Pty. Ltd. owns a 12.55% limited partnership interest in Hazelwood Finance Limited Partnership. Section 3.3 Authorization; Validity of Agreement. (a) The Company has the requisite corporate power and authority to execute and deliver this Agreement and, subject to approval of its stockholders as contemplated by Section 6.7 hereof, to consummate the transactions contemplated hereby. The execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of the Company (the "Board") and, other than approval and adoption of this Agreement by the holders of at least 66 2/3% of the outstanding shares of Company Common Stock, no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated hereby. This Agreement has been duly exe- 11 cuted and delivered by the Company and, assuming due authorization, execution and delivery of this Agreement by Parent, Dow and Purchaser, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (b) The Board has duly approved the transactions contemplated by this Agreement for the purposes of Section 203 of the DGCL such that the provisions of Section 203 of the DGCL will not apply to the transactions contemplated by this Agreement. Section 3.4 No Violations; Consents and Approvals. (a) Except as set forth in Schedule 3.4(a) of the Disclosure Schedule, neither the execution and delivery of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) assuming stockholder approval as contemplated by Section 6.7 hereof has been obtained, violate any provision of the Amended and Restated Certificate of Incorporation or By-Laws of the Company or the equivalent organizational documents of its Subsidiaries, (ii) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, the provisions of any note, mortgage, indenture, guarantee, lease, license, contract, agreement or other instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their assets may be bound or (iii) assuming that all consents, authorizations and approvals contemplated by Section 3.4(b) have been obtained and all filings contemplated thereby have been made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company, any of its Subsidiaries or any of their assets; in each case, except for such violations, breaches, defaults, terminations, amendments, cancellations or accelerations which (x) would not prevent the Merger, (y) would not result in a Material Adverse Effect or (z) result from the regulatory status of Parent or Purchaser. (b) Except as disclosed in Schedule 3.4(b) of the Disclosure Schedule, no filing or registration with, notification to, or authorization, consent or approval 12 of, any U.S., state, local or foreign court, legislative, executive or regulatory authority or agency (a "Governmental Entity") is required in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, except (i) applicable requirements under Competition Laws (as defined in Section 6.5(b)), (ii) applicable requirements under the Securities Exchange Act of 1934, as amended and the regulations thereunder (the "Exchange Act"), (iii) the filing of the Certificate of Merger with the Secretary of State, (iv) applicable requirements under state securities or "blue sky" laws of various states or non- United States change-in-control or investment laws or regulations, and (v) such other consents, approvals, orders, authorizations, notifications, registrations, declarations and filings (x) the failure of which to be obtained or made would not prevent the Merger or result in a Material Adverse Effect or (y) required as a result of the regulatory status of Parent or Purchaser. Section 3.5 SEC Reports and Financial Statements. The Company has filed with the Securities and Exchange Commission (the "SEC") all reports, forms and documents required to be filed by it since January 1, 1994 under the Exchange Act and has heretofore made available to Parent (i) its Annual Reports on Form 10-K for the fiscal years ended December 31, 1994 and December 31, 1995, respectively, and its Amendment to its Annual Report on Form 10-K/A for the year ended December 31, 1995, (ii) its Quarterly Reports on Form 10-Q for the periods ended March 31, June 30 and September 30, 1996, respectively, (iii) all proxy statements relating to meetings of stockholders of the Company since January 1, 1994 (in the form mailed to stockholders), (iv) all other forms, reports and registration statements filed by the Company with the SEC since January 1, 1994 (other than registration statements on Form S-8 or Form 8-A, filings on Form T-1 or preliminary materials and registration statements in forms not declared effective) and (v) the unaudited consolidated balance sheet as of December 31, 1996 (the "Balance Sheet"). The documents described in clauses (i)-(iv) above are referred to in this Agreement collectively as the "Company SEC Documents". As of their respective dates, the Company SEC Documents (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or 13 necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act of 1933 (the "Securities Act"), as the case may be, and the applicable rules and regulations of the SEC thereunder. The consolidated financial statements included in the Company SEC Documents and the Balance Sheet have been prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except as otherwise noted therein and except that the interim financial statements and the Balance Sheet are subject to year end adjustment and do not contain all footnote disclosures required by GAAP) and fairly present in all material respects the consolidated financial position and the consolidated results of operations and cash flows of the Company and its consolidated Subsidiaries as at the dates thereof or for the periods presented therein. No variation in the balance sheet included in the audited financial statements for the year ended December 31, 1996 delivered to Parent pursuant to Section 6.3 hereof from the Balance Sheet will result in a Material Adverse Effect. Section 3.6 Absence of Certain Changes. Except as disclosed in the Company SEC Documents or as disclosed in Schedule 3.6 to the Disclosure Schedule, from December 31, 1996 until the date of this Agreement, (i) there has not been a Material Adverse Effect and (ii)(a) the Company has not declared, set aside or paid any dividend or other distribution with respect to its capital stock, (b) neither the Company nor any of its Subsidiaries has issued or disposed of any additional shares of, or securities convertible into or exchangeable for, or options, warrants, or rights of any kind to acquire, any shares of its capital stock of any class or any other ownership interest, other than issuances of shares of the Company in respect of the exercise of options, warrants or rights outstanding as of such date and other than the issuance of shares or ownership interests in the Company or any wholly owned Subsidiary, (c) the Company and its Subsidiaries have not incurred any material indebtedness for borrowed money other than short term indebtedness incurred in the ordinary course of business and indebtedness of Subsidiaries incurred in connection with the acquisition, development, construc- 14 tion or operation of power generation or energy producing facilities, which indebtedness is without recourse to the Company or its assets (other than the assets or earnings of such Subsidiary or such facility), and (d) the Company has not changed any of the accounting principles or practices used by the Company or its Subsidiaries, except as required as a result of a change in law, SEC guidelines or GAAP (or, if applicable with respect to Subsidiaries, applicable foreign generally accepted accounting principles). Section 3.7 Absence of Undisclosed Liabilities. Except as and to the extent disclosed in the Company SEC Documents or as disclosed in Schedule 3.7 to the Disclosure Schedule, since the date of the Balance Sheet, the Company and its Subsidiaries have not incurred any liabilities that would be required to be reflected or reserved against in a consolidated balance sheet of the Company and its Subsidiaries prepared in accordance with GAAP, except for such liabilities as would not result in a Material Adverse Effect and except for liabilities and obligations resulting from the execution and delivery of this Agreement or relating to the transactions contemplated hereby. Section 3.8 Proxy Statement. The Proxy Statement (as defined in Section 6.7(b)) (and any amendment thereof or supplement thereto) at the date mailed to Company stockholders and at the time of the Special Meeting (as defined in Section 6.7(a)), (i) will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading and (ii) will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder; except that no representation is made by the Company with respect to statements made in the Proxy Statement based on information supplied by Parent or Purchaser for inclusion in the Proxy Statement. Section 3.9 Employee Benefit Plans; ERISA. (a) Schedule 3.9(a) of the Disclosure Schedule contains a true and complete list of each bonus, deferred compensation, incentive compensation, stock purchase, 15 stock option, restricted stock, deferred stock, stock appreciation right, vacation policy, superannuation, severance or termination pay, hospitalization or other medical, life or other insurance, flexible benefit, cafeteria plan, supplemental unemployment benefits, profit-sharing, pension, or retirement plan, program, agreement or arrangement, and each other employee benefit plan, program, agreement or arrangement, sponsored, maintained or contributed to by the Company or its Subsidiaries, for the benefit of any employee or former employee of the Company or any of its Subsidiaries employed in the United States (the "Plans"). Schedule identifies each of the Plans (collectively, the "ERISA Plans") that is an "employee benefit plan," as defined in section 3(3) of the Employee Retirement Security Income Plan of 1974, as amended ("ERISA"). (b) With respect to each Plan, the Company has heretofore delivered or made available to Purchaser a true and complete copy of each of the following documents: (i) the Plan (including all amendments thereto); (ii) the most recent annual report and actuarial report with respect to each such Plan, if required under ERISA; (iii) the most recent report on Form 5500 and Summary Plan Description, together with each Summary of Material Modifications required under ERISA with respect thereto; (iv) if the Plan is funded through a trust or any third party funding vehicle, the trust or other funding agreement (including all amendments thereto) and the latest financial statements thereof; and (v) the most recent determination letter received from the Internal Revenue Service with respect to each Plan intended to qualify under section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). 16 (c) Neither the Company nor any of its Subsidiaries sponsors, maintains, contributes to or has any obligation with respect to a Plan which is either a defined benefit plan or a money purchase plan or which is subject to Title IV of ERISA. (d) No direct or indirect liability under Title IV of ERISA has been incurred by the Company or any of its Subsidiaries with respect to any Plan and the Company does not reasonably expect that it or any of its Subsidiaries will incur liabilities under such Title, other than liabilities that would not have a Material Adverse Effect. (e) No ERISA Plan is a "multiemployer pension plan," as defined in section 3(37) of ERISA, nor is any ERISA Plan a plan described in section 4063(a) of ERISA. (f) No ERISA Plan or any trust established thereunder has incurred any "accumulated funding deficiency" (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each ERISA Plan ended prior to the Closing Date. Each ERISA Plan intended to be "qualified" within the meaning of section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified (or timely application has been made therefor); to the knowledge of the Company, no event has occurred since the date of such determination that would adversely affect such qualification; and each trust maintained thereunder has been determined by the Internal Revenue Service to be exempt from taxation under section 501(a) of the Code. Except as disclosed in Schedule 3.9(f) of the Disclosure Schedule, each Plan has been operated and administered in all material respects in accordance with its terms and applicable law, including but not limited to ERISA and the Code, the Company and its Subsidiaries have substantially performed all obligations, whether arising by operation of law or by contract, required to be performed by them in connection with the Plans, each employee benefit plan, policy and arrangement applicable to employees of the Company and its Subsidiaries who are employed outside of the United States has been operated and administered in all material respects in accordance with its terms and applicable law and the Company and its Subsidiaries have substantially performed all obligations, whether arising by operation 17 of law or by contract, required to be performed by them in connection with each such plan, policy and arrangement, except where a failure to so operate or administer or to perform such obligations would not result in a Material Adverse Effect. There are no pending, or to the actual knowledge of the Company, threatened, material claims by or on behalf of any Plan, by any employee or beneficiary covered under any such Plan, or otherwise involving any such Plan (other than routine claims for benefits). Except as disclosed in Schedule 3.9(f) of the Disclosure Schedule, as of the date hereof, there is no matter pending (other than routine qualification determination filings) with respect to any of the Plans before any Governmental Entity, other than matters that could not reasonably be expected to have a Material Adverse Effect. (g) Neither the Company nor any of its Subsidiaries, nor any of the ERISA Plans, nor any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which the Company or any of its Subsidiaries, any of the ERISA Plans, any such trust, or any trustee or administrator thereof, or any party dealing with the ERISA Plans or any such trust could be subject to either (i) breach of fiduciary duty liability damages under section 409 of ERISA, (ii) a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or (iii) a tax imposed pursuant to Chapter 43 of Subtitle D of the Code, except where such damages, penalty or tax would not reasonably be expected to have a Material Adverse Effect. (h) Except as set forth in Schedule 3.9(h) to the Disclosure Schedule, no Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees of the Company or its Subsidiaries beyond their retirement or other termination of service (other than (i) coverage mandated by applicable law, (ii) death benefits or retirement benefits under any "employee pension benefit plan," as that term is defined in section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of the Company or (iv) benefits the full cost of which is borne by the current or former employee (or his beneficiary). 18 (i) Each trust funding a Plan, which trust is intended to be exempt from federal income taxation pursuant to section 501(c)(9) of the Code, satisfies the requirements of such section and has received a favorable determination letter from the Internal Revenue Service regarding such exempt status. (j) Except as disclosed in Schedule 3.9(j)(i) of the Disclosure Schedule, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not (1) require the Company or any of its Subsidiaries to make a larger contribution to, or pay greater benefits under, any Plan or (2) create or give rise to any additional vested rights or service credits under any Plan. Except as disclosed in Schedule 3.9(j)(ii) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party to any agreement, nor has the Company or any of its Subsidiaries established any policy or practice, requiring any such entity to make a payment or provide any other form of compensation or benefit to any person performing services for the Company or any of its Subsidiaries upon termination of such services which would not be payable or provided in the absence of the consummation of the transactions contemplated by this Agreement. In connection with the consummation of the transactions contemplated by this Agreement, no payments have or will be made hereunder, under the Plans, or under any other agreement (including, without limitation, the employment and severance agreements listed in Schedule 3.9(j)(iii) of the Disclosure Schedule) which, in the aggregate, would result in impo- sition of the sanctions imposed under sections 280G and 4999 of the Code. (k) Schedule 3.9(k)(i) of the Disclosure Schedule contains a true and complete list of each employment or severance agreement and, to the actual knowledge of the Management Committee and the General Counsel, each consulting agreement with an individual providing for payment obligations in excess of $350,000, pertaining to any employee of the Company or any of its Subsidiaries. The Company has heretofore delivered or made available to Purchaser a true and complete copy of each such employment and severance agreement. Schedule 3.9(k)(ii) of the Disclosure Schedule sets forth by number and employment classification the approximate numbers of employees employed by the Company and its Subsidiaries as 19 of the date of this Agreement. None of said employees are subject to union or collective bargaining agreements with the Company or any of its Subsidiaries. Section 3.10 Litigation; Compliance with Law. (a) Except as set forth in Schedule 3.10 of the Disclosure Schedule or as disclosed in the Company SEC Documents and except for claims under Environmental Laws (which are the subject of Section 3.14), there is no (i) suit, claim, action, proceeding or investigation (A) pending or, to the actual knowledge of the Company, threatened, against the Company or any of its Subsidiaries which if determined adversely to the Company or such Subsidiaries would have a Material Adverse Effect or (B) as of the date hereof, pending or, to the actual knowledge of the Company, threatened, against the Company or any of its Subsidiaries which if determined adversely to the Company or such Subsidiaries would prevent the Merger or (ii) judgment, decree, injunction, rule or order of a Governmental Entity or arbitrator outstanding against the Company or any of its Subsidiaries (x) which would have a Material Adverse Effect or (y) in effect as of the date hereof which would prevent the Merger. (b) Except as disclosed in the Company SEC Documents and except for Environmental Laws (which are the subject of Section 3.14), the operations of the Company and its Subsidiaries are not being conducted in violation of any law, statute, regulation, and judgment, decree, order or injunction of any Governmental Entity, except where such violations would not have a Material Adverse Effect. (c) The Company and its Subsidiaries hold all licenses, permits, variances and approvals of Governmental Entities necessary for the lawful conduct of their respective businesses as currently conducted except for licenses, permits, variances or approvals under Environmental Laws (which are the subject of Section 3.14) and except where the failure to hold such licenses, permits, variances or approvals would not have a Material Adverse Effect. Section 3.11 Intellectual Property. Except as set forth on Schedule 3.11 of the Disclosure Schedule, the Company and its Subsidiaries own, or possess licenses 20 or other valid rights to use, all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, service marks, service mark rights, trade secrets, applications to register, and registrations for, the foregoing trademarks, service marks, know-how and other proprietary rights and information (collectively, "Intellectual Property") necessary in connection with the business of the Company and its Subsidiaries as currently conducted, except where the failure to possess such rights or licenses or valid rights to use would not have a Material Adverse Effect. To the actual knowledge of the Company, except as disclosed in Schedule 3.11 of the Disclosure Schedule, (i) the conduct of the business of the Company and its Subsidiaries as currently conducted does not infringe upon any Intellectual Property of any third party except where such infringement would not result in a Material Adverse Effect and (ii) no Person is infringing upon any Intellectual Property of the Company or its Subsidiaries except where such infringement would not result in a Material Adverse Effect. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in the loss of, or any encumbrance on, the rights of the Company or any Subsidiary with respect to the Intellectual Property owned or used by them, except where such loss or encumbrance would not have a Material Adverse Effect. Section 3.12 Significant Agreements. (a) Schedule 3.12(a) of the Disclosure Schedule lists all contracts, agreements and commitments between the Company or any of its Subsidiaries, on the one hand, and on the other hand Dow or any of its affiliates (other than the Company and its Subsidiaries) that will survive the consummation of the Merger, excluding contracts, agreements and commitments which collectively are immaterial to the Company and except for this Agreement and the other agreements entered into in connection with this Agreement (the "Dow Agreements"). The Company has heretofore made available to Parent complete and correct copies of the Dow Agreements and the contracts or agreements of the Company included as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as amended by the Company's Form 10-K/A (the Dow Agreements and such other agreements and 21 contracts being referred to herein as the "Significant Agreements"). (b) Except as set forth in Schedule 3.12(b) of the Disclosure Schedule, to the knowledge of the Company each of the Significant Agreements is in full force and effect and enforceable in accordance with its terms; neither the Company nor any of its Subsidiaries has received written notice of cancellation or termination of any Significant Agreement; and there exists no event of default or occurrence, condition or act on the part of the Company or any of its Subsidiaries or, to the knowledge of the Company, on the part of the other parties to the Significant Agreements which constitutes or would constitute (with notice or lapse of time or both) a breach of or default under any of the Significant Agreements; except where the failure to be in full force and effect would not have, and such breaches and defaults as would not result in, a Material Adverse Effect. (c) Except as disclosed on Schedules 3.4(a) and Schedule 3.12(c) of the Disclosure Schedule, no consents from any third parties under any Significant Agreements are required in connection with the consummation of the Merger, except for such consents, which if not received, would not result in a Material Adverse Effect or prevent the consummation of the Merger. (d) Other than the Significant Agreements, and any contract, agreement or commitment previously provided or made available to Parent or Purchaser, there are no contracts or agreements, the performance of which would result in a Material Adverse Effect. Section 3.13 Taxes. (a) The Company and its Subsidiaries have (i) filed (or there have been filed on their behalf) with the appropriate governmental authorities all material Tax Returns (as hereinafter defined) required to be filed by them and such Tax Returns are true, correct and complete, and (ii) paid or withheld or made provision in accordance with GAAP (or there has been paid or provision has been made on their behalf) for the payment of all material Taxes (as hereinafter defined) that are due and payable or required to be withheld for all taxable periods and portions thereof through the date hereof; (b) except as set forth on Schedule 3.13 of the Disclosure Schedule, no federal, state, local or foreign 22 audits or other administrative proceedings or court proceedings are presently pending with regard to any material Taxes of the Company or its Subsidiaries, and no assessment, deficiency or adjustment has been asserted with regard to any such Taxes that the Company and its Subsidiaries have not paid or have not made provision for in accordance with GAAP or are contesting in good faith; (c) there are no material liens for Taxes upon any property or assets of the Company or any Subsidiary thereof, except for liens for Taxes not yet due and payable and liens for Taxes that are being contested in good faith; and (d) except as set forth on Schedule 3.13 of the Disclosure Schedule there is not in force any extension of time for the assessment or payment of any Tax with respect to the Company or any Subsidiary of the Company. For purposes of this Agreement, "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, excise, stamp, real or personal property, ad valorem, withholding, estimated, social security, unemployment, occupation, use, service, service use, license, net worth, payroll, franchise, severance, transfer, recording or other taxes, assessments or charges imposed by any Governmental Entity and any interest, penalties, or additions to tax attributable thereto. For purposes of this Agreement, "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax. Section 3.14 Environmental Matters. (a) Except as disclosed in the Company SEC Documents or as disclosed in Schedule 3.14(a) of the Disclosure Schedule, the Company and its Subsidiaries are in compliance with all applicable Environmental Laws (as hereinafter defined), which compliance includes the possession of permits and governmental authorizations required under applicable Environmental Laws and compliance with the terms and conditions thereof, except where such non-compliance would not result in a Material Adverse Effect. 23 (b) Except as disclosed in the Company SEC Documents or as disclosed in Schedule 3.14(b) of the Disclosure Schedule, there are no Environmental Claims (as hereinafter defined) pending or, to the actual knowledge of the Company, threatened, against the Company or its Subsidiaries that would result in a Material Adverse Effect. (c) As of the date hereof, to the actual knowledge of the Management Committee and the General Counsel of the Company, except as previously disclosed or contained in materials previously provided or made available to Parent or Purchaser, the Company and its Subsidiaries are not subject to any remedial obligations required under Environmental Laws that would result in a Material Adverse Effect. (d) Parent and Purchaser acknowledge that the representations and warranties contained in this Section 3.14 are the only representations and warranties being made by the Company with respect to compliance with, or liability or claims under, Environmental Laws or with respect to permits issued or required under Environmental Laws, that no other representation by the Company contained in this Agreement shall apply to any such matters and that no other representation or warranty, express or implied, is being made with respect thereto. (e) As used in this Agreement: (i) the term "Environmental Claim" means any claim, action, investigation or written notice to the Company or its Subsidiaries by any person or entity alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resource damages, personal injuries, or penalties) arising out of, based on, or resulting from (a) the presence, or release into the environment, of any Hazardous Substance (as hereinafter defined) at any location, whether or not owned or operated by the Company or its Subsidiaries or (b) circumstances forming the basis of any violation, or alleged violation of any applicable Environmental Law; 24 (ii) the term "Environmental Laws" means all federal, state, local and foreign laws and regulations, decrees and legal requirements including judicial and administrative decrees, as in effect and as interpreted as of the date hereof, relating to pollution or protection of the environment, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Substances, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances; and (iii) the term "Hazardous Substance" means chemicals, pollutants, contaminants, solid and hazardous wastes, hazardous and toxic substances, and oil and petroleum products. Section 3.15 Required Vote by Company Stockholders. The affirmative vote of the holders of at least 66 2/3% of the outstanding Shares entitled to vote hereon is the only vote of any class of capital stock of the Company required by the DGCL, the Amended and Restated Certificate of Incorporation or the By-Laws of the Company to adopt this Agreement and approve the transactions contemplated hereby. Section 3.16 Brokers. Except for Morgan Stanley & Co. Incorporated, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company is solely responsible for the fees and expenses of Morgan Stanley & Co. Incorporated, the amount of which has been previously disclosed to Parent. Section 3.17 Public Utility Company; Public Utility Regulatory Policies Act. (a) Neither the Company nor any of its Subsidiaries is (i) subject to regulation as a "holding company" or a "subsidiary company" of a holding company or a "public utility company" under Section 2(a) of the Public Utility Holding Company Act of 1935 ("PUHCA"), (ii) except with respect to the Company's Subsidiaries that are "exempt wholesale generators" (as such term is de- 25 fined in Section 32 of PUHCA) or engaged in power marketing activities, subject to regulation under the Federal Power Act, as amended ("FPA"), other than as contemplated by 18 C.F.R. ss. 292.601(c) or 18 C.F.R. ss. 35.12 or (iii) except with respect to the Company's Subsidiaries that are "exempt wholesale generators" (as such term is defined in Section 32 of PUHCA) or engaged in power marketing activities, subject to any state law or regulation with respect to rates or the financial or organizational regulation of electric utilities, other than as contemplated by 18 C.F.R. ss. 292.602(c). (b) Each of the power generation projects in which the Company or its Subsidiaries has an interest which is subject to the requirements under the Public Utility Regulatory Policies Act of 1978, as amended (16 U.S.C. ss. 796, et seq.), and the regulations of the Federal Energy Regulatory Commission ("FERC") promulgated thereunder, as amended from time to time, necessary to be a "qualifying cogeneration facility" and/or a "qualifying small power production facility" (the "QF Projects") meets such requirements. Schedule 3.17(b) sets forth a complete list of the QF Projects. (c) Each of the power generation projects in which the Company or its Subsidiaries has an interest which is subject to regulation as an "exempt wholesale generator" (as such term is defined in Section 32 of PUHCA) ("EWG Projects") as of the date hereof meets the requirements to maintain "exempt wholesale generator" status. A complete list of the Company's EWG Projects is disclosed in Schedule 3.17(c) of the Disclosure Schedule. (d) Each of the power generation projects in which the Company or its Subsidiaries has an interest which is subject to regulation as a "foreign utility company" (as such term is defined in Section 33 of PUHCA) ("FUCO Projects") as of the date hereof meets the requirements to maintain "foreign utility company" status. A complete list of the Company's FUCO Projects is disclosed in Schedule 3.17(d) of the Disclosure Schedule. Section 3.18 Fairness Opinion. The Company has received the opinion of Morgan Stanley & Co. Incorporated to the effect that, as of the date hereof, the consideration to be received by the stockholders of the 26 Company in the Merger is fair to such stockholders from a financial point of view. Section 3.19 Excluded Subsidiaries. To the actual knowledge of the Management Committee and the General Counsel of the Company, there is no event or condition with respect to any Excluded Subsidiary that, if the Excluded Subsidiaries were included in the definition of Subsidiaries, would result in a breach of any representation or warranty set forth in this Article III. Section 3.20 No Other Representations or Warranties. Except for the representations and warranties contained in this Article III, neither the Company nor any other Person makes any other express or implied representation or warranty on behalf of the Company. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF DOW Dow represents and warrants to Parent and Purchaser as follows: Section 4.1 Organization. Dow is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Section 4.2 Authorization; Validity of Agreement. Dow has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby (which, for purposes of this Agreement shall include all of Dow's obligations under Section 6.12 hereof). The execution and delivery by Dow of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the board of directors of Dow and no other corporate proceedings on the part of Dow are necessary to authorize the execution and delivery of this Agreement by Dow and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Dow and, assuming due authorization, execution and delivery of this Agreement by the Company, Parent and Purchaser, is a valid and binding obligation of Dow enforceable against Dow in accordance with its terms. 27 Section 4.3 No Violations; Consents and Approvals. (a) Neither the execution and delivery of this Agreement by Dow nor the consummation by Dow of the transactions contemplated hereby will (i) violate any provision of the Certificate of Incorporation or By-Laws of Dow; (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation, or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebt- edness, lease, license, contract, agreement or other instrument or obligation to which Dow is a party or by which its assets may be bound; or (iii) assuming that all consents, authorizations and approvals contemplated by Section 4.3(b) below have been obtained and all filings contemplated thereby have been made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Dow or any of its properties or assets; in each case, except for any such violations, breaches, defaults, terminations, amendments, cancellations or accelerations which would not individually or in the aggregate be reasonably expected to prevent the consummation by Dow of the transactions contemplated by this Agreement. (b) No filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity is required in connection with the execution and delivery of this Agreement by Dow or the consummation by Dow of the transactions contemplated hereby, except (i) applicable requirements under Competition Laws; (ii) applicable requirements under the Exchange Act; (iii) applicable requirements under state securities and Blue Sky laws; (iv) applicable requirements pursuant to (s) 203 of the FPA; and (v) such other consents, approvals, orders, authorizations, notifications, registrations, declarations and filings, the failure of which to be obtained or made would not prevent the consummation by Dow of the transactions contemplated by this Agreement. (c) As of the date hereof, neither Dow, nor any of its properties or assets is subject to any order, writ, judgment, injunction, decree, determination or 28 award which would prevent the consummation by Dow of the transactions contemplated hereby. Section 4.4 Title to Shares. (a) The Dow Shares described in Schedule A represent all of the Shares beneficially owned by Dow. Dow is the sole record and beneficial owner of the Dow Shares. (b) There are no options or rights to acquire, or any agreements to which Dow is a party relating to, the Dow Shares, other than this Agreement. Section 4.5 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Dow (it being understood that Morgan Stanley & Co. Incorporated is acting as investment banker for the Company and is entitled to a fee from the Company in connection with the transactions contemplated by this Agreement). Section 4.6 No Other Representations or Warranties. Except for the representations and warranties contained in this Article IV, neither Dow nor any other Person makes any other express or implied representation or warranty on behalf of Dow. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser represent and warrant to the Company as follows: Section 5.1 Organization. Parent is a corporation duly organized, validly existing and in good standing under the laws of Delaware and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Delaware. Each of Parent and Purchaser has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and is qualified or licensed to do business as a foreign corporation and is 29 in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so organized, existing and in good standing or to have such power and authority, or to be so qualified or licensed would not have a material adverse effect on the business or financial condition of Parent and its Subsidiaries, taken as a whole, or materially impair or delay the consummation of the transactions contemplated by this Agreement. Parent has previously delivered to the Company complete and correct copies of its certificate of incorporation and by-laws and the certificate of incorporation and by-laws of Purchaser, in each case as currently in effect. Section 5.2 Authorization; Validity of Agreement. Each of Parent and Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by Parent and Purchaser of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the respective Boards of Directors of Parent and Purchaser and no other corporate proceedings on the part of Parent or Purchaser are necessary to authorize the execution and delivery of this Agreement by Parent and Purchaser and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and Purchaser and, assuming due authorization, execution and delivery of this Agreement by the Company and Dow, is a valid and binding obligation of each of Parent and Purchaser enforceable against each of them in accordance with its terms. Section 5.3 No Violations; Consents and Approvals. (a) Neither the execution and delivery of this Agreement by Parent and Purchaser nor the consummation by Parent and Purchaser of the transactions contemplated hereby will (i) violate any provision of the respective certificate of incorporation or by-laws of Parent or Purchaser, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any material note, bond, mortgage, indenture, guarantee, other evidence of 30 indebtedness, license, lease, contract, agreement or other instrument or obligation to which Parent or any of its Subsidiaries is a party or by which any of them or any of their assets may be bound or (iii) assuming that all consents, authorizations and approvals contemplated by Section 5.3(b) have been obtained and all filings contemplated thereby have been made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent, any of its Subsidiaries or any of their properties or assets; except for such violations, breaches, defaults, terminations, amendments, cancellations or accelerations which would not materially impair or delay the consummation of the transactions contemplated by this Agreement. (b) No filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity is required in connection with the execution and delivery of this Agreement by Parent and Purchaser or the consummation by Parent and Purchaser of the transactions contemplated hereby, except (i) applicable requirements under Competition Laws, (ii) applicable requirements under the Exchange Act, (iii) the filing of the Certificate of Merger with the Secretary of State, (iv) applicable requirements under state securities or "blue sky" laws of various states or non-United States change-in-control laws or regulations, (v) applicable requirements pursuant to ss. 203 of the FPA and (vi) such other consents, approvals, orders, authorizations, notifications, registrations, declarations and filings the failure of which to be obtained or made would not materially impair or delay the consummation of the transactions contemplated by this Agreement. Section 5.4 Proxy Statement. None of the information supplied by Parent or Purchaser for inclusion in the Proxy Statement (including any amendments or supplements thereto) will, at the date mailed to stockholders and at the time of the Special Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 31 Section 5.5 Interim Financial Condition. The unaudited balance sheet of Parent for the interim period ending September 30, 1996 has been prepared in accordance with GAAP (except as otherwise noted therein and except that the unaudited balance sheet is subject to year-end adjustment and does not contain all footnote disclosures required by GAAP) and fairly presents in all material respects the financial position of Parent as of the date thereof. Since such date, there has not been an adverse effect in Parent's financial condition that would materially adversely affect the ability of Parent or Purchaser to consummate the Merger. Section 5.6 Financing. Parent and Purchaser will have sufficient funds available (through existing credit arrangements or otherwise) at the Closing to pay the Merger Consideration and to perform their obligations hereunder and the obligations of the Surviving Corporation and its Subsidiaries following the Effective Time. Section 5.7 Surviving Corporation After the Merger. At and immediately after the Effective Time, and after giving effect to the Merger and the other transactions contemplated in connection therewith (and any changes in the Surviving Corporation's assets and liabilities as a result thereof), the Surviving Corporation will not (i) be insolvent (either because its financial condition is such that the sum of its debts is greater than the fair value of its assets or because the present fair saleable value of its assets will be less than the amount required to pay its probable liabilities on its debts as they mature), (ii) have unreasonably small capital with which to engage in its business or (iii) have incurred or plan to incur indebtedness beyond its ability to pay such debts as they mature. Section 5.8 Beneficial Ownership of Shares; Interested Stockholder. None of Parent, Purchaser or any of their respective affiliates or associates beneficially owns more than 5% of the outstanding shares of Company Common Stock or any securities convertible into or exchangeable for Company Common Stock. Section 5.9 Brokers. Except for Chase Securities Inc., no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contem- 32 plated by this Agreement based upon arrangements made by or on behalf of Parent and Purchaser. Parent and Purchaser are solely responsible for the fees and expenses of Chase Securities Inc. Section 5.10 Public Utility Company; Public Utility Regulatory Policies Act. (a) Neither Parent, Purchaser nor any of their respective Subsidiaries is (i) subject to regulation as a "holding company" or a "subsidiary company" of a holding company or a "public utility company" under Section 2(a) of the PUHCA, (ii) except with respect to their power marketing activities, subject to regulation under the FPA, other than as contemplated by 18 C.F.R. (s) 292.601(c) or (iii) subject to any state law or regulation with respect to rates or the financial or organizational regulation of electric utilities, other than as contem- plated by 18 C.F.R. (s) 292.602(c). (b) Neither Parent, Purchaser nor any of their respective Subsidiaries is engaged in any activities that would require any filing with, or receipt of regulatory approvals from, the Federal Energy Regulatory Commission under (s)(s) 203 (except with respect to their power marketing activities), 204 or 205 of the FPA in connection with the consummation of the transactions contemplated by this Agreement. Section 5.11 Absence of Litigation. As of the date hereof, there is no suit, claim, action, proceeding or investigation pending against, or to the actual knowledge of Parent and Purchaser, threatened against, Parent or Purchaser or any of their respective properties before any Governmental Entity or arbitrator which challenges or seeks to prevent, enjoin, alter or delay the Merger or any of the other transactions contemplated by this Agreement. As of the date hereof, neither Parent nor Purchaser nor any of their respective properties is subject to any judgment, decree, order or injunction of any Govern- mental Entity or arbitrator which would prevent or delay the consummation of the transactions contemplated hereby. Section 5.12 No Prior Activities. Since the date of its incorporation, Purchaser has not engaged in any activities other than in connection with or as contemplated by this Agreement or in connection with arrang- 33 ing any financing required to consummate the transactions contemplated hereby. Section 5.13 No Other Representations or Warranties. Except for the representations and warranties contained in this Article V, neither Parent, Purchaser nor any other Person makes any other express or implied representation or warranty on behalf of Parent or Purchaser. ARTICLE VI COVENANTS Section 6.1 Interim Operations of the Company. The Company covenants and agrees that after the date hereof and prior to the Effective Time, except as (i) contemplated by this Agreement, (ii) required by applicable law, by any Significant Agreement or by any Plan disclosed on Schedule 3.9(a) of the Disclosure Schedule or (iii) agreed to in writing by Parent: (a) the business of the Company and its Subsidiaries shall be conducted only in the ordinary course and, to the extent consistent therewith, the Company shall use its reasonable best efforts to preserve its business organization and the business organization of its Subsidiaries intact and maintain existing relations with customers, suppliers and employees; (b) the Company shall not amend its Amended and Restated Certificate of Incorporation or By-Laws and shall not authorize or vote in favor of, directly or indirectly, any amendment by its Subsidiaries of their respective organizational documents; (c) the Company shall not declare, set aside or pay any dividend or other distribution with respect to its capital stock; and neither the Company nor its Subsidiaries shall (i) issue or dispose of any additional shares of, or securities convertible into or exchangeable for, or options, warrants, or rights to acquire, any shares of capital stock of any class of the Company or its Subsidiaries other than issuances of shares of Company Common Stock pursuant to securities, options, warrants, calls, commitments or rights existing at the date 34 hereof and disclosed to Purchaser in writing (including as disclosed in the Company SEC Documents); or (ii) redeem, purchase or otherwise acquire directly or indirectly any of its capital stock; (d) Neither the Company nor its Subsidiaries shall incur any indebtedness for borrowed money other than (i) short term indebtedness incurred in the ordinary course of business (ii) indebtedness of Subsidiaries incurred in connection with the acquisition, development, construction or operation of power generation or energy producing facilities, which indebtedness is without recourse to the Company or its assets (other than the assets or earnings of such Subsidiary or such facility), and (iii) other indebtedness not in excess of $15 million in the aggregate; (e) except as set forth in Schedule 6.1(e) of the Disclosure Schedule, neither the Company nor its Subsidiaries shall (i) except for increases in the ordinary course of business consistent with past practice or to reflect promotions, grant any material increase in the compensation payable or to become payable by the Company or any of its Subsidiaries to any employee; (ii) adopt or otherwise materially increase, or accelerate the payment or vesting of the amounts payable under any existing, bonus, incentive compensation, deferred compensation, severance, profit sharing, stock option, stock appreciation right, restricted stock purchase, insurance, pension, retirement or other employee benefit plan agreement or arrangement; or (iii) enter into or amend in any material respect any existing employment or severance agreement or consulting agreement with any individual consultant (which consulting agreement provides for payments in excess of $350,000) or, except in accordance with the existing written policies of the Company, existing contracts or agreements or in the ordinary course of business consistent with past practice, grant any severance or termination pay to any officer, director, employee or individual consultant of the Company or any of its Subsidiaries; (f) neither the Company nor its Subsidiaries shall change the accounting principles used by it unless required by law, SEC guidelines or GAAP (or, if applicable with respect to Subsidiaries, applicable foreign generally accepted accounting principles); 35 (g) The Company shall not, and shall not permit any of its Subsidiaries to, acquire or agree to acquire any material assets except in the ordinary course of business or incur or commit to incur, or consent to the incurrence by any of the Excluded Subsidiaries, of any capital expenditures (as such term is defined under GAAP) not included in the 1997 project financial models previously provided to Parent except for such capital expenditures not in excess of $1 million per project or more than $15 million in the aggregate; and (h) The Company shall not permit any individual to subscribe for any additional shares of Company Common Stock under the Stock Purchase Plan. (i) neither the Company nor its Subsidiaries will enter into an agreement, contract, commitment or arrangement to do any of the foregoing. Section 6.2 Acquisition Proposals. (a) The Company and its Subsidiaries will not, directly or indirectly through their respective officers, directors, employees, representatives and agents, (i) initiate, facilitate, encourage or solicit the making of any Acquisition Proposal (as hereinafter defined) or (ii) except as permitted below, engage in negotiations or discussions with, or furnish any non-public information to, any third party relating to an Acquisition Proposal. Notwithstanding anything to the contrary contained in this Agreement, at any time prior to the approval of the Merger by the Company's stockholders the Company and the Board (i) may participate in negotiations or discussions (including, as a part thereof, making any counterproposal) with or furnish information to any third party that delivers a written Acquisition Proposal to the Company which was not solicited or encouraged after the date hereof if the Board determines in good faith, after consultation with its outside counsel, that the failure to participate in such discussions or negotiations or to furnish such information could reasonably be expected to constitute a breach of the Board's fiduciary duties under applicable law and (ii) without qualifying the obligations of the Company pursuant to Section 6.7(a) hereof, shall be permitted to (x) take and disclose to the Company's stockholders a position with respect to the Merger or another Acquisition Proposal, or amend or with- 36 draw such position, pursuant to Rules 14d-9 and 14e-2 under the Exchange Act or (y) make disclosure to the Company's stockholders, in each case if the Board determines in good faith, after consultation with its outside counsel, that the failure to take such action could reasonably be expected to constitute a breach of the Board's fiduciary duties under, or otherwise violate, applicable law. The Company, Dow and their respective Subsidiaries, officers, directors, employees, representatives and agents shall immediately cease all existing activities, discussions and negotiations with any parties other than Parent and The AES Corporation ("AES") conducted heretofore with respect to an Acquisition Proposal. (b) The Company shall promptly advise Parent in writing of any inquiries or proposals relating to an Acquisition Proposal and any actions taken pursuant to Section 6.2(a) (including the material terms thereof and the identity of the other parties involved). (c) Any action by the Board pursuant to the second sentence of Section 6.2(a) shall not change the approval of the Board with respect to this Agreement for purposes of Section 203 of the DGCL. (d) For purposes of this Agreement, "Acquisition Proposal" shall mean any proposal made by a third party relating to (i) a merger, recapitalization, share exchange, consolidation, business combination, sale of shares of capital stock or securities convertible into or exercisable or exchangeable for capital stock, tender offer or exchange offer or similar transaction involving the Company including, without limitation, any single or multi-step transaction or series of related transactions or, (ii) the acquisition of any material portion of the business or assets of the Company and its Subsidiaries or (iii) any public announcement of a proposal, plan or intention to do any of the foregoing, in each case other than the transactions contemplated by this Agreement and other than the transactions related to the Company's disposition of its interest in the Tiger Bay project partnership to Florida Power Corporation or its affiliates. Section 6.3 Audited Financial Statements. The Company will deliver to Parent a copy of audited finan- 37 cial statements for the year ended December 31, 1996 (and any consolidating financial statements used in the preparation thereof) promptly after such audited financial statements have been made publicly available. Section 6.4 Access to Information. From the date of this Agreement until the Effective Time, the Company shall afford to Parent and its authorized representatives and, solely with respect to the international operations of the Company and its Subsidiaries, to AES and its authorized representatives, reasonable access during normal business hours upon reasonable prior notice to all of its books and records and, during such period, the Company shall furnish promptly to Parent or AES, as applicable, such financial data and other information concerning its business, properties and personnel as Parent or AES may reasonably request. Parent or AES and their respective authorized representatives will conduct all such inspections in a manner which will minimize any disruptions of the business and operations of the Company and its Subsidiaries. Until the Effective Time, Parent and Purchaser and AES will hold any such information in accordance with the provisions of the confidentiality agreement between the Company and Parent, dated as of November 6, 1996, or between the Company and AES, dated as of October 24, 1996, (as the case may be "Confidentiality Agreements"), and will cause such information to be so held by their Representatives (as defined in the Confidentiality Agreement). Upon a termination of this Agreement pursuant to Section 8.1, Parent, Purchaser, AES and their respective Representatives shall return (and hold confidential) all information provided pursuant to this Section 6.4 and all other Information (as defined in the Confidentiality Agreements) pursuant to the procedures set forth in the Confidentiality Agreements. The foregoing shall not require the Company to permit any inspection or to disclose any information which in the reasonable judgment of the Company would result in the disclosure of any trade secrets of third parties or violate any obligation of the Company with respect to confidentiality if the Company shall have used its reasonable best efforts to obtain the consent of such third party to such inspection or disclosure. 38 Section 6.5 Further Action; Reasonable Best Efforts. (a) Upon the terms and subject to the conditions herein provided, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using reasonable best efforts to obtain all necessary authorizations, consents and approvals, and to effect all necessary registrations and filings. Each of the parties hereto will furnish to the other parties such necessary information and reasonable assistance as such other parties may reasonably request in connection with the foregoing and will provide the other parties with copies of all filings made by such party with any Governmental Entity or any other information supplied by such party to a Governmental Entity in connection with this Agreement, and the transactions contemplated hereby. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and/or directors of the Surviving Corporation shall take or cause to be taken all such necessary action. In addition, the Company agrees to use its reasonable best efforts to assist AES in obtaining any necessary authorization, consent and approval with respect to a sale after the Effective Time by Parent or Purchaser to AES of any assets relating to the international operations of the Company and its Subsid- iaries. (b) Parent, Purchaser, Dow and the Company shall use their respective reasonable best efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated hereby under the laws, rules, guidelines or regulations of any Governmental Entity. Without limiting the foregoing, each of the parties shall cooperate in good faith and consult with each other with respect to filings, communications, agreements, arrangements or consents, written or oral, formal or informal, with the FERC and shall further use their reasonable best effort to obtain any approvals required to be received from the FERC in connection with the consummation of the transactions contemplated by this Agreement. 39 (c) Without limiting Section 6.5(b), Dow and Parent shall, as soon as practicable, file Notification and Report Forms under the HSR Act (as defined below) with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") and shall use reasonable best efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation; and Parent and Purchaser shall use their reasonable best efforts to take or cause to be taken all actions necessary, proper or advisable to obtain any consent, waiver, approval or authorization relating to any Competition Law that is required for the consummation of the transactions contemplated by this Agreement, provided, however, that the foregoing shall not obligate Parent or Purchaser to take any action which would have a material adverse effect on the combined businesses of the Company and its Subsidiaries, and Parent and its affiliates, taken as a whole. "Competition Laws" means federal, state, local or foreign statutes, rules, regulations, orders, decrees, administrative and judicial doctrines, and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization, lessening of competition or restraint of trade and includes the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Section 6.6 Employee Benefits. (a) Parent and Purchaser hereby agree to honor without modification or contest, and agree to cause the Surviving Corporation to honor without modification or contest, and to make required payments when due under, all Plans and other agreements listed on Schedule 3.9(k) of the Disclosure Schedule in existence as of the date hereof (or as modified to the extent permitted by Section 6.1); provided, however, that nothing herein shall be construed as preventing Parent from amending or terminating any Plan, to the extent permitted under the terms of such Plan. Purchaser and Parent hereby acknowledge that, notwithstanding the terms of any Plan or award or agreement entered into thereunder, the Merger constitutes a "Change in Control" for purposes of such Plans, awards and agreements and agree to abide by the provisions of any Plan which relate to a Change in Control, including the accelerated vesting and/or payment of equity-based 40 awards under the Stock Plan, Variable Pay Plan and the Stock Purchase Plan. (b) Parent and Purchaser hereby agree that, for a period of one year immediately following the Effective Time, they shall, or shall cause the Surviving Corporation to either (i) continue to maintain the employee benefit plans, policies and arrangements established, maintained or contributed to by the Company or its Subsidiaries for the benefit of the employees and former employees of the Company and its Subsidiaries (whether employed in the U.S. or outside the U.S.) on terms no less favorable in the aggregate than those provided on the date hereof to such employees and former employees of the Company and its Subsidiaries or (ii) provide that such employees and former employees of the Company and its Subsidiaries may participate in analogous plans of Parent which provide benefits which in the aggregate are substantially similar to those provided to them under such plans on the date hereof (such analogous plans being referred to herein as the "Parent Plans"). (c) Parent and Purchaser agree that for purposes of all plans referred to in Section 6.6(b) and Parent Plans (including all policies and employee fringe benefit programs, including vacations, of the Surviving Corporation) under which an employee's benefit depends, in whole or in part, on length of service, credit will be given to individuals employed by the Company and its Subsidiaries as of the Effective Time ("Company Employees") for service previously credited with the Company or its Subsidiaries prior to the Effective Time, provided, that such crediting of service does not result in duplication of benefits, and provided that such crediting of service shall not be given for benefit accrual purposes under any defined benefit plan. Company Employees shall also be given credit for any deductible or co-payment amounts paid in respect of the Plan year in which the Effective Time occurs, to the extent that, following the Effective Time, they participate in any Parent Plan for which deductibles or co-payments are required. Parent and Purchaser shall also cause each Parent Plan to waive (i) any preexisting condition restriction which was waived under the terms of any analogous Plan immediately prior to the Effective Time or (ii) waiting period limitation which would otherwise be applicable to a Company Employee on or after the Effective Time to the extent 41 such Company Employee had satisfied any similar waiting period limitation under an analogous Plan prior to the Effective Time. Section 6.7 Stockholders' Meeting; Proxy Statement. (a) The Company shall, in accordance with applicable federal securities laws, the DGCL, the Amended and Restated Certificate of Incorporation and the By-laws of the Company, duly call, give notice of, convene and hold a special meeting of its stockholders (the "Special Meeting") as promptly as practicable after the date hereof for the purpose of considering and taking action upon this Agreement and such other matters as may be appropriate at the Special Meeting. Notwithstanding anything in this Agreement to the contrary, the Company shall not take any action which interferes with the convening of the Special Meeting or the taking of a stockholders' vote at that meeting. (b) The Company shall prepare and file with the SEC, and Parent, Dow and Purchaser shall cooperate with the Company in such preparation and filing, a preliminary proxy statement or information statement relating to this Agreement and the transactions contemplated hereby and use its reasonable best efforts to furnish the information required to be included by the SEC in the Proxy Statement (as hereinafter defined) and, after consultation with Parent, to respond promptly to any comments made by the SEC with respect to the preliminary proxy statement and, promptly after the completion of any SEC review or notification from the SEC that the preliminary proxy materials will not be subject to comment, cause a definitive proxy statement or information statement (the "Proxy Statement") to be mailed to its stockholders. Subject to the fiduciary obligations of the Board under applicable law, the Company shall include in the Proxy Statement the recommendation of the Board that stockholders of the Company approve and adopt this Agreement and the transactions contemplated hereby. 42 (c) Parent agrees that (i) it will provide the Company with all information concerning Parent or Purchaser necessary or appropriate to be included in the Proxy Statement and (ii) at the Special Meeting or any postponement or adjournment thereof (or at any other meeting at which the Merger or this Agreement are considered by stockholders), it will vote, or cause to be voted, all of the Shares then owned by, or with respect to which proxies are held by it, Purchaser or any of its other Subsidiaries and affiliates, if any, in favor of the approval and adoption of this Agreement. (d) The Company, Parent and Purchaser shall cooperate with one another in the preparation and filing of the Proxy Statement and shall use their reasonable best efforts to promptly obtain and furnish the information required to be included in the Proxy Statement and to respond promptly to any comments or requests made by the SEC with respect to the Proxy Statement. Each party hereto shall promptly notify the other parties of the receipt of comments of, or any requests by, the SEC with respect to the Proxy Statement, and shall promptly supply the other parties with copies of all correspondence between such party (or its representatives) and the SEC (or its staff) relating thereto. The Company, Parent and Purchaser each agree to correct any information provided by it for use in the Proxy Statement which shall have become, or is, false or misleading. Section 6.8 Directors' and Officers' Insurance and Indemnification. (a) The Certificate of Incorporation and By-laws of the Surviving Corporation shall contain provisions with respect to indemnification set forth in Article VI of the Company's Amended and Restated Certificate of Incorporation and Article VII of the Company's By-laws on the date of this Agreement, which provisions shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time (or, in the case of matters occurring prior to the Effective Time which have not been resolved prior to the sixth anniversary of the Effective Time, until such matters are finally resolved), in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors or officers of the Company in respect of actions or omissions occurring at or prior 43 to the Effective Time (including, without limitation, the transactions contemplated by this Agreement). (b) Parent agrees that at all times after the Merger it shall indemnify, or shall cause the Surviving Corporation and its Subsidiaries to indemnify, each person who is now, or has been at any time prior to the date hereof, an employee, director or officer of the Company or of any of the Company's Subsidiaries (individually an "Indemnified Party" and collectively the "Indemnified Parties"), to the full extent permitted by applicable law, with respect to any claim, liability loss, damage, cost or expense, whenever asserted or claimed ("Indemnified Liability"), based in whole or in part on, or arising in whole or in part out of, any matter existing or occurring at or prior to the Effective Time; provided, however, that such indemnity for any such employee seeking indemnification in connection with a proceeding (or part thereof) initiated by such employee shall be required only if such proceeding (or part thereof) was authorized by Parent, the Surviving Corporation or a Subsidiary thereof employing such employee; and provided, further, that notwithstanding the immediately preceding clause if a written claim received from or on behalf of an indemnified party is not paid in full within ninety days after such receipt, the claimant may at any time thereafter bring suit against the Surviving Corporation or Parent to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. Parent shall, and shall cause the Surviving Corporation to, maintain in effect for not less than six years after the Effective Time policies of directors' and officers' liability insurance with a coverage amount of $75 million and equivalent in all other material respects to those maintained by or on behalf of the Company and its Subsidiaries on the date hereof (and containing terms and conditions which are no less advantageous to the persons currently covered by such policies as insured) with respect to matters existing or occurring at or prior to the Effective Time. (c) Without limiting the foregoing, in the event any Indemnified Party becomes involved in any capacity in any action, proceeding or investigation based in whole or in part on, or arising in whole or in part out of, any matter, including the transactions contem- 44 plated hereby, existing or occurring at or prior to the Effective Time, then to the extent permitted by law Parent shall, or shall cause the Surviving Corporation to, periodically advance to such Indemnified Party its legal and other expenses (including the cost of any investigation and preparation incurred in connection therewith), subject to the provision by such Indemnified Party of an undertaking to reimburse the amounts so advanced in the event of a final determination by a court of competent jurisdiction that such Indemnified Party is not entitled thereto. Promptly after receipt by an Indemnified Party of notice of the assertion (an "Assertion") of any claim or the commencement of any action against him in respect to which indemnity or reimbursement may be sought against Parent, the Company, the Surviving Corporation or a Subsidiary of the Company or the Surviving Corporation ("Indemnitors") hereunder, such Indemnified Party shall notify any Indemnitor in writing of the Assertion, but the failure to so notify any Indemnitor shall not relieve any Indemnitor of any liability it may have to such Indemnified Party hereunder except to the extent that such failure shall have materially and irreversibly prejudiced Indemnitor in defending against such Assertion. Indemnitors shall be entitled to participate in and, to the extent Indemnitors elect by written notice to such Indemnified Party within 30 days after receipt by any Indemnitor of notice of such Assertion, to assume the defense of such Assertion, at their own expense, with counsel chosen by Indemnitors and reasonably satisfactory to such Indemnified Party. Notwithstanding that Indemnitors shall have elected by such written notice to assume the defense of any Assertion, such Indemnified Party shall have the right to participate in the investigation and defense thereof, with separate counsel chosen by such Indemnified Party, but in such event the fees and expenses of such counsel shall be paid by such Indemnified Party unless such separate counsel is required due to a conflict of interest, in which case the Indemnitors shall be responsible for the fees and expenses of separate counsel. No Indemnified Party shall settle any Assertion without the prior written consent of Parent, which shall not be unreasonably withheld, nor shall any Indemnitors settle any Assertion without either (i) the written consent of all Indemnified Parties against whom such Assertion was made, or (ii) obtaining an unconditional general release from the party making 45 the Assertion for all Indemnified Parties as a condition of such settlement. (d) The provisions of this Section 6.8 are intended for the benefit of, and shall be enforceable by, the respective Indemnified Parties. Section 6.9 Publicity. None of the Company, Parent, Dow, Purchaser nor any of their respective affiliates shall issue or cause the publication of any press release or other announcement with respect to this Agreement, the Merger or the other transactions contemplated hereby or thereby without prior consultation with the other parties, except as may be required by law or by any listing agreement with a national securities exchange after prior notice has been given to, and all reasonable efforts have been made to consult with the other parties. Section 6.10 No Solicitation. Dow agrees that, for a period commencing on the date hereof and ending on the first anniversary of the Closing Date, it will not to the knowledge of the elected officers of Dow, directly or indirectly, solicit for employment any employee of the Company or any of its Subsidiaries. Section 6.11 Certain Arrangements. (a) Upon the Effective Time, the Company and Dow shall cause to be terminated the agreements set forth in Schedule 6.11(a) of the Disclosure Schedule. Except as provided in the immediately preceding sentence or if terminated pursuant to their respective terms, the Dow Agreements in effect immediately prior to the consummation of the Merger shall continue in full force and effect following the Effective Time, in accordance with their terms. (b) Upon the Effective Time, Parent and Purchaser shall cause Dow to be released as an obligor under the arrangements set forth in Schedule 6.11(b) of the Disclosure Schedule including agreeing that Parent shall become liable for or cause another to become liable for such obligation. (c) Effective as of the purchase by Purchaser of the Dow Shares, Dow and its Subsidiaries, on the one hand, and the Company and its Subsidiaries, on the other hand, shall settle and repay all outstanding intercompany 46 obligations between them for borrowed money, in accordance with the terms of such obligations. Section 6.12 Voting Agreement. (a) For so long as this Agreement is in effect, Dow shall vote, or cause to be voted, all of the Dow Shares in favor of the approval and adoption of this Agreement and the transactions contemplated thereby. (b) For so long as this Agreement is in effect, in any meeting of the stockholders of the Company, however called, and in any action by consent of the stockholders of the Company, Dow shall vote or cause to be voted all of Dow's Shares against: (i) any Acquisition Proposal; (ii) any other proposed corporate action of the Company requiring stockholder approval that would prevent or materially delay the consummation of the transactions contemplated by this Agreement; or (iii) any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation of the Company or Dow under this Agreement. Section 6.13 Employee Benefits Indemnification. With respect to claims made within three years after the Effective Time, from and after the Effective Time, Dow shall be liable for, and shall indemnify the Company and its Subsidiaries for and hold such entities harmless against any obligations arising out of any employee benefit plans (within the meaning of section 3(3) of ERISA) established, maintained or contributed to by Dow or any corporation (other than the Company or any of its Subsidiaries), trade, business, or entity under common control with Dow, within the meaning of Section 414(b), (c), (m) or (o) of the Code or section 4001 of ERISA. Section 6.14 The Dow Shares. Dow agrees not to (either directly or indirectly): (i) sell, transfer, pledge, assign, hypothecate or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, assignment, hypothecation or other disposition of the Dow Shares (including, without limitation, through the disposition or transfer of control of another person); (ii) grant any proxies with respect to the Dow Shares, deposit 47 the Dow Shares into a voting trust or enter into a voting agreement with respect to any of the Dow Shares; or (iii) take any action which would be reasonably expected to make any representation or warranty of Dow herein untrue or incorrect in any material respect. Section 6.15 Acquisition Proposals. (a) Dow will not, directly or indirectly through any officer, director, employee, representative, or agent (i) initiate, facilitate, encourage or solicit the making of any Acquisition Proposal, (ii) engage in negotiations or discussions with, or furnish any non-public information to, any third party relating to an Acquisition Proposal, or (iii) agree to or approve any Acquisition Proposal; provided, that Dow shall not be deemed to have breached its obligations contained in this Section 6.15 by reason of any action taken by the Company or its Board permitted by the second sentence of Section 6.2(a) of this Agreement. (b) Dow shall immediately advise Parent in writing of the receipt by Dow of any inquiries or proposals relating to an Acquisition Proposal. Section 6.16 Tax Matters. (a) Dow and Parent shall make a joint election for the Company (and all U.S. corporations that are Subsidiaries of the Company) under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code") and under any applicable similar provisions of state or local law with respect to the purchase of the Dow Shares or any deemed purchase of such Subsidiaries (collectively, the "Section 338(h)(10) Elections"). On the Closing Date, Dow and Parent shall exchange completed and executed copies of Internal Revenue Service Form 8023-A and any similar state or local forms (collectively, the "Forms"). If any changes are required in the Forms as a result of information which is first available after such Forms are prepared, the parties will promptly agree on such changes. After all required schedules to support the Forms are completed, Dow and Parent shall file the Forms, which filing shall be made within the time period specified under applicable law. Dow, Parent, and the Company shall make all required filings relating to the Section 338(h)(10) Elections in connection with 48 their federal and applicable state and local income tax returns, and shall cooperate fully with each other with respect to such filings. Within 180 days following the Closing Date, Parent shall (i) draft a schedule (the "Allocation Schedule") allocating the Modified Adjusted Deemed Sales Price (as defined in Section 1.338(h)(10)-1(f) of the Treasury regulations) and the Adjusted Deemed Sales Price (as defined in Section 1.338-3(d) of the Treasury regulations) for the Company and each Subsidiary for which Section 338(h)(10) Elections or elections under Section 338(g) of the Code will be made, among the assets of the Company and each such Subsidiary and (ii) deliver such Allocation Schedule to Dow. The Allocation Schedule shall be reasonable and shall be prepared in accordance with Section 338(h)(10) of the Code and the Treasury regulations thereunder. Each of Parent, on the one hand, and Dow (upon its consent to the Allocation Schedule, which consent shall not be unreasonably withheld) on the other hand, shall report the transactions contemplated hereby, and file all Tax Returns, in each case, for federal, state, local and foreign Tax purposes in accordance with the Allocation Schedule. (b) Nothing contained herein shall be construed as altering the rights, obligations and duties of Dow, the Company and any Subsidiaries of the Company to each other pursuant to the Tax Sharing Agreement between Dow and the Company and its Subsidiaries dated May 15, 1996 (the "Tax Sharing Agreement") previously disclosed to Parent and Purchaser. The Tax Sharing Agreement shall continue to govern the rights and obligations of the Company and Dow with respect to the taxable periods for which it is effective. The Tax Sharing Agreement shall be amended effective as of the Closing Date in the form of the First Amendment to the Tax Sharing Agreement which has been previously distributed to Parent. Parent shall pay or cause the Company to pay to Dow all amounts required to be paid to Dow under the Tax Sharing Agreement. Dow shall pay to the Company all amounts Dow is required to pay to the Company under the Tax Sharing Agreement. 49 (c) (i) Dow shall be liable for, and shall indemnify Parent and Purchaser for and hold Parent and Purchaser harmless against (A) all income Taxes imposed for any taxable year on Dow's "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) or any other combined or unitary group for state, local or foreign tax purposes that includes Dow and (B) any incremental amount of state and local income Taxes (not including the use of any losses or other Tax attributes) imposed on the Company and its Subsidiaries (other than any amount of state or local Taxes imposed on a combined or unitary group that includes Dow) for the taxable year that includes the Closing Date, to the extent that such amount is incurred as a result of the Section 338(h)(10) Elections or any election under Section 338(g) of the Code. Dow shall be entitled to any refund of (or credit for) Taxes allocable or attributable to Taxes for which Dow is liable to Purchaser pursuant to this paragraph (c)(i) of this Section 6.16. (ii) Parent and Purchaser shall be liable for, and shall indemnify Dow for and hold Dow harmless against, all Taxes of or imposed on the Company or any Subsidiary of the Company for any taxable period other than those Taxes referred to in paragraph (c)(i) of this Section 6.16. Parent shall be entitled to any refund of (or credit for) Taxes allocable or attributable to Taxes for which Parent is liable to Dow pursuant to this paragraph (c)(ii) of Section 6.16. (iii) Notwithstanding anything to the contrary contained herein, Parent shall assume and pay all sales, use, privilege, transfer, stock transfer, real property transfer, documentary, gains, stamp, duties, recording and similar Taxes and fees (including any penalties, interest or additions) imposed upon any party incurred in connection with any of the transactions contemplated by this Agreement (collectively, "Transfer Taxes") except for such Transfer Taxes imposed on Dow with respect to the sale of the Dow Shares, and Parent shall, at its own expense, accurately file all necessary Tax Returns and other documentation with respect to any Transfer Tax other than Tax Returns which Dow is responsible for filing under applicable law. Parent and Dow agree to timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an 50 exemption from (or otherwise reduce), or file Tax Returns with respect to, such Transfer Taxes. (d) (i) Dow shall file or cause to be filed when due all Tax Returns Dow has elected to file pursuant to the Tax Sharing Agreement and Dow shall remit or cause to be remitted any Taxes due in respect of such Tax Returns, and Parent shall file or cause to be filed when due all Tax Returns other than those Tax Returns Dow has elected to file pursuant to the Tax Sharing Agreement that are required to be filed by or with respect to the Company and each of its Subsidiaries and Parent shall remit or cause to be remitted any Taxes due in respect of such Tax Returns. (ii) None of Parent or any affiliate of Parent shall (or shall cause or permit the Company or any of its Subsidiaries to) amend, refile or otherwise modify any Tax Return relating in whole or in part to the Company or any of its Subsidiaries with respect to any taxable year or period ending on or before the Closing Date without the prior written consent of Dow. (iii) Parent shall promptly cause the Company and each Subsidiary to prepare and provide to Dow all Tax information materials, including, without limitation, schedules and work papers which the Company is required to provide Dow pursuant to the Tax Sharing Agreement. Each of Dow and Parent shall (and shall cause their respective affiliates to): (A) assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing in accordance with clause (i) of this Section 6.16(d), (B) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Company and each Subsidiary of the Company, and (C) make available to the other party and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Company and each Subsidiary of the Company, provided, Dow or Parent (or respective affiliates) has access to information, records or personnel concerning such Tax Returns that is not available to the other party. (e) Dow or Parent shall pay the other party for the Taxes for which Dow or Parent, respectively, is liable pursuant to paragraph (c) of Section 6.16 upon the 51 written request of the party entitled to the payment, setting forth in detail the nature and the amount of the Taxes to which the payment relates. (f) Each of Dow and Parent shall (and shall cause their respective affiliates to): (A) provide timely notice to the other in writing of any notice of deficiency, proposed adjustment, adjustment, assessment, audit, examination, suit, dispute or other claim ("Tax Claim") delivered, sent, commenced or initiated to or against the Company or any Subsidiary of the Company by any Taxing authority with respect to taxable periods for which the other may have a liability under this Section 6.16, and (B) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period. (g) Dow shall have the sole right to represent the Company's and each of its Subsidiaries' interests in any Tax Claim, Tax audit or administrative or court proceeding ("Proceeding") relating to any Taxes (A) imposed for any taxable year on Dow's "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) or any other combined or unitary group of Dow, (B) imposed on the Company or any Subsidiary of the Company as a result of the Section 338(h)(10) Elections or elections under Section 338(g) of the Code (or similar provision under state, local or foreign law) pursuant to paragraph (a) of Section 6.16. None of Parent, any of its affiliates, the Company or any Subsidiaries of the Company may settle any Proceeding for any taxable year which may be the subject of indemnification by Dow under paragraph (c) of Section 6.16 without the prior written consent of Dow, which consent may not be unreasonably withheld. Parent shall have the sole right to represent the Company's and each of its Subsidiaries' interests in any Proceeding relating to any Taxes for which Parent could be liable to Dow pursuant to Section 6.16(c) of this Agreement. If the resolution of any Proceeding could adversely affect a party other than the party with the sole right to represent the Company's or any Subsidiary's interest in any Tax Claim then such other party shall have the right to participate in such Proceeding at its own cost and expense. 52 (h) Any payment by Parent, Purchaser or Dow pursuant to this Section 6.16 shall be an adjustment to the Merger Consideration. (i) The obligations set forth in this Section 6.16 shall be unconditional and absolute and shall remain in effect without limitation as to time. ARTICLE VII CONDITIONS Section 7.1 Conditions to Each Party's Obligation To Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions: (a) Any approval required under the FPA to consummate the Merger shall have been obtained; (b) Any waiting period applicable to the Merger under the HSR Act and under any other Competition Law that requires a filing prior to the Effective Time shall have terminated or expired; (c) This Agreement shall have been approved and adopted by the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of Company Common Stock; and (d) No statute, rule, injunction, order, decree or regulation shall have been enacted or promulgated by any Governmental Entity of competent jurisdiction which prohibits the consummation of the Merger or makes the Merger illegal. Section 7.2 Conditions to Parent and Purchaser's Obligation to Effect the Merger. The obligation of Parent and Purchaser to effect the Merger shall be subject to the satisfaction or waiver at or prior to the Closing Date of each of the following conditions: (a) The Company and Dow shall have performed in all material respects all of their respective covenants and agreements under this Agreement required to be 53 performed at or prior to the Closing provided, that with respect to such covenants and agreements of the Company, the foregoing condition shall be deemed satisfied so long as no failure to perform any such covenant or agreement shall have had or would have a Material Adverse Effect. (b) The representations and warranties of Dow set forth in this Agreement shall be true and correct in all material respects (except in the case of any representation and warranty made as of a specified date, which need only be true as of such date) as of the date of the Closing as if such representations and warranties were made on such date; and (c) The representations and warranties of the Company set forth in this Agreement shall be true and correct (except in the case of any representation and warranty made as of a specified date, which need only be true as of such date) as of the date of the Closing as if such representations and warranties were made on such date; provided, that the foregoing condition shall be deemed satisfied so long as no failure to be so true and correct shall have had or would have a Material Adverse Effect. Section 7.3 Conditions to the Company's Obligation to Effect the Merger. The obligation of the Company to effect the Merger shall be subject to the satisfaction or waiver at or prior to the Closing of each of the following conditions: (a) Parent and Purchaser shall have performed in all material respects all of their covenants and agreements under this Agreement required to be performed at or prior to the Closing; and (b) The representations and warranties of Parent and Purchaser set forth in this Agreement shall be true and correct in all material respects (except in the case of any representation and warranty made as of a specified date, which need only be true as of such date) as of the date of the Closing as if such representations and warranties were made on such date. 54 ARTICLE VIII TERMINATION Section 8.1 Termination. Notwithstanding anything herein to the contrary, this Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after stockholder approval thereof: (a) By the mutual consent of Parent, Dow and the Company; or (b) By the Company, Dow or Parent, if: (i) the Merger has not been consummated on or prior to December 31, 1997, or such other date, if any, as Parent, Dow and the Company shall agree upon; provided that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to a party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Effective Time to occur on or before such date; (ii) if the stockholders of the Company fail to approve and adopt this Agreement at the Special Meeting (including any postponement or adjournment thereof) or (iii) any Governmental Entity shall have issued a statute, order, decree or regulation or taken any other action (which statute, order, decree, regulation or other action the parties hereto shall use their reasonable best efforts to lift) in each case permanently restraining, enjoining or otherwise prohibiting the Merger or making the Merger illegal and such statute, order, decree, regulation or other action shall have become final and non-appealable. Section 8.2 Effect of Termination. In the event of the termination of this Agreement as provided in Section 8.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void, and there shall be no liability on the part of Parent, Purchaser, Dow or the Company except as set forth in Section 9.1 hereof and Section 8.3 hereof and except with respect to the requirement to comply with the Confidentiality Agreements and return and hold confidential Information pursuant to the procedures set forth in Section 6.4. The termination of this Agreement shall not relieve 55 any party from liability for breach of this Agreement except as provided in the second sentence of Section 8.3 hereof. Section 8.3 Fee. The Company shall promptly pay to Parent a fee of $65,000,000 in the event that this Agreement is terminated pursuant to Section 8.1(b)(ii). If this Agreement is terminated pursuant to Section 8.1(b)(ii) hereof, the payment of such fee shall be the sole and exclusive remedy against the Company, Dow and their respective Affiliates, officers, directors and representatives in connection with this Agreement and the transactions contemplated hereby. ARTICLE IX MISCELLANEOUS Section 9.1 Fees and Expenses. Except as contemplated by this Agreement, all costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such expenses. Section 9.2 Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. Section 9.3 Amendment; Waiver. (a) This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval by the stockholders of the Company of the matters presented in connection with the Merger, but after any such approval no amendment shall be made without the approval of such stockholders if such amendment changes the Merger Consideration or alters or changes any of the other terms or conditions of this Agreement if such alteration or change would materially adversely affect the rights of such stockholders. This Agreement 56 may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. (b) At any time prior to the Effective Time, the parties may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions of the other parties hereto contained herein. Any agreement on the part of any party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Section 9.4 Survival. The respective representations and warranties of Parent, Purchaser, Dow and the Company contained herein or in any certificates or other documents delivered prior to or as of the Effective Time shall not survive beyond the Effective Time, provided however that the representations and warranties of Dow in Section 4.4 of this Agreement shall survive indefinitely following the Effective Time. The covenants and agreements of the parties hereto (including the Surviving Corporation after the Merger) shall survive the Effective Time without limitation (except for those which, by their terms, contemplate a shorter survival period). Section 9.5 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon (a) transmitter's confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand or (c) the expiration of five business days after the day when mailed in the United States by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): 57 (a) if to the Company, to: Destec Energy, Inc. 2500 CityWest Blvd. Suite 150 Houston, Texas 77042 Telephone: (713) 735-4261 Facsimile: (713) 735-4267 Attention: Marian M. Davenport, Esq. with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Telephone: (212) 735-3000 Facsimile: (212) 735-2001 Attention: Roger S. Aaron, Esq. (b) If to Dow, to: The Dow Chemical Company 2030 Dow Center Midland, Michigan 48674 Telephone: (517) 636-1000 Facsimile: (517) 636-0861 Attention: Jane M. Gootee, Esq. with a copy to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603 Telephone: (312) 782-0600 Facsimile: (312) 701-7711 Attention: Scott J. Davis, Esq. and : (c) if to Parent or Purchaser, to: NGC Corporation 13430 Northwest Freeway, Suite 1200 Houston, Texas 77040-6095 Telephone: (713) 507-6816 Facsimile: (713) 507-6808 Attention: Kenneth E. Randolph, Esq. 58 with a copy to: Vinson & Elkins L.L.P. 2300 First City Tower 1001 Fannin Street Houston, Texas 77002-6760 Telephone: (713) 758-2222 Facsimile: (713) 758-2346 Attention: T. Mark Kelly and Keith R. Fullenweider Section 9.6 Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation". The phrase "made available" when used in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The words "affiliates" and "associates" when used in this Agreement shall have the respective meanings ascribed to them in Rule 12b-2 under the Exchange Act. The phrase "beneficial ownership" and words of similar import when used in this Agreement shall have the meaning ascribed to it in Rule 13d-3 under the Exchange Act. Section 9.7 Headings; Schedules. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any matter disclosed pursuant to any Schedule to the Disclosure Schedule shall be deemed to be disclosed for all purposes under this Agreement but such disclosure shall not be deemed to be an admission or representation as to the materiality of the item so disclosed. Section 9.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same agreement. Section 9.9 Entire Agreement. This Agreement and the Confidentiality Agreement, and certain other agreements executed by the parties hereto as of the date of this Agreement, constitute the entire agreement, and supersedes all prior agreements and understandings (written and oral), among the parties with respect to the subject matter hereof. 59 Section 9.10 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 9.11 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof. Section 9.12 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns, and except to the extent necessary to enforce the provisions of Sections 2.1, 2.3, and 6.8, the provisions of this Agreement are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. Section 9.13 Consent to Jurisdiction. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of Delaware and of the United States of America located in the State of Delaware (the "Dela- ware Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such Delaware Courts), waives any objection to the laying of venue of any such litigation in the Delaware Courts and agrees not to plead or claim in any Delaware Court that such litigation brought therein has been brought in an inconvenient forum. 60 IN WITNESS WHEREOF, Parent, Purchaser, Dow and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. DESTEC ENERGY, INC. By: /s/ Enrique M. Larroucau -------------------------------- Name: Enrique M. Larroucau Title: Senior Vice President, Chief Financial Officer and Treasurer THE DOW CHEMICAL COMPANY By: /s/ B.G. Taylorson -------------------------------- Name: B.G. Taylorson Title: Corporate Director, M&A NGC CORPORATION By: /s/ Kenneth E. Randolph ------------------------------- Name: Kenneth E. Randolph Title: Senior Vice President and General Counsel NGC ACQUISITION CORPORATION II By: /s/ Kenneth E. Randolph ------------------------------ Name: Kenneth E. Randolph Title: Senior Vice President 61 SCHEDULE A Number of Shares ---------------- The Dow Chemical Company 45,000,000 A-1 EX-2.4 3 ASSET PURCHASE AGREEMENT EXHIBIT 2.4 ASSET PURCHASE AGREEMENT by and between NGC CORPORATION and THE AES CORPORATION dated as of February 17, 1997 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of February 17, 1997, by and between NGC Corporation, a Delaware corporation ("NGC"), and The AES Corporation, a Delaware corporation ("Parent"). WHEREAS, simultaneously with the execution and delivery hereof, Parent, NGC or its affiliate, Destec Energy, Inc., a Delaware corporation (the "Company"), and The Dow Chemical Company, a Delaware corporation ("Dow"), are entering into an agreement and plan of merger (the "Merger Agreement") pursuant to which the Company has agreed to merge with a subsidiary of NGC (the "Merger"); WHEREAS, the Company owns and operates certain international businesses and assets; WHEREAS, Parent desires to cause a wholly-owned subsidiary, a Delaware corporation ("Purchaser"), to buy and immediately following the Merger, NGC desires to cause the Company to sell the international businesses and assets of the Company and its subsidiaries, and Purchaser is willing to assume certain related liabilities and obligations of the Company and its subsidiaries, all upon the terms and conditions hereinafter set forth; and WHEREAS, in furtherance of such acquisition, the Boards of Directors of Parent and NGC have each approved the transactions contemplated by this Agreement. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS Section 1.1 Purchase and Sale of the International Assets. Subject to the terms and conditions of this Agreement, on the Closing Date (as hereinafter defined), and immediately following the consummation of the Merger, NGC shall cause the Company to sell, convey, assign, transfer and deliver (or cause to be sold, conveyed, assigned, transferred and delivered) to Purchaser, and the Purchaser shall purchase and acquire the international assets of the Company, including, without limitation, all of the Company's or its Subsidiaries' (as defined in the Merger Agreement) right, title and interest in and to the following: (i) all of the issued and outstanding shares of capital stock (or their equivalent under local law) (the "Purchased Shares") as set forth in Part I of Schedule 1.1 of the disclosure schedule attached hereto (the "Disclosure Schedule"), which when delivered to Purchaser at the Closing (as hereinafter defined) will be free and clear of any liens, claims, security interests, charges, leases, licenses or sublicenses created by, through or under NGC ("Liens"); (ii) all rights, options and other interests in projects or projects in development outside of the United States, including those set forth in Part II of Schedule 1.1 of the Disclosure Schedule; (iii) all contracts and other agreements associated with or relating to the projects known as Elsta, Los Mina, Indian Queens, Hazelwood and Kingston Cogen (collectively, the "Projects"), including those listed on Part III of Schedule 1.1 of the Disclosure Schedule; (iv) all licenses, permits or franchises issued by any Governmental Entity (as hereinafter defined) relating to the Projects; and (v) those other assets and properties set forth in Part IV of Schedule 1.1 of the Disclosure Schedule. The assets being sold, conveyed, assigned, transferred and delivered to Purchaser by the Company hereunder are hereinafter referred to as the "International Assets" or the "International Businesses." Section 1.2 Instruments of Conveyance and Transfer. At the Closing, NGC shall cause the Company to (a) deliver or cause to be delivered to Purchaser stock certificates, stock powers, assignments and other good and sufficient instruments of transfer, conveyance and assignment as the Purchaser and its counsel shall deem necessary or appropriate to vest in Purchaser all of the Company's and the Subsidiaries' right, title and interest in and to the International Assets, and (b) transfer to Purchaser all of the Company's and its Subsidiaries' right, title and interest in and to the contracts, agreements, commitments, books, records, files and other data relating to the International Assets. 2 Section 1.3 Assumed Liabilities. At the Closing, Purchaser shall deliver to the Company an undertaking (the "Assumption Agreement") in the form to be agreed upon whereby Purchaser, on and as of the Closing Date, assumes and agrees to pay, perform and discharge when due, (i) the liabilities and obligations of the Company and its Subsidiaries primarily attributable to the International Assets including, without limitation, the liabilities and obligations listed on Schedule 1.3 of the Disclosure Schedule, (ii) with respect to any corporate liabilities of the Company unknown to NGC or Parent that are not primarily attributable to the International Assets or to the Company's domestic assets, a pro rata portion of such corporate liabilities calculated based on a fraction the numerator of which is the Purchase Price and the denominator of which is the Merger Consideration (as defined in the Merger Agreement), (iii) all liabilities and obligations with respect to the International Employees described in Section 6.2, including, without limitation, all liabilities and obligations relating to the International Employees under (a) the Destec Energy, Inc. 1996 Variable Pay Plan, (b) the Destec Energy, Inc. 1995 Variable Pay Plan, (c) the Destec Special Recognition Award (SRA) Program, (d) the Destec Energy, Inc. Amended and Restated 1990 Award and Option Plan, (e) the Destec Foreign Service Policy, (iv) all severance costs, obligations under employment agreements and consulting agreements, and employee benefit liabilities arising as a result of (I) the termination of employment of any International Employees from and after the Closing Date or (II) the transactions consummated under this Agreement in respect of the International Employees (the cost, obligations and liabilities under this clause (iv) are collectively the "International Employee Obligations"), and (v) each liability or obligation relating to any International Employee (with respect to employee benefit plans, in excess of any assets owned by the Company or the Subsidiaries and directly related to such plan or held by any trust with respect thereto sponsored or maintained by the Company or the Subsidiaries (other than the International Assets) which are available to satisfy or otherwise offset such liability or obligation), relating to any bonus, deferred compensation, incentive compensation, stock purchase, stock option, restricted stock, deferred stock, stock appreciation right, vacation policy, superannuation, severance or termination pay, hospitalization or other medical, life or other insurance, flexible benefit, cafeteria plan, supplemental unemployment benefits, profit sharing, pension, or retirement plan, program, agreement or arrangement, employment agreements, consulting agreements and each other employee benefit plan, program, agreement or arrangement, sponsored, maintained or contributed to by the Company or its Subsidiaries (the "International Employee Plans") and (vi) all obligations and liabilities with respect to transfer stamp taxes or similar taxes arising in connection with the purchase of the International Assets by Purchaser. The liabilities and obligations assumed by Purchaser in accordance with this Section 1.3 are hereinafter referred to as the "Assumed Liabilities." Section 1.4 Excluded Liabilities. Any liability of the Company or any affiliate thereof other than the Assumed Liabilities shall not be assumed by Purchaser or its affiliates including, without limitation, all liabilities and obligations relating to the Plans (as defined in the Merger Agreement), except for any of the International Employee Obligations and the International Employee Plans. The liabilities that are not to be assumed by Purchaser or its affiliates in accordance with this Section 1.4 are hereinafter referred to as the "Excluded Liabilities." Section 1.5 Closing. Unless this Agreement shall have been terminated and the transactions contemplated herein shall have been abandoned pursuant to Section 8.1 hereof, the closing of the transactions contemplated by this Agreement (the "Closing") will take place after all of the conditions herein or incorporated herein are satisfied or waived immediately following the Effective Time (as defined in the Merger Agreement), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, unless an earlier date or place is agreed to in writing by the parties hereto. The date on which the Closing occurs is referred to herein as the "Closing Date." 4 Section 1.6 Purchase Price and Payment. (a) In consideration for the International Assets and subject to the terms and conditions of this Agreement, Purchaser shall on the Closing Date assume the Assumed Liabilities as provided in Section 1.3 hereof pursuant to the Assumption Agreement and shall transfer to or to the order of the Company in immediately available funds in New York City an amount equal to U.S. $407,055,000 (the "Base Purchase Price"), as adjusted as set forth in accordance with the provisions of this Section 1.6 (the "Purchase Price"). NGC and Purchaser agree to negotiate in good faith to adjust the Base Purchase Price to be paid at the Closing if allocations of net cash flow to be made pursuant to Section 1.6(c) between the date hereof and the Closing Date are expected to be at least $10,000,000. (b) One business day prior to the proposed Effective Time, Parent or Purchaser shall deposit the Base Purchase Price in trust with the Paying Agent (as defined in the Merger Agreement) in a segregated account (the "AES Fund"). NGC shall instruct the Paying Agent that the AES Fund shall not be released without the written consent of Parent and NGC. Parent shall give its written consent upon satisfaction of the conditions set forth in Article VII of this Agreement. The AES Fund shall be deposited in an interest bearing account. If the conditions set forth in Article VII of this Agreement have not been satisfied by 12:00 noon on the second business day after the AES Fund was initially deposited, or such later date or time as Parent in its sole discretion may agree, NGC shall instruct the Paying Agent to return the AES Fund to Parent or Purchaser, as the case may be, including all interest earned thereon. Upon release of the AES Fund other than to Parent or Purchaser, NGC shall instruct the Paying Agent to promptly pay the interest earned on the AES Fund until the Effective Time of the Merger to Parent or Purchaser, as the case may be. (c) The Base Purchase Price shall be adjusted as set forth in this clause (c) to reflect the following allocation of the net cash flow of the Company and its Subsidiaries for the period from January 1, 1997 to the Closing Date: the net cash flow of the Company and its Subsidiaries for the period from and including January 1, 1997 to and excluding the Closing will be allocated in a fair and reasonable manner between the International Assets, on the one hand, and the Company and its Subsidiaries (other than the International Assets), on the other hand. Within three business days after such allocation becomes final and binding upon Parent and NGC pursuant to clause (d) below, if the net cash flow so allocated to the International Assets is greater than zero, Parent shall cause Purchaser to pay the Company such difference, and if the net cash flow so allocated to the International Assets is less than zero, NGC shall cause the Company to pay Purchaser such difference. Any such adjusting payment shall bear interest at 7.5% per annum for the period from and including the Closing Date through and excluding the date of payment to the party to which it is owed pursuant to this Section 1.6(c). (d) Within 60 days after the Closing Date, NGC shall deliver to Parent a proposed settlement statement (the "Proposed Settlement Statement") prepared in good faith setting forth the allocation of such net cash flows between the International Assets and the Company and its Subsidiaries (other than the International Assets), together with supporting documentation in reasonable detail. NGC shall provide Parent with full access to the same information available to NGC for purposes of determining such allocation of net cash flow. If Parent objects to the Proposed Settlement Statement, it shall so notify NGC in writing within 30 days after receipt of the Proposed Settlement Statement, which notice shall set forth in reasonable detail any such objections. If Parent fails to deliver any such objection within such 30-day period, Parent shall be deemed to have accepted the Proposed Settlement Statement (including the calculation of the Purchase Price therein). NGC and Parent shall promptly meet to attempt to resolve any such objections, and if they fail to resolve such objections within 30 days after receipt by NGC of Parent's objections, such objections shall be resolved by an independent accounting firm (the "Accountants") selected by Deloitte & Touche and Arthur 6 Andersen & Co., with Parent and NGC to bear the fees and expenses of the Accountants pro rata in inverse proportion to the amounts of their respective awards with respect to the disputed items. The Purchase Price as determined by agreement by NGC and Parent, by failure of Parent to deliver an objection as described above or by the Accountants pursuant to this Section 1.6(d) shall be final and binding upon the parties. Section 1.7 Allocation of Purchase Price. The Purchase Price shall be allocated among the International Assets in writing, by the parties hereto prior to the Closing. The parties hereto agree that the net book value of any International Asset may not be indicative of its fair market value. Section 1.8 Transfer of Purchased Assets, Assignment of Contractual Rights, Governmental Consents, Etc. (a) Anything contained in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement or an attempted agreement to transfer, sublease or assign any contract, license, lease, commitment, purchase order, sales order or other agreement or any claim, right, benefit, license, permit or authorization arising thereunder or resulting therefrom if a transfer, sublease or assignment or an attempted transfer, sublease or assignment thereof, without the consent of any other party thereto, would be ineffective, would constitute a breach thereof or would in any way affect the rights of the Purchaser thereunder. Additionally, this Agreement shall not constitute an agreement or an attempt to transfer any of the International Assets, the transfer of which may require the prior consent of any United States or foreign governmental authority or agency until such consent is obtained. NGC, Parent and Purchaser shall use their reasonable best efforts to obtain the consent of any such governmental authority and to obtain the consent of the other party to any of the agreements referred to above, to the transfer of the International Assets to the Purchaser in all cases in which such consent is required for such transfer. Except as otherwise agreed between NGC and Parent pursuant to Section 1.8(b) hereof, if, upon the satisfaction of all conditions to the Closing, any such consent (governmental or otherwise) is not obtained or if a transfer, sublease, or assignment or an attempted transfer, sublease or assignment of any of the International Assets would be ineffective, would constitute a breach thereof or would in any way materially affect the rights thereunder such that the Purchaser would not in fact receive all of the rights or ownership to the International Assets as provided in this Agreement (any such International Assets, the "Deferred Assets"), title to the Deferred Assets shall be retained by the Company but there shall be no reduction or reimbursement of the Purchase Price. After the Closing, NGC, the Company, Parent and Purchaser shall continue to use their reasonable best efforts to (i) cooperate to attempt to obtain any such consents and (ii) to transfer to Parent or Purchaser pursuant to reasonable and lawful arrangements the benefits and liabilities with respect to the Deferred Assets effective as of the Closing. After the Closing, such efforts shall include, without limitation, the enforcement for the benefit of the Purchaser (at Purchaser's cost) of any and all rights of NGC, the Company or their subsidiaries against third parties to any contract or agreement and the transfer or sale of such Deferred Asset to any person or entity designated by the Purchaser (and the net proceeds from any such transfer or sale shall be for Purchaser's account). NGC shall cooperate with Parent and the Company in all reasonable requests Parent, Purchaser or the Company shall make in connection with the obtaining of all such consents and approvals. Upon receipt of the required consents or approvals with respect to any Deferred Assets, NGC shall cause the Company to transfer such Deferred Asset (and the liabilities related thereto) to Parent or Purchaser, without recourse except as to encumbrances in each case created by, through or under NGC, the Company or their affiliates from and after the Closing. Any such transfer shall to the extent possible be effective as of the Closing, and arrangements will be made to transfer the net cash flow between the Deferred Assets, on the one hand, and the Company and the Subsidiaries (excluding the International Assets) on the other hand attributable to projects so 8 transferred for the period from the date of the Closing through the date of such transfer, to the extent that they were not theretofore transferred. (b) With respect to the project known as "Hazelwood," NGC and Parent acknowledge that there is a question as to whether consents of the Government of Victoria of Australia that are required pursuant to certain financing, project and other documents relating to the Hazelwood project will be received at or prior to the Closing. Therefore, NGC and Parent agree to fully cooperate to determine whether such consents will be received prior to or at Closing by acting together to seek such consents as expeditiously as possible. If after 15 days from the date of this Agreement it appears to either of the parties that such consents are not reasonably likely to be received prior to or at the Closing, NGC and the Parent agree to negotiate in good faith with respect to (i) whether reasonable and lawful arrangements (which do not violate any law or contractual obligations applicable to the Hazelwood project) can be designed to achieve the transfer described above with respect to the Hazelwood project, including to the extent feasible trust arrangements, put/call arrangements, or obligations on the part of NGC to cause the timely sale of the Hazelwood project (with proceeds thereof to be delivered to Parent or Purchaser with adjustments to be agreed upon to reflect benefits and liabilities of the Hazelwood project from the date of the Closing through the date of the sale of the Hazelwood project), and (ii) whether the structure of the transactions contemplated in this Agreement and the Merger Agreement could be "flipped" so that the Parent or its affiliate merges with the Company and immediately thereafter the Parent causes the Company to sell its assets (other than the International Assets) to NGC. In addition, NGC agrees that, if after such 15 days it appears that the consents will not be received prior to or at the Closing, it shall as expeditiously as possible seek the third party consents necessary to consummate such a flipped transaction. Notwithstanding anything herein to the contrary, NGC shall not be under any obligation to consummate such a flipped transaction if a necessary third party consent is not obtainable after a reasonable good faith effort on NGC's behalf to obtain such a consent or NGC determines in good faith that such a transaction would be significantly adverse to NGC. (c) EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE III AND EXCEPT AS OTHERWISE PROVIDED IN SECTION 1.1(i), THE INTERNATIONAL ASSETS ARE BEING SOLD TO PURCHASER AS IS, WHERE IS, WITH ALL FAULTS, DEFECTS, LIENS AND OTHER ENCUMBRANCES; PROVIDED THAT THE FOREGOING SHALL NOT AFFECT PARENT'S RIGHTS UNDER SECTION 7.1. ARTICLE II [Intentionally Omitted] ARTICLE III REPRESENTATIONS AND WARRANTIES OF NGC AND THE COMPANY NGC represents and warrants to Parent and Purchaser as follows: Section 3.1 Organization. NGC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. NGC has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and is or will be qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on the business or financial condition of NGC and its subsidiaries, taken as a whole, or materially impair or delay the consummation of the transactions contemplated by this Agreement. NGC has previously delivered to the Parent and Purchaser complete and correct copies of its certificate of incorporation and by-laws, as currently in effect, and prior to the Closing NGC will have delivered to Parent complete and correct copies of 10 the certificate of incorporation and by-laws of the Company, as in effect at the time of such delivery. Section 3.2 Authorization; Validity of Agreement. NGC has the requisite corporate power and authority to execute and deliver this Agreement. NGC has, and as of the Closing the Company will have, the requisite corporate power and authority to consummate the transactions contemplated hereby. The execution and delivery by NGC of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by NGC's Board of Directors and no other corporate proceedings on the part of NGC are necessary to authorize the execution and delivery of this Agreement by NGC and the consummation of the transactions contemplated hereby. The consummation of the transactions contemplated hereby will be duly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company will be necessary to authorize the transactions contemplated hereby. This Agreement has been duly executed and delivered by NGC and, assuming due authorization, execution and delivery of this Agreement by Parent, is a valid and binding obligation of NGC enforceable against it in accordance with its terms. Section 3.3 No Violations; Consents and Approvals. (a) Neither the execution and delivery of this Agreement by NGC nor the consummation by NGC of the transactions contemplated hereby will (i) violate any provision of the respective certificates of incorporation or by-laws of NGC or, as of the Closing, the Company, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, license, lease, contract, agreement or other instrument or obligation to which NGC or, with respect to agreements entered into by or on behalf of NGC ("New Agreements"), the Company is a party, or by which NGC or, pursuant to New Agreements, the Company or any of their respective assets are bound or (iii) assuming that all consents, authorizations and approvals contemplated by Section 3.3(b) or Section 1.8 have been obtained and all filings contemplated thereby have been made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to NGC, any of its subsidiaries (excluding for purposes of this clause (iii) the Company and its subsidiaries) or any of their properties or assets; except for such violations, breaches, defaults, terminations, amendments, cancellations or accelerations which would not materially impair or delay the consummation of the transactions contemplated by this Agreement. (b) No filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity is required in connection with the execution and delivery of this Agreement by NGC or the consummation by NGC of the transactions contemplated hereby, except (i) applicable requirements under Competition Laws (as hereinafter defined), (ii) applicable requirements under the Securities Exchange Act of 1934, as amended and the regulations thereunder (the "Exchange Act") and (iii) such other consents, approvals, orders, authorizations, notifications, registrations, 12 declarations and filings the failure of which to be obtained or made would not materially impair or delay the consummation of the transactions contemplated by this Agreement. Section 3.4 No Other Representations or Warranties. Except for the representations and warranties contained in this Article III, neither NGC nor any other Person (as defined in the Merger Agreement) makes any other express or implied representation or warranty on behalf of NGC. ARTICLE IV [Intentionally Omitted] ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent represents and warrants and Purchaser as of the Closing will represent and warrant to NGC as follows: Section 5.1 Organization. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and Purchaser as of the Closing will be a corporation duly organized, validly existing and in good standing under the laws of Delaware. Parent has and as of the Closing Purchaser will have all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being or will be conducted and is or will be qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on the business or financial condition of Parent and its Subsidiaries, taken as a whole, or materially impair or delay the consummation of the transactions contemplated by this Agreement. Parent has previously delivered to NGC complete and correct copies of its certificate of incorporation and by-laws, as currently in effect and prior to the Closing Parent will have delivered to NGC complete and correct copies of the certificate of incorporation and by-laws of Purchaser, as in effect at the time of such delivery. Section 5.2 Authorization; Validity of Agreement. Parent has the requisite corporate power and authority to execute and deliver this Agreement. Parent has, and as of the Closing Purchaser will have, the requisite corporate power and authority to consummate the transactions contemplated hereby. The execution and delivery by Parent of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of Parent and no other corporate proceedings on the part of Parent are necessary to authorize the execution and delivery of this Agreement by Parent and the consummation of the transactions contemplated hereby. The consummation of the transactions contemplated hereby will be duly authorized by the Board of Directors of Purchaser and no other corporate proceedings on the part of Purchaser will be necessary to authorize the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and, assuming due authorization, execution and delivery of this Agreement by NGC, is a valid and binding obligation of Parent enforceable against Parent in accordance with its terms. Section 5.3 No Violations; Consents and Approvals. (a) Neither the execution and delivery of this Agreement by Parent nor the consummation by Parent and Purchaser of the transactions contemplated hereby will (i) violate any provision of the respective certificates of incorporation or by-laws of Parent or Purchaser, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, license, lease, contract, agreement or other 14 instrument or obligation to which Parent or any of its Subsidiaries is a party or by which any of them or any of their assets may be bound or (iii) assuming that all consents, authorizations and approvals contemplated by Section 5.3(b) have been obtained and all filings contemplated thereby have been made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent, any of its Subsidiaries or any of their properties or assets; except for such violations, breaches, defaults, terminations, amendments, cancellations or accelerations which would not materially impair or delay the consummation of the transactions contemplated by this Agreement. (b) No filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity is required in connection with the execution and delivery of this Agreement by Parent or the consummation by Parent and Purchaser of the transactions contemplated hereby, except (i) applicable requirements under Competition Laws, (ii) applicable requirements under the Exchange Act and (iii) such other consents, approvals, orders, authorizations, notifications, registrations, declarations and filings the failure of which to be obtained or made would not materially impair or delay the consummation of the transactions contemplated by this Agreement. Section 5.4 Financing. One business day prior to the Effective Time, Parent and Purchaser will have sufficient funds available (through existing credit arrangements or otherwise) to pay the Purchase Price and to perform their obligations hereunder. Section 5.5 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent and Purchaser. Section 5.6 Public Utility Company; Public Utility Regulatory Policies Act. Neither Parent nor its Subsidiaries is subject to regulation as a "holding company" or a "subsidiary company" of a holding company or a "public utility company" under Section 2(a) of the Public Utility Holding Company Act of 1935. Section 5.7 Absence of Litigation. As of the date hereof, there is no suit, claim, action, proceeding or investigation pending against, or to the actual knowledge of Parent, threatened against, Parent or any of its respective properties before any Governmental Entity or arbitrator which challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement. As of the date hereof, neither Parent nor any of its respective properties is subject to any judgment, decree, order or injunction of any Governmental Entity or arbitrator which would prevent or delay the consummation of the transactions contemplated hereby. Section 5.8 No Other Representations or Warranties. Except for the representations and warranties contained in this Article V, neither Parent, Purchaser nor any other Person makes any other express or implied representation or warranty on behalf of Parent or Purchaser. ARTICLE VI COVENANTS Section 6.1 Further Action; Reasonable Best Efforts. (a) Upon the terms and subject to the conditions herein provided, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using reasonable best efforts to effect all necessary registrations and filings. Each of the parties hereto will furnish to the other parties such necessary information and reasonable assistance as such other 16 parties may reasonably request in connection with the foregoing and will provide the other parties with copies of all filings made by such party with any Governmental Entity or any other information supplied by such party to a Governmental Entity in connection with this Agreement, and the transactions contemplated hereby. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and/or directors of the Company, including any successor, shall take or cause to be taken all such necessary action. (b) Parent and NGC shall use their respective reasonable best efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated hereby under the laws, rules, guidelines or regulations of any Governmental Entity. Without limiting the foregoing, Parent and NGC shall, as soon as practicable, file Notification and Report Forms under the HSR Act (as defined below) with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") and shall use reasonable best efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation; and Parent and NGC shall use their reasonable best efforts to take or cause to be taken all actions necessary, proper or advisable to obtain any consent, waiver, approval or authorization relating to any Competition Law that is required for the consummation of the transactions contemplated by this Agreement; provided, however, that the foregoing shall not obligate Parent or NGC to take any action which would have a material adverse effect on the International Assets. "Competition Laws" means statutes, rules, regulations, orders, decrees, administrative and judicial doctrines, and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization, lessening of competition or restraint of trade and includes the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Section 6.2 Employee Benefits. (a) For purposes of this Agreement, the term "International Employees" means those employees of the Company and the Subsidiaries who devote a substantial amount of time to the International Business and those consultants whose services relate primarily to the International Businesses. Parent and Purchaser hereby agree to honor without modification or contest, and to make required payments when due under, all portions of the International Employee Plans in existence on the date hereof (or as modified to the extent permitted by the Merger Agreement); provided, however, that nothing in this Section 6.2 shall be construed to limit the ability of Parent and Purchaser to amend or terminate such Plans after the Closing to the extent permitted under the terms of the International Employee Plans. (b) Parent and Purchaser hereby agree that for a period of one year immediately following the Effective Time, they shall, or shall cause the International Entities (as hereinafter defined) to either (i) continue to maintain the International Employee Plans on terms no less favorable in the aggregate than those provided to the International Employees and former international employees on the date hereof or (ii) provide that International Employees and former international employees may participate in analogous plans of Parent which provide benefits which in the aggregate are substantially similar to those provided to them under the International Employee Plans on the date hereof. Section 6.3 Indemnification. (a) NGC shall, and NGC shall cause the Company to, jointly and severally indemnify, defend and hold Parent, Purchaser and their affiliates harmless against and in respect of (i) all claims asserted by third parties with respect to Excluded Liabilities and (ii) all costs and expenses (including expenses of investigation, settlement negotiation and attorneys' fees) incurred by Parent or Purchaser in connection with any action, suit, proceeding, demand, claim, investigation, assessment or 18 judgment incident to any of the matters indemnified against in this Section 6.3(a). (b) Parent shall, and Parent shall cause the Purchaser to, jointly and severally indemnify, defend and hold NGC, the Company and their affiliates harmless against and in respect of (i) claims asserted by third parties with respect to the Assumed Liabilities, (ii) all credit support obligations, guarantees and contribution obligations relating to the International Assets, including but not limited to those listed on Schedule 1.3 of the Disclosure Schedule with respect to which the Company and its Subsidiaries have not been fully released by the Closing to the reasonable satisfaction of NGC and (iii) all costs and expenses (including expenses of investigation settlement negotiation and attorneys' fees) incurred by the Company, NGC and their affiliates in connection with any action, suit, proceeding, demand, claim, investigation assessment or judgment incident to any of the matters indemnified against in this Section 6.3(b). (c) Promptly after receipt by an indemnified party under this Section 6.3 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 6.3, notify the indemnifying party in writing of the claim or the commencement of that action, provided that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to the indemnified party except to the extent that the indemnifying party is prejudiced by such failure to notify. If any such claim shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and to assume the defense thereof with counsel reasonably satisfactory to the indemnified party, and to settle and compromise any such claim or action; provided, however, such settlement or compromise shall be effected only with the consent of the indemnified party, which consent shall not be unreasonably withheld. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6.3 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation (including related reasonable attorney's fees and expenses), provided, however, that the indemnified party shall have the right to employ counsel to represent it if, in the indemnified party's reasonable judgment, it is advisable for the indemnified party to be represented by separate counsel), and in that event the fees and expenses of such separate counsel shall be paid by the indemnified party unless the named parties to any such claim or action (including any impleaded parties) include both the indemnifying party and the indemnified party and in the opinion of counsel to the indemnified party (which counsel is reasonably satisfactory to the indemnifying party) representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, in which case the reasonable fees and expenses of separate counsel (which counsel is reasonably satisfactory to the indemnifying party) shall be paid by the indemnifying party. Purchaser and the Company shall each render to each other such assistance (including by asserting reasonable counterclaims and bringing suit against third parties) as may reasonably be requested in order to insure the proper and adequate defense of any such claim or proceeding. (d) The indemnities provided in this Agreement shall survive the Closing. (e) The parties agree that the indemnification payments made pursuant to this Agreement shall be treated for tax purposes as an adjustment to the Purchase Price, unless otherwise required by applicable law. Section 6.4 Publicity. None of NGC, Parent, Purchaser nor any of their respective affiliates shall issue or cause the publication of any press release or other 20 announcement with respect to this Agreement, or the other transactions contemplated hereby without prior consultation with the other parties, except as may be required by law or by any listing agreement with a national securities exchange after prior notice has been given to, and all reasonable efforts have been made to consult with the other parties. Section 6.5 Corporate Names; Termination of Trademark Licensing Agreements. (a) Each of Parent and Purchaser shall change any of the names of the corporations or other Persons included as part of the International Assets which contain "Destec" to corporate names not containing "Destec" within 90 days after the transfer of such Person to Purchaser and shall use their respective reasonable best efforts to remove all corporate names, service marks, trademarks and trade names containing "Destec" (the "Destec Names") from any of the International Assets within one year after the Closing Date. After the Closing Date, neither Parent nor Purchaser shall seek to obtain any rights to or use the Destec Names except as specifically provided in this Section 6.5. (b) All trademark licensing agreements by and between the Company and any of the entities included as part of the International Assets shall be terminated as of the Closing Date subject to the provisions of this Section 6.5. Section 6.6 No Non-Compete Obligation. The parties hereby acknowledge that the consummation of the transactions contemplated hereby will not create an obligation of (i) NGC or its affiliates not to compete in any business with Parent, Purchaser or their respective affiliates; provided that none of NGC, the Company or their affiliates shall use any confidential information obtained from the Company in connection with NGC entering into the Merger Agreement or this Agreement to so compete or (ii) Parent or its affiliates not to compete in any business with NGC, the Company or their respective affiliates; provided that none of Parent, Purchaser or their affiliates shall use any confidential information obtained from the Company in connection with Parent entering into this Agreement. Section 6.7 Obligations under Merger Agreement. If the conditions to NGC's obligations under the Merger Agreement have been satisfied, NGC will consummate the Merger; provided, that Parent shall be in compliance with Section 1.6(b) of this Agreement. Section 6.8 Transfer Taxes. Parent shall cause Purchaser to pay all transfer taxes, stamp taxes or similar taxes arising in connection with the sale and purchase of the International Assets hereunder. Section 6.9 Merger Agreement Break-Up Fee. NGC shall promptly pay to Parent its pro rata share of any proceeds received by NGC pursuant to Section 8.3 of the Merger Agreement. Section 6.10 Site Development Agreement. If the Company receives notice from The Dow Chemical Company ("Dow") under Section 3.1 of the Site Development Agreement between the Company and Dow dated February 17, 1997 with respect to any project outside the United States of America, NGC shall cause the Company to promptly send to Purchasers a copy of such notice. Section 6.11 Certain Confidentiality Obligations. Parent hereby agrees to be bound by the terms and conditions of Section 6.4 of the Merger Agreement. Section 6.12 Tax Matters. (a) NGC and Parent shall make a joint election for the International Entities (as hereinafter defined) that are U.S. corporations under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code") and under any applicable similar provisions of state or local law 22 (collectively, the "Section 338(h)(10) Elections"). On the Closing Date, NGC and Parent shall exchange completed and executed copies of Internal Revenue Service Form 8023-A and any similar state or local forms (collectively, the "Forms"). If any changes are required in the Forms as a result of information which is first available after such Forms are prepared, the parties will promptly agree on such changes. After all required schedules to support the Forms are completed, NGC and Parent shall file the Forms, which filing shall be made within the time period specified under applicable law. NGC, Parent, the International Entities and the Company shall make all required filings relating to the Section 338(h)(10) Elections in connection with their federal and applicable state and local income tax returns, and shall cooperate fully with each other with respect to such filings. For purposes of this Agreement, "International Entities" means those Persons which own, or have any rights to or interest in (direct or indirect), the International Assets. Within 180 days following the Closing Date, Parent shall (i) draft a schedule (the "Allocation Schedule") allocating the Modified Adjusted Deemed Sales Price (as defined in Section 1.338(h)(10)-1(f) of the Treasury regulations), and the Adjusted Deemed Sales Price (as defined in Section 1.338-3(d) of the Treasury Regulations for the International Entities for which Section 338(h)(10) Elections or Section 338(g) elections will be among the International Assets and (ii) deliver such Allocation Schedule to NGC. The Allocation Schedule shall be reasonable and shall be prepared in accordance with Section 338 of the Code and the Treasury regulations thereunder. Each of Parent, on the one hand, and NGC (upon its consent to the Allocation Schedule, which consent shall not be unreasonably withheld) on the other hand, shall report the transactions contemplated hereby, and file all Tax Returns (as defined below), in each case, for federal, state, local and foreign Tax purposes in accordance with the Allocation Schedule. NGC represents and warrants that it will make joint Section 338(h)(10) Elections with Dow for the International Entities that are U.S. corporations and will file Section 338(g) elections only for those International Entities designated by Parent. Parent represents and covenants that it will not file, or permit to be filed by any affiliate, Section 338(g) Elections except for those International Entities designated for such Elections pursuant to the preceding sentence. (b) Nothing contained herein shall be construed as altering the rights, obligations and duties of Dow, the Company and any Subsidiaries of the Company to each other pursuant to the Tax Sharing Agreement between Dow, the Company and its Subsidiaries dated May 15, 1996 (the "Tax Sharing Agreement") (attached hereto as Exhibit 6.12). The Tax Sharing Agreement shall continue to govern the rights and obligations of Dow, the Company and any Subsidiaries of the Company with respect to the taxable periods for which it is effective. Parent acknowledges that the Tax Sharing Agreement shall be amended effective as of the Closing Date in the form of the First Amendment to the Tax Sharing Agreement, which has been previously distributed to Parent. Parent shall pay or cause the International Entities to pay to NGC all amount required to be paid by the International Entities to Dow under the Tax Sharing Agreement. NGC shall pay to the International Entities all amounts Dow is required to pay to the International Entities under the Tax Sharing Agreement. (c) (i) NGC shall be liable for, and shall indemnify Parent and Purchaser for and hold Parent and Purchaser harmless against (A) all income Taxes (as defined below) imposed for any taxable year on Dow's "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) or any other combined or unitary group for state, local or foreign tax purposes that include Dow (not including the use of any losses or other Tax attributes) (B) any incremental amount of state and local income Taxes imposed on the International Entities (other than any amount of state or 24 local Taxes imposed on a combined or unitary group that includes Dow) for the taxable year that includes the Closing Date, to the extent that such amount is incurred as a result of the Section 338(h)(10) Elections or any election under Section 338(g) of the Code and (C) all liability for income Taxes imposed on any International Entities pursuant to Section 1.1502-6 of the Treasury Regulations or any comparable provision of state or local law. NGC shall be entitled to any refund of (or credit for) Taxes allocable or attributable to Taxes for which NGC is liable to Parent or Purchaser pursuant to this paragraph (c)(i) of this Section 6.12. (ii) Parent and Purchaser shall be liable for, and shall indemnify NGC for and hold Seller harmless against all Taxes of or imposed on any of the International Entities for any taxable period other than those Taxes referred to in paragraph (c)(i) of this Section 6.12. Parent shall be entitled to any refund of (or credit for) Taxes allocable or attributable to Taxes for which Parent is liable to NGC pursuant to this paragraph (c)(ii) of Section 6.12. (iii) Notwithstanding anything to the contrary contained herein, Parent shall assume and pay all sales, use, privilege, transfer, stock transfer, real property transfer, documentary, gains, stamp, duties, recording and similar Taxes and fees and all foreign Taxes (including any penalties, interest or additions) imposed upon any party incurred in connection with any of the transfers contemplated by this Agreement (collectively, "Transfer Taxes") and Parent shall, at its own expense, accurately file all necessary Tax Returns and other documentation with respect to any Transfer Tax other than Tax Returns which Seller is responsible for filing under applicable law. Parent and Seller agree to timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns with respect to, such Transfer Taxes. (d) (i) Parent acknowledges that Dow shall file or cause to be filed when due all Tax Returns Dow has elected to file pursuant to the Tax Sharing Agreement and Dow shall remit or cause to be remitted any Taxes due in respect of such Tax Returns, and Parent shall file or cause to be filed when due all Tax Returns other than those Tax Returns Dow has elected to file pursuant to the Tax Sharing Agreement that are required to be filed by or with respect to the International Entities and Parent shall remit or cause to be remitted any Taxes due in respect of such Tax Returns. (ii) None of Parent or any affiliate of Parent shall (or shall cause or permit the Company or any of its Subsidiaries to) amend, refile or otherwise modify any Tax Return relating in whole or in part to the Company or any of its Subsidiaries with respect to any Company or any of its Subsidiaries with respect to any taxable year or period ending on or before the Closing Date without the prior written consent of NGC. (iii) Parent shall promptly cause the International Entities to prepare and provide to, or at the direction of, NGC, all Tax information materials, including, without limitation, schedules and work papers which the Company is required to provide Dow pursuant to the Tax Sharing Agreement. Each of NGC and Parent shall (and shall cause their respective affiliates to): (A) assist the other party and/or Dow in preparing any Tax Returns which such other party or Dow is responsible for preparing and filing in accordance with clause (i) of this Section 6.12, (B) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Company and each Subsidiary of the Company, and (C) make available to the other party and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Company and each Subsidiary of the Company, provided, NGC or Parent (or respective affiliates) has access to information, records or personnel concerning such Tax Returns that is not available to the other party. (e) NGC or Parent shall pay the other party for the Taxes for which NGC or Parent, respectively, is liable pursuant to paragraph (c) of Section 6.12 upon the written request of the party entitled to the payment, setting forth in detail the nature and the amount of the Taxes to which the payment relates. 26 (f) Each of NGC and Parent shall (and cause their respective affiliates to): (A) provide timely notice to the other in writing of any notice of deficiency, proposed adjustment, adjustment, assessment, audit, examination, suit, dispute or other claim ("Tax Claim") delivered, sent, commenced or initiated to or against the Company or any Subsidiary of the Company by any Taxing authority with respect to taxable periods for which the other may have a liability under this Section 6.12, and (B) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period. (g) Parent acknowledges that Dow shall have the sole right to represent the Company's and each of its Subsidiaries' interests in any Tax Claim, Tax audit or administrative or court proceeding ("Proceeding") relating to any Taxes (A) imposed for any taxable year on Dow's "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) or any other combined or unitary group of Dow, (B) imposed on the Company or any Subsidiary of the Company as a result of the Section 338(h)(10) Elections (or similar provision under state, local or foreign law) pursuant to paragraph (a) of Section 6.12. None of Parent, any of its affiliates, or any International Entities may settle any Proceeding for any taxable year which may be the subject of indemnification by NGC under paragraph (c) of Section 6.12 without the prior written consent of NGC, which consent may not be unreasonably withheld. Parent shall have the sole right to represent the International Entities' interests in any Proceeding relating to any Taxes for which Parent could be liable to NGC pursuant to Section 6.12(c) of this Agreement. If the resolution of any Proceeding could adversely affect a party other than the party with the sole right to represent the Company's or any Subsidiary's interest in any Tax Claim then such other party shall have the right to participate in such Proceeding at its own cost and expense. (h) Any payment by Parent, Purchaser or NGC pursuant to this Section 6.12 shall be an adjustment to the Purchase Price. (i) For purposes of this Agreement, "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, excise, stamp, real or personal property, ad valorem, withholding, estimated, social security, unemployment, occupation, use, service, service use, license, net worth, payroll, franchise, severance, transfer, recording or other taxes, assessments or charges imposed by any Governmental Entity and any interest, penalties, or additions to tax attributable thereto. For purposes of this Agreement, "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation,, any information return, claim for refund, amended return or declaration of estimated Tax. (j) The obligations set forth in this Section 6.12 shall be unconditional and absolute and shall remain in effect without limitation as to time. Section 6.13 Financing Commitment. Parent agrees that: (a) Within 10 days of the signing of this agreement, Parent will provide to NGC a commitment letter substantially in the form of that original letter dated February 17, 1997 from Morgan Guaranty Trust Company of New York and J.P. Morgan Securities, Inc. (Morgan) except that (a) clauses (iii) and (iv) shall be deleted in their entirety and (b) a termsheet evidencing the substantive terms and conditions under which Morgan will finance AES's purchase of the International Assets shall be referenced and attached. 28 (b) No later than three weeks before the special meeting of Destec's stockholders to approve the Agreement and Plan of Merger, Parent will provide to NGC either (a) evidence that Parent has sufficient cash on hand to fund its obligations under this Agreement or (b) a commitment letter substantially in the form described in (a) above except the due diligence condition in clause (i) therein shall be deleted in its entirety, or (c) such other evidence of a firm financing commitment as may be reasonably satisfactory to NGC and Parent. ARTICLE VII CONDITIONS Section 7.1 Conditions to Purchaser's Obligation to Purchase the International Assets. The obligation of Purchaser to purchase the International Assets hereunder shall be subject to the satisfaction or waiver by Purchaser at or prior to the Closing of the following: (a) the representations and warranties of NGC and the Company set forth in this Agreement shall be true and correct (except in the case of any representation and warranty made as of a specified date, which need only be true as of such date) as of the date of the Closing as if such representations and warranties were made on such date except for such representations and warranties the failure of which to be true and correct would not have a material adverse effect on the transactions contemplated by this Agreement; (b) no representation, warranty, condition, covenant or other term in the Merger Agreement relating to the International Assets shall be amended, modified or waived, which amendment, modification or waiver could reasonably be expected to have a material adverse effect on the International Assets taken as a whole, without the prior written consent of Parent or Purchaser; (c) the Merger Agreement shall have been consummated, without waiver of any of the conditions contained in the Merger Agreement, which waiver could reasonably be expected to have a material adverse effect on the International Assets taken as a whole, without the written consent of Parent or Purchaser. Section 7.2. Conditions to NGC's Obligation to Sell the International Assets. The obligation of NGC to sell the International Assets hereunder shall be subject to the satisfaction or waiver by NGC at or prior to the Closing of the following: (a) the Merger shall have been consummated, (b) the representations and warranties of the Parent and Purchaser set forth in this Agreement shall be true and correct (except in the case of any representation and warranty made as of a specified date, which need only be true as of such date) as of the date of the Closing as if such representations and warranties were made on such date except for such representations and warranties the failure of which to be true and correct would not have a material adverse effect on the transactions contemplated by this Agreement and (c) Purchaser shall have complied with Section 1.6(b) hereof. ARTICLE VIII TERMINATION Section 8.1 Termination. Notwithstanding anything herein to the contrary, this Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) By the mutual written consent of Parent and NGC; or (b) By Parent or NGC, if: (i) the Merger Agreement is terminated; (ii) the transactions contemplated by this Agreement have not been consummated on or prior to December 31, 1997, or such other date, if any, as Parent and NGC shall agree upon; provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to a party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; or (iii) any Governmental Entity shall have issued a statute, order, decree or regulation or taken any other action (which statute, order, decree, regulation or other action the parties 30 hereto shall use their reasonable best efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or making such transactions illegal and such statute, order, decree, regulation or other action shall have become final and non-appealable. Section 8.2 Effect of Termination. In the event of the termination of this Agreement as provided in Section 8.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall terminate, and there shall be no liability on the part of Parent, Purchaser or NGC except as set forth in Section 9.1 hereof; provided that the termination of this Agreement shall not relieve any party from liability for breach of this Agreement. ARTICLE IX MISCELLANEOUS Section 9.1 Fees and Expenses. Except as contemplated by this Agreement, all costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such expenses. Section 9.2 Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. Section 9.3 Amendment; Waiver. (a) This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. (b) At any time prior to the Closing, the parties may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions of the other parties hereto contained herein. Any agreement on the part of any party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Section 9.4 Survival. The respective representations and warranties of Parent, Purchaser and NGC contained herein or in any certificates or other documents delivered prior to or as of the Closing shall not survive beyond the Closing. The covenants and agreements of the parties hereto shall survive the Closing without limitation (except for those which, by their terms, contemplate a shorter survival period). Section 9.5 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon (a) transmitter's confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand or (c) the expiration of five business days after the day when mailed in the United States by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to NGC, to: NGC Corporation 13430 Northwest Freeway 32 2500 Citywest Blvd. Suite 1200 Houston, Texas 77040-6095 Telephone: (713) Facsimile: (713) 507-6505 Attention: Hugh Tarpley with a copy to: Vinson & Elkins L.L.P. 2300 First City Tower 1001 Fannin Street Houston, Texas 77002-6760 Telephone: (713) 758-2222 Facsimile: (713) 758-2346 Attention: T. Mark Kelly, Esq. Keith R. Fullenweider, Esq. and (b) if to Parent, to: The AES Corporation 1001 North 19th Street Arlington, Virginia 22209 Telephone: (703) 522-1315 Facsimile: (703) 528-4510 Attention: Katherine Oster with a copy to: Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 Telephone: (212) 408-5100 Facsimile: (212) 541-5369 Attention: John T. Baecher, Esq. Section 9.6 Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation". The phrase "made available" when used in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The words "affiliates" and "associates" when used in this Agreement shall have the respective meanings ascribed to them in Rule 12b-2 under the Exchange Act. The phrase "beneficial ownership" and words of similar import when used in this Agreement shall have the meaning ascribed to it in Rule 13d-3 under the Exchange Act. Section 9.7 Headings; Schedules. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any matter disclosed pursuant to any Schedule to the Disclosure Schedule shall be deemed to be disclosed for all purposes under this Agreement but such disclosure shall not be deemed to be an admission or representation as to the materiality of the item so disclosed. Section 9.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same agreement. Section 9.9 Entire Agreement. This Agreement constitutes the entire agreement, and supersedes all prior agreements and understandings (written and oral) among the parties with respect to the subject matter hereof, including, without limitation, that certain Joint Bidding Agreement, dated February 10, 1997, by and between Parent and NGC. Section 9.10 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions 34 of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 9.11 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof. Section 9.12 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns. The provisions of this Agreement are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. Section 9.13 Consent to Jurisdiction. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to jurisdiction of the courts of the State of Delaware and of the United States of America located in the State of Delaware (the "Delaware Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such Delaware Courts), waives any objection to the laying of venue of any such litigation in the Delaware Courts and agrees not to plead or claim in any Delaware Court that such litigation brought therein has been brought in an inconvenient forum. IN WITNESS WHEREOF, Parent and NGC have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. NGC CORPORATION By: /s/ Kenneth E. Randolph -------------------------- Name: Kenneth E. Randolph Title: Senior Vice President and General Counsel THE AES CORPORATION By: /s/ Kenneth R. Woodcock -------------------------- Name: Kenneth R. Woodcock Title: Senior Vice President 36 EX-3.1 4 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF NGC CORPORATION NGC Corporation hereby adopts a Restated Certificate of Incorporation and states as follows: 1. The present name of the corporation is "NGC Corporation." The corporation was originally incorporated under the name Midstream Combination Corp. pursuant to its original Certificate of Incorporation, which was filed with the Secretary of State of the State of Delaware on May 22, 1996; 2. The Restated Certificate of Incorporation (i) was duly adopted in accordance with Section 245 of the Delaware General Corporation Law by the Board of Directors without a vote of stockholders; (ii) only restates and integrates and does not further amend the provisions of the Certificate of Incorporation of the corporation as heretofore amended by that certain Certificate of Merger merging NGC Corporation with and into Midstream Combination Corp., which filed with the Secretary of State of the State of Delaware on August 30, 1996; and (iii) there is no discrepancy between the provisions of the Certificate of Incorporation as so amended and the provisions of the Restated Certificate of Incorporation; and 3. The Restated Certificate of Incorporation restates and integrates the Certificate of Incorporation as heretofore amended by the Certificate of Merger as follows: FIRST: The name of the corporation is NGC Corporation (the "Corporation"). SECOND: The registered office of the Corporation in the State of Delaware is located at Corporation Service Company, 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the registered agent of the Corporation at such address is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: A. Capital Stock. The total number of shares of stock which the Corporation shall have authority to issue is 450,000,000 shares, divided into two classes as follows: (i) 50,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"); and (ii) 400,000,000 shares of Common Stock, par value $0.01 per share ("Common Stock"). The designations and the powers, preferences, rights, qualifications, limitations, and restrictions of the Preferred Stock and the Common Stock of the Corporation are as follows: B. Provisions Relating to the Preferred Stock. 1. The Preferred Stock may be issued from time to time in one or more series, the shares of each series to have such designations and powers, preferences, and rights, and qualifications, limitations, and restrictions thereof as are stated and expressed herein and in the resolution or resolutions providing for the issuance of such series adopted by the board of directors of the Corporation as hereafter prescribed. 2. Authority is hereby expressly granted to and vested in the board of directors of the Corporation to authorize the issuance of the Preferred Stock from time to time in one or more series, and with respect to each such series of the Preferred Stock, to fix and state by the resolution or resolutions from time to time adopted providing for the issuance thereof the following: (i) whether or not such series is to have voting rights, full, special, or limited, or is to be without voting rights, and whether or not such series is to be entitled to vote as a separate class either alone or together with the holders of one or more other series or class of stock; (ii) the number of shares to constitute such series and the designations thereof; (iii) the preferences, and relative, participating, optional, or other special rights, if any, and the qualifications, limitations, or restrictions thereof, if any, with respect to any such series; (iv) whether or not the shares of any such series shall be redeemable at the option of the Corporation or the holders thereof or upon the happening of any specified event, and, if redeemable, the redemption price or prices (which may be payable in the form of cash, notes, securities, or other property), and the time or times at which, and the terms and conditions upon which, such shares shall be redeemable and the manner of redemption; (v) whether or not the shares of such series shall be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such shares for retirement, and, if such retirement or sinking fund or funds are to be established, the annual amount thereof, and the terms and provisions relative to the operation thereof; (vi) the dividend rate, whether dividends are payable in cash, stock of the Corporation, or other property, or a combination thereof, the conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of dividends payable on any other class or classes or series of stock, whether such dividends shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall accumulate; 2 (vii) the preferences, if any, and the amounts thereof which the holders of any such series shall be entitled to receive upon the voluntary and involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (viii) whether or not the shares of any such series, at the option of the Corporation or the holder thereof or upon the happening of any specified event, shall be convertible into or exchangeable for the shares of any other class or classes or of any other series of the same or any other class or classes of stock, securities, or other property of the Corporation and the conversion price or prices or ratio or ratios or the rate or rates at which such exchange may be made, with such adjustments, if any, as shall be stated and expressed or provided for in such resolution or resolutions; and (ix) such other special rights and provisions with respect to any such series as may to the board of directors of the Corporation seem advisable. 3. The shares of each series of the Preferred Stock may vary from the shares of any other class or series thereof in any or all of the foregoing respects. The board of directors of the Corporation may increase the number of shares of the Preferred Stock designated for any existing series by a resolution adding to such series authorized and unissued shares of the Preferred Stock not designated for any other series. The board of directors of the Corporation may decrease the number of shares of the Preferred Stock designated for any existing series by a resolution, subtracting from such series unissued shares of the Preferred Stock designated for such series, and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock. C. Provisions Relating to the Series A Participating Preferred Stock. 1. Designation and Amount. The shares of such series of Preferred Stock shall be designated as "Series A Participating Preferred Stock" (the "Series A Preferred"), $0.01 par value per share, and the number of shares of Preferred Stock constituting such series shall be 8,000,000. 2. Dividends and Distribution. Subject to the provision for adjustment hereinafter set forth, the holders of the Series A Preferred shall be entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of Common Stock, when and as the same are declared by the Board of Directors out of any funds legally available therefor and paid to the holders of Common Stock, and no dividend may be declared and paid on Common Stock unless an identical dividend or distribution is declared and paid concurrently on Series A Preferred. If, however, at any time after the date of original issuance of Series A Preferred, the Corporation shall subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares of Common Stock or combine or reclassify the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, and in each such case, the amount to which holders of the Series A Preferred were entitled immediately 3 prior to such event shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of the Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of the Common Stock outstanding immediately prior to such event. The Corporation will have the right to issue shares of capital stock that are senior or junior to or on a parity with the Series A Preferred with respect to dividends without the approval or consent of the holders of Series A Preferred. 3. Voting Rights. Except as provided by law, the holders of the Series A Preferred shall have no voting rights on any matter. 4. Redemption. The shares of the Series A Preferred shall not be redeemable. 5. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, no distribution shall be made to the holders of Common Stock or any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred unless, prior thereto, the holders of the Series A Preferred shall have received $1.00 per share. All assets of the Corporation available for distribution after the liquidation preferences are fully met of the Series A Preferred and any shares senior to or on a parity with the Series A Preferred with respect to liquidation preferences shall be distributed ratably among the holders of the Series A Preferred and Common Stock in proportion to the number of shares of Series A Preferred and Common Stock outstanding at the time of such liquidation, dissolution or winding up of the Corporation. The Corporation will have the right to issue shares of capital stock that are senior or junior to or on a parity with the Series A Preferred with respect to the liquidation, winding-up or dissolution of the Corporation without the approval or consent of the holders of the Series A Preferred. 6. Conversion. The Series A Preferred may be converted at the option of the holder thereof, or shall be converted automatically without any action on the part of the holder thereof, into shares of Common Stock, on the terms and conditions set forth in this Section 6. For purposes of this section 6, the term "affiliate" shall mean any corporation, partnership or other entity that is an "affiliate" within the meaning of the regulations promulgated under the Securities Act of 1933, as amended (the "Securities Act"), as such regulations are in effect on the date hereof, and the term "Person" shall mean any individual, firm, corporation, partnership, association, trust, joint venture, legal entity, political subdivision or instrumentality or other organization. (A) Right to Convert. Subject to the provisions for adjustment hereinafter set forth, each share of the Series A Preferred shall be convertible, at the option of the holder, at any time after the date of issuance of such share, into one share of Common Stock as follows: (i) To the extent necessary (a) to avoid dilution of the holder's percentage ownership of the issued Common Stock, provided that, with respect to dilution resulting from the issuance of additional compensatory options as approved 4 by not less than eighty-five percent (85%) of the entire Board of Directors, the holder would have no such conversion right so long as its ownership of Common Stock would still be greater than twenty percent (20%) of the issued Common Stock, assuming for this purpose that all shares of Common Stock subject to currently exercisable options and warrants were issued and outstanding, or (b) to maintain a percentage ownership of the issued Common Stock at least equal to that of the then largest other stockholder of the Corporation; (ii) To the extent necessary, if any Person other than the holder of Series A Preferred or an affiliate of such holder makes a tender offer for Common Stock and such holder desires to tender the shares of the Series A Preferred in the same proportion as it tenders Common Stock; (iii) Upon approval by the stockholders of the Corporation of any merger or recapitalization proposal in which the Series A Preferred would be treated differently than Common Stock; and (iv) Upon approval by the Corporation's stockholders of any (a) sale of all or substantially all of the assets of the Corporation or (b) liquidation, dissolution or winding up of the Corporation. (B) Automatic Conversion. Subject to the provisions for adjustment hereinafter set forth, each share of the Series A Preferred shall be automatically converted into one share of Common Stock upon a sale or other transfer (by operation of law, merger or otherwise) by the holder of such shares to any Person other than an affiliate of the holder. (C) Conversion Rate Adjustments. The Conversion Rate of the Series A Preferred shall be subject to adjustment as hereinafter set forth. If at any time the Corporation shall subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares of Common Stock or combine or reclassify the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, and in each such case, the number of shares of Common Stock into which each share of the Series A Preferred is convertible shall be adjusted so that the holder of each share thereof shall be entitled to receive, upon the conversion thereof, the number of shares of Common Stock which the holder of a share of the Series A Preferred would have been entitled to receive after the happening of any and all of the events described above had such share been converted into Common Stock immediately prior to the happening of such event or the record date therefor, whichever is earlier. (D) Mechanics of Conversion. The holder of any shares of the Series A Preferred may exercise its option to convert such shares into shares of Common Stock by surrendering for such purpose to the Corporation, at its principal office or at such other office or agency maintained by the Corporation for that purpose, a certificate or certificates representing the shares of the Series A Preferred to be converted accompanied by a written notice stating that 5 such holder elects to convert all or a specified whole number of such shares in accordance with the provisions of this Section 6 and specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. In case such notice shall specify a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issuance of shares of Common Stock in such name or names. As promptly as practicable, and in any event within five business days after the surrender of such certificates and the receipt of such notice relating thereto and, if applicable, payment of all transfer taxes, the Corporation shall deliver or cause to be delivered (i) certificates representing the number of validly issued, fully paid and nonassessable shares of Common Stock of the Corporation to which the holder of the Series A Preferred so converted shall be entitled (and/or any other consideration to which the holders of such shares of Common Stock would then be entitled) and (ii) if less than the full number of shares of the Series A Preferred evidenced by the surrendered certificate or certificates are being converted, a new certificate or certificates, for the number of shares evidenced by such surrendered certificate or certificates less the number of shares converted. Such conversions shall be deemed to have been made upon receipt by the Corporation of such notice and such surrendered certificate or certificates representing the shares of the Series A Preferred to be converted, so that the rights of the holder thereof shall cease except for the right to receive Common Stock of the Corporation in accordance herewith (and/or any other consideration to which the holders of such shares of Common Stock would then be entitled), and such holder shall be treated for all purposes as having become the record holder of such Common Stock of the Corporation at such time. D. Provisions Relating to the Common Stock. 1. Except as otherwise required by law, and subject to any special voting rights which may be granted any series of Preferred Stock in the board of directors resolution which creates such series, each holder of Common Stock shall be entitled to one vote for each share of Common Stock standing in such other holder's name on the records of the Corporation on each matter submitted to a vote of the stockholders. 2. Subject to the rights of the holders of the Preferred Stock, the holders of the Common Stock shall be entitled to receive when, as, and if declared by the board of directors of the Corporation, out of funds legally available therefor, dividends payable in cash, stock, or otherwise. 3. Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, and after the holders of the Preferred Stock and the holders of any bonds, debentures, or other obligations of the Corporation shall have been paid in full the amounts to which they shall be entitled (if any), or a sum sufficient for such payment in full shall have been set aside, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock and the holders of Series A Preferred in accordance with their respective rights and interest, to the exclusion of the holders of any other series of the Preferred Stock and any bonds, debentures, or other obligations of the Corporation. 6 4. Without the consent of the holders of eighty-five percent (85%) of the outstanding Common Stock, the Corporation may (and may permit any subsidiary of the Corporation over which it has control to) sell the following products: (i) crude oil; (ii) other products usually and normally refined as petroleum products from crude oils; and (iii) natural gas liquids or liquefied petroleum gases; irrespective of where such sales or products are made, only when the seller has no actual knowledge that the sale is not for consumption or resale in one or more of the following areas: (i) the United States or any of its territories or possessions; (ii) any country wholly located in the Western Hemisphere and/or Europe or surrounded by the Mediterranean Sea; (iii) any country all of the territory of which was formerly contained within the Union of Soviet Socialist Republics; (iv) any country whose territory is contained within the territories constituting as of the date hereof the countries known as Algeria, Angola, Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Congo, Cote D'Ivoire, Equatorial Guinea, Gabon, Gambia, Ghana, Greenland, Guinea, Guinea Bissau, Iceland, Liberia, Libya, Mali, Mauritania, Mongolia, Morocco, Niger, Nigeria, Rio Muni, Senegal, Sierra Leone, Togo, Tunisia, Turkey, Western Sahara and/or Zaire; (v) Antarctica; and (vi) international waters; unless (a) otherwise permitted by the terms of that certain Scope of Business Agreement, dated May 22, 1996, between the Corporation and Chevron Corporation, as the same may from time to time be amended in accordance with the terms thereof, or (b) such Scope of Business Agreement is terminated pursuant to its terms, upon which termination the provisions of this paragraph 4 shall be of no further force and effect. A copy of such Scope of Business Agreement, as the same may be amended, shall be available for inspection by any stockholder of the Corporation at the principal offices of the Corporation. Except as indicated above or as may otherwise be provided in this Certificate of Incorporation or by Delaware law, stockholders shall have no right to approve specific business activities of the Corporation, and the above provisions shall not otherwise affect corporate powers and purposes as stated in Article III. 7 E. General. 1. Subject to the foregoing provisions of this Certificate of Incorporation, the Corporation may issue shares of its Preferred Stock and Common Stock from time to time for such consideration (in any form, but not less in value than the par value thereof) as may be fixed by the board of directors of the Corporation, which is expressly authorized to fix the same in its absolute and uncontrolled discretion subject to the foregoing conditions. Shares so issued for which the consideration shall have been paid or delivered to the Corporation shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares. 2. The Corporation shall have authority to create and issue rights and options entitling their holders to purchase or otherwise acquire shares of the Corporation's capital stock of any class or series or other securities of the Corporation, and such rights and options shall be evidenced by instrument(s) approved by the board of directors of the Corporation. The board of directors of the Corporation shall be empowered to set the exercise price, duration, times for exercise, and other terms of such options or rights; provided, however, that the consideration to be received (which may be in any form) for any shares of capital stock subject thereto shall have a value not less than the par value thereof. FIFTH: No contract or transaction between the Corporation and one or more of its directors, officers, or stockholders or between the Corporation and any person (as used herein "person" means any other corporation, partnership, association, firm, trust, joint venture, other legal entity, political subdivision, or instrumentality or other organization) in which one or more of its directors, officers, or stockholders are directors, officers, or stockholders, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because his, her, or their votes are counted for such purpose, if (i) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the board of directors, a committee thereof (to the extent permitted by applicable law), or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. 8 SIXTH: The Corporation shall indemnify any person who was, is, or is threatened to be made a party to a proceeding (as hereinafter defined) by reason of the fact that he (i) is or was a director or officer of the Corporation or (ii) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent permitted under the General Corporation Law of Delaware, as the same exists or may hereafter be amended. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the General Corporation Law of Delaware, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the General Corporation Law of Delaware, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its board of directors or any committee or directors thereof, independent legal counsel, or stockholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Corporation (including its board of directors or any committee or directors thereof, independent legal counsel or stockholders) that such indemnification or advancement is not permissible shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, resolution of stockholders or directors, agreement, or otherwise. The Company shall be required to indemnify an indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if the initiation of such proceeding (or part thereof) by the indemnitee was authorized by the board of directors of the Company. The Corporation's obligation, if any, to indemnify or advance expenses to any person who was or is serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise shall be reduced by any amount such person may collect as indemnification or advancement from such other foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise. The Corporation may additionally indemnify any employee or agent of the Corporation to the fullest extent permitted by law. 9 As used herein, the term "proceeding" means any threatened, pending, or completed action suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. Any repeal or amendment of this Article SIXTH shall be prospective only and shall not affect the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment to this Article SIXTH. SEVENTH: The board of directors shall have the power to make, adopt, alter, amend, and repeal from time to time the Bylaws of the Corporation and to make from time to time new Bylaws of the Corporation (subject to the right of the stockholders entitled to vote thereon to adopt, alter, amend, and repeal Bylaws made by the board of directors or to make new Bylaws) to the extent and in the manner provided in the Bylaws; provided, however, that the stockholders of the Corporation shall be entitled to adopt, alter, amend, or repeal Bylaws made by the board of directors or to make new Bylaws solely upon the affirmative vote of the holders of a majority of the outstanding shares of the Common Stock. EIGHTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve 10 intentional misconduct or knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or amendment of this Article EIGHTH by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation arising from an act or omission occurring prior to the time of such repeal or amendment. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the foregoing provisions of this Article EIGHTH, a director shall not be liable to the Corporation or its stockholders to such further extent as permitted by any law hereafter enacted, including without limitation any subsequent amendment to the General Corporation Law of Delaware. NINTH: The number of directors constituting the board of directors shall be fixed by, or in the manner provided in, the Bylaws of the Corporation. Each director of the Corporation shall hold office until the next annual meeting of stockholders or until his or her successor shall have been duly elected and qualified. Directors need not be elected by written ballot. EXECUTED this 21st day of November, 1996. NGC CORPORATION By: /s/ C. L. Watson ------------------------ C. L. Watson Chairman of the Board and Chief Executive Officer 11 EX-3.2 5 AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF NGC CORPORATION A Delaware Corporation As Amended by an Amendment adopted by the Board of Directors on February 7, 1997 TABLE OF CONTENTS Section Page ------- ---- ARTICLE ONE: OFFICES 1.1 Registered Office and Agent ........................................ 1 1.2 Other Offices ...................................................... 1 ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.1 Annual Meeting ..................................................... 1 2.2 Special Meeting .................................................... 1 2.3 Place of Meetings .................................................. 2 2.4 Notice ............................................................. 2 2.5 Voting List......................................................... 2 2.6 Quorum ............................................................. 2 2.7 Required Vote; Withdrawal of Quorum ................................ 3 2.8 Method of Voting; Proxies .......................................... 3 2.9 Record Date ........................................................ 3 2.10 Conduct of Meeting ................................................. 4 2.11 Inspectors ......................................................... 4 ARTICLE THREE: DIRECTORS 3.1 Management ......................................................... 5 3.2 Number; Term; Advisory Director..................................... 5 3.3 Removal; Vacancies ................................................. 5 3.4 Meetings of Directors .............................................. 5 3.5 First Meeting ...................................................... 5 3.6 Election of Officers ............................................... 6 3.7 Regular Meetings ................................................... 6 3.8 Special Meetings ................................................... 6 3.9 Notice ............................................................. 6 3.10 Quorum; Vote Required; Actions Requiring Approval .................. 6 3.11 Procedure .......................................................... 9 3.12 Presumption of Assent .............................................. 9 3.13 Compensation ....................................................... 9 3.14 Interested Directors ............................................... 9 i ARTICLE FOUR: COMMITTEES 4.1 Executive Committee................................................ 10 4.2 Other Committees .................................................. 10 4.3 Number; Qualification; Term ....................................... 10 4.4 Authority ......................................................... 10 4.5 Committee Changes ................................................. 11 4.6 Alternate Members of Committees ................................... 11 4.7 Regular Meetings .................................................. 11 4.8 Special Meetings .................................................. 11 4.9 Quorum; Majority Vote ............................................. 11 4.10 Minutes ........................................................... 11 4.11 Compensation ...................................................... 11 4.12 Responsibility .................................................... 12 ARTICLE FIVE: NOTICE 5.1 Method ............................................................ 12 5.2 Waiver ............................................................ 12 ARTICLE SIX: OFFICERS 6.1 Number; Titles; Term of Office..................................... 12 6.2 Removal ........................................................... 13 6.3 Vacancies ......................................................... 13 6.4 Authority ......................................................... 13 6.5 Compensation ...................................................... 13 6.6 Chairman of the Board ............................................. 13 6.7 President ......................................................... 13 6.8 Vice Presidents ................................................... 14 6.9 Treasurer ......................................................... 14 6.10 Assistant Treasurers .............................................. 14 6.11 Secretary ......................................................... 14 6.12 Assistant Secretaries ............................................. 14 ARTICLE SEVEN: CERTIFICATES AND STOCKHOLDERS 7.1 Certificates for Shares ........................................... 15 7.2 Replacement of Lost or Destroyed Certificates ..................... 15 7.3 Transfer of Shares ................................................ 15 ii 7.4 Registered Stockholders ........................................... 15 7.5 Regulations ....................................................... 16 7.6 Legends ........................................................... 16 ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.1 Reserves .......................................................... 16 8.2 Books and Records ................................................. 16 8.3 Fiscal Year ....................................................... 16 8.4 Seal .............................................................. 16 8.5 Resignations ...................................................... 16 8.6 Securities of Other Corporations .................................. 17 8.7 Telephone Meetings ................................................ 17 8.8 Invalid Provisions ................................................ 17 8.9 Mortgages, etc. ................................................... 17 8.10 Headings .......................................................... 17 8.11 References ........................................................ 17 8.12 Amendments ........................................................ 17 iii BYLAWS OF NGC CORPORATION A Delaware Corporation ARTICLE ONE: OFFICES 1.1 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. 1.2 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the board of directors may from time to time determine or as the business of the Corporation may require. ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.1 Annual Meeting. An annual meeting of stockholders of the Corporation shall be held each calendar year on such date and at such time as shall be designated from time to time by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. At such meeting, the stockholders shall elect directors and transact such other business as may be properly brought before the meeting. 2.2 Special Meeting. A special meeting of the stockholders may be called by the board of directors pursuant to a resolution adopted by a majority of the directors, by the Chairman of the Board, by the President, or by any holder or holders of record of at least 10% of the outstanding shares of capital stock of the Corporation then entitled to vote on any matter for which the respective special meeting is being called (considered for this purpose as one class). Subject to applicable law, a special meeting shall be held on such date and at such time as shall be designated by the persons(s) calling the meeting and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting given in accordance with these Bylaws or in a duly executed waiver of notice of such meeting. 2.3 Place of Meetings. An annual meeting of stockholders may be held at any place within or without the State of Delaware designated by the board of directors. A 2 special meeting of stockholders may be held at any place within or without the State of Delaware designated in the notice of the meeting or a duly executed waiver of notice of such meeting. Meetings of stockholders shall be held at the principal office of the Corporation unless another place is designated for meetings in the manner provided herein. 2.4 Notice. A written or printed notice stating the place, day and time of each meeting of the stockholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the President, the Secretary or the officer or person(s) calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is to be sent by mail, it shall be directed to such stockholder at such stockholder's address as it appears on the records of the Corporation, unless such stockholder shall have filed with the Secretary of the Corporation a written request that notices to such stockholder be mailed to some other address, in which case it shall be directed to such stockholder at such other address. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. 2.5 Voting List. At least ten days before each meeting of stockholders, the Secretary or other officer of the Corporation who has charge of the Corporation's stock ledger, either directly or through another officer appointed by such officer or through a transfer agent appointed by the board of directors, shall prepare a complete list of stockholders entitled to vote thereat arranged in alphabetical order and showing the address of each stockholder and number of shares of capital stock registered in the name of each stockholder. For a period of ten days prior to such meeting, such list shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting or a duly executed waiver of notice of such meeting or, if not so specified, at the place where the meeting is to be held, and shall be open to examination by any stockholder during ordinary business hours. Such list shall be produced at such meeting and kept at the meeting at all times during such meeting and may be inspected by any stockholder who is present. 2.6 Quorum. The holders of a majority of the voting power of the outstanding shares of capital stock entitled to vote on a matter, present in person or by proxy, shall constitute a quorum at any meeting of stockholders, except as otherwise provided by law, the certificate of incorporation of the Corporation, these Bylaws, or any rule or regulation applicable to the Corporation or of any applicable national securities exchange. If a quorum shall not be present, in person or by proxy, at any meeting of stockholders, the stockholders entitled to vote thereat who are present, in person or by proxy (or, if no stockholder entitled to 3 vote is present, any officer of the Corporation), may adjourn the meeting from time to time without notice other than announcement at the meeting (unless the board of directors, after such adjournment, fixes a new record date for the adjourned meeting), until a quorum shall be present, in person or by proxy. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted which may have been transacted at the original meeting had a quorum been present; provided that, if the adjournment is for more than 30 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. 2.7 Required Vote; Withdrawal of Quorum. When a quorum is present at any meeting, the vote of the holders of at least a majority of the voting power of the outstanding shares of capital stock entitled to vote thereat who are present, in person or by proxy, shall decide any questions brought before such meeting, unless the question is one on which, by express provision of law, the certificate of incorporation of the Corporation, these Bylaws, or any rule or regulation applicable to the Corporation or of any applicable national securities exchange, a different vote is required, in which cases such express provision shall govern and control the decision of such question. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shares of capital stock to leave less than a quorum. 2.8 Method of Voting; Proxies. Except as otherwise provided in the certificate of incorporation of the Corporation or by law, each outstanding share of capital stock, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Elections of directors need not be by written ballot. At any meeting of stockholders, every stockholder having the right to vote may vote either in person or by proxy executed in writing by the stockholder or by such stockholder's duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after three years from the date of its execution, unless otherwise provided in the proxy. If no date is stated in a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by law. 2.9 Record Date. For the purposes of determine stockholders entitled (a) to notice of or to vote at any meeting of stockholders or any adjournment thereof, (b) to receive payment of any dividend or other distribution or allotment of any rights, or (c) to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board 4 of directors for any such determination of stockholders, such date in any case to be not more than 60 days and not less than ten days prior to such meeting nor more than 60 days prior to any other action. If no record date is fixed: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date of the adjourned meeting. 2.10 Conduct of Meeting. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the President shall chair all meetings of stockholders. The Secretary shall keep the records of each meeting of stockholders. In the absence or inability to act of any such officer, such officer's duties shall be performed by the officer given the authority to act for such absent or non- acting officer under these Bylaws or by a person appointed by the meeting. 2.11 Inspectors. The board of directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact 5 found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. ARTICLE THREE: DIRECTORS 3.1 Management. The business and property of the Corporation shall be managed by the board of directors. Subject to the restrictions imposed by law, the certificate of incorporation of the Corporation or these Bylaws, the board of directors may exercise all the powers of the Corporation. 3.2 Number; Term; Advisory Director. The number of directors constituting the board of directors shall be thirteen. Each director shall hold office until the next annual meeting of stockholders following his or her election, and until his or her successor shall have been duly elected and qualified, or until his or her earlier death, resignation or removal. In addition to the thirteen directors who shall be elected by the stockholders of the Corporation, the board of directors may also designate, by resolution of the Board, an advisory director who shall be entitled to attend all meetings of the Board, but shall not be entitled to vote on any matters before the Board. Except as set forth in this Section 3.2, the advisory director shall have no rights as a director either under the certificate of incorporation of the Corporation, these Bylaws, Delaware law or any other agreement to which the Corporation is a party. Notwithstanding the foregoing, an advisory director shall be entitled to receive compensation for his or her services as a director in the same amount and manner that such director would be entitled to receive compensation as an employee director or non-employee director, as the case may be, if such director were elected by the stockholders of the Corporation. 3.3 Removal; Vacancies. Any or all of the directors may be removed, with or without cause, upon the affirmative vote or consent of the holders of a majority of the voting power of the outstanding shares of each class of capital stock then entitled to vote in person or by proxy at an election of such directors. Any vacancies occurring in the board of directors caused by death, resignation, retirement, disqualification, removal or other termination from office of any director may be filled by the vote of at least eleven directors then in office or by the affirmative vote, at any annual meeting or any special meeting of the stockholders called for the purpose of filling such directorship or directorships, of the holders of a majority of the outstanding shares of each class of capital stock then entitled to vote in person or by proxy at an election of such directors. Each successor director so chosen shall hold office for the unexpired term of his or her predecessor in office. 3.4 Meetings of Directors. The directors may hold their meetings and may have an office and keep the records of the Corporation, except as otherwise provided by law, in such place or places within or without the State of Delaware as the board of directors may from time to time determine or as shall be specified in the notice of such meeting or duly executed waiver of notice of such meeting. 3.5 First Meeting. Each newly elected board of directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of stockholders, and no notice of such meeting shall be necessary. 6 3.6 Election of Officers. At the first meeting of the board of directors after each annual meeting of stockholders at which a quorum shall be present, the board of directors shall elect the officers of the Corporation. 3.7 Regular Meetings. Regular meetings of the board of directors shall be held at such times and places as shall be designated from time to time by resolution of the board of directors. Notice of such regular meetings shall not be required. 3.8 Special Meetings. Special meetings of the board of directors shall be held whenever called by the Chairman of the Board or any two or more directors. 3.9 Notice. The Secretary shall give notice of each special meeting to each director at least five business days before the meeting. Notice of any such meeting need not be given to any director who, either before or after the meeting, submits a signed waiver of notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to him or her. The purpose of any special meeting shall be specified in the notice or waiver of notice of such meeting. 3.10 Quorum; Vote Required; Actions Requiring Approval. (a) Except as provided in Section 3.10(b), at all meetings of the board of directors, seven directors shall constitute a quorum for the transaction of business. If at any meeting of the board of directors there is less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. Unless the act of a greater number is required by law, the certificate of incorporation of the Corporation or these Bylaws, the act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors. (b) Notwithstanding anything to the contrary herein (and subject to the provisions of Section 4.1 of these Bylaws), the Corporation shall not take (or permit to be taken in its capacity as a shareholder or partner or otherwise permit any Subsidiary of the Corporation to take) any of the following actions unless approved by the affirmative vote of at least eleven directors: (i) any sale of all or substantially all of the assets of the Corporation or any Subsidiary; (ii) any merger, consolidation, liquidation or dissolution of the Corporation or any Subsidiary or any purchase or other acquisition of any common stock or preferred stock of the Corporation; 7 (iii) adopting any resolution proposing an amendment to the certificate of incorporation of the Corporation; (iv) the Corporation or any Subsidiary entering into any line of business that neither the Corporation nor any Subsidiary is engaged in on Effective Time (as such term is defined in that certain Combination Agreement and Plan of Merger among the Corporation and certain other parties dated as of May 22, 1996); (v) the Corporation or any Subsidiary paying any dividend or otherwise making any distribution to any person; (vi) the Corporation or any Subsidiary issuing any stock or other security or ownership interests to any person; (vii) the Corporation or any Subsidiary engaging in any oil or gas futures activities, or other trading activities relating to oil or gas pricing, including, without limitation, hedging, swaps, options or speculation (such activities referred to herein as "trading activities"), that, based on the average oil or gas pricing during the 6 months preceding the date of such activity, could result in exposure to loss to the Corporation in excess of $10,000,000 as to any single transaction, other than trading activities which offset physical transactions and are accounted for as a hedge, and in no event shall the uncovered portion of the trading activities of the Corporation and its Subsidiaries, in the aggregate, result in an exposure to loss to the Corporation in excess of $10,000,000; (viii) amending or terminating any contract, commitment or employee compensation plan if the execution of or entering into such contract, commitment or plan was approved by the board of directors pursuant to this Section 3.10(b) (or would have been subject to board of director approval pursuant to this Section 3.10(b) if this Section 3.10 had been in effect at the time of execution of or entering into such contract, commitment or plan); (ix) approving a different method in which the Corporation keeps its books; (x) the commencement by the Corporation or any Subsidiary of a voluntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or of any other voluntary case or proceeding to be adjudicated a bankrupt or insolvent or the consent by it to the entry of a decree or order for relief against it in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the 8 filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of action in furtherance of any such action; (xi) the Corporation or any Subsidiary taking any action in its capacity as a shareholder, partner, member or owner of any interest in a person which, if taken by the Corporation itself, would require the approval of the board of directors pursuant to this Section 3.10(b); (xii) the Corporation or any Subsidiary (A) making, or committing to make, any payment in excess of $10,000,000 per transaction or contract (or series of related transaction or contracts), whether as or in connection with a capital expenditure, asset purchase, purchase of goods or services, investment, rental, settlement, equity contribution, loan, guaranty or otherwise, (B) borrowing any amount in excess of $10,000,000 per transaction or contract (or series of related transactions or contracts), (C) disposing of or otherwise transferring any asset (or related assets) whose fair market value exceeds $10,000,000 or (D) entering into any contract or transaction (or series of contracts or transactions) pursuant to which the Corporation or any Subsidiary is to receive more than $10,000,000; provided, however, if the amount in question is in excess of $10,000,000 but less than $25,000,000, any action referred to in (A), (B), (C) or (D) (including any such action that is also subject to Section 3.10(b)(vii) and any other such action that is subject to any of the other provisions of Section 3.10(b) except for the Corporation issuing any stock or other security or ownership interests to any person or paying any dividend or otherwise making any distribution to any person) need not be approved as aforesaid by the board of directors if approved by the unanimous vote of the Executive Committee; (xiii) any change in the fiscal year of the Corporation; (xiv) the appointment or removal of the Corporation's Chief Executive Officer, President, Chief Financial Officer or any Senior Vice President; (xv) the filling of any vacancy in the board of directors of the Corporation; and (xvi) the establishment of any committee of the board of directors of the Corporation. 9 Notwithstanding the foregoing, if one or more directors give written notice to the Secretary that such director or directors intend to abstain pursuant to Section 3.14 of these Bylaws on a matter that is subject to this Section 3.10(b), then in lieu of the approval otherwise required herein such action may be approved by the affirmative vote of at least such number of directors equal to eleven less the number of directors that have given such notice. For purposes of these Bylaws, "Subsidiary" means (i) any corporation or other entity a majority of the capital stock of which having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is at the time owned, directly or indirectly, with power to vote, by the Corporation, or (ii) a partnership, joint venture or limited liability company in which the Corporation holds, directly or indirectly, a majority interest with respect to voting power, rights to receive distributions or report earnings, or capital accounts, provided that none of Novagas Clearinghouse Limited Partnership, Novagas Clearinghouse Limited, Novagas Clearinghouse Pipelines Limited Partnership or Novagas Clearinghouse Pipelines Limited shall be deemed to be a Subsidiary as currently constituted or as changed in connection with the transactions contemplated by that certain Combination Agreement and Plan of Merger dated as of May 22, 1996 among NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp. and shall not be considered a Subsidiary solely by reason of an increase in the Corporation's equity interest in any one or more of the foregoing entities from approximately 49% to approximately 51%. 3.11 Procedure. At meetings of the board of directors, business shall be transacted in such order as from time to time the board of directors may determine. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the President shall preside at all meetings of the board of directors. In the absence or inability to act of either such officer, a chairman shall be chosen by the board of directors from among the directors present. The Secretary of the Corporation shall act as the secretary of each meeting of the board of directors unless the board of directors appoints another person to act as secretary of the meeting. The board of directors shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation. 3.12 Presumption of Assent. A director of the Corporation who is present at the meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his abstention or dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent or abstention by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 10 3.13 Compensation. The board of directors shall have the authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the board of directors or any committee thereof; provided, however, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 3.14 Interested Directors. A director who has an interest in a transaction or matter within the meaning of Section 144 of the Delaware General Corporation Law (or in which the Stockholder that nominated such director pursuant to that certain Stockholders Agreement dated May 22, 1996 among the Corporation and certain other persons (the "Stockholders Agreement") has an interest) that is the subject of review or action by the board of directors shall (i) disclose such interest to the board of directors, (ii) abstain from voting with respect to such transaction or matter and (iii) give written notice to the Secretary of the Corporation that he or she intends to so abstain. If one or more directors give written notice to the Secretary that such director or directors intend to abstain pursuant to this Section 3.14 with respect to any action by the Board of Directors, then in lieu of the approval otherwise required under these Bylaws for such action, such action may be approved by the affirmative vote of at least the number of directors that would otherwise have been required less the number of directors that have given such notice. ARTICLE FOUR: COMMITTEES 4.1 Executive Committee. The board of directors, acting by resolution adopted by at least eleven directors, may elect from among its members an Executive Committee of four members, which committee shall have the authority to approve actions to the extent specified in Section 3.10(b) of these Bylaws and, with respect to actions not subject to Section 3.10(b), any other actions that a majority of the board of directors could approve except to the extent restricted by law or the certificate of incorporation of the Corporation. In the event of a vacancy, the Executive Committee shall have no authority to take any action until such vacancy is filled. 4.2 Other Committees. In addition to the Executive Committee, the board of directors may, by resolution adopted by at least eleven directors, designate one or more other committees (an "Additional Committee"). 4.3 Number; Qualification; Term. Each Additional Committee shall consist of one or more directors appointed by resolution adopted by at least eleven directors. The number of committee members may be increased or decreased from time to time by resolution adopted by at least eleven directors. Each committee member shall serve as such until the 11 earliest of (i) the expiration of his or her term as director, (ii) his or her resignation as a committee member or as a director, or (iii) his or her removal as a committee member or as a director. 4.4 Authority. Each Additional Committee, to the extent expressly provided in the resolution adopted by at least eleven directors establishing such committee, shall have and may exercise all of the authority of the board of directors in the management of the business and property of the Corporation except to the extent expressly restricted by such resolution or by law, the certificate of incorporation of the Corporation, or these Bylaws. Notwithstanding the foregoing, no committee (other than the Executive Committee as provided in, but only to the extent provided in, Section 3.10(b)) may approve or authorize the actions specified in Section 3.10(b). 4.5 Committee Changes. The board of directors by resolution adopted by at least eleven directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. 4.6 Alternate Members of Committees. The board of directors may designate one or more directors as alternate members of any committee. 4.7 Regular Meetings. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by the committee and communicated to all members thereof. 4.8 Special Meetings. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least two days before such special meeting. The purpose of any special meeting shall be specified in the notice or waiver of notice of such meeting. 4.9 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the board of directors shall constitute a quorum for the transaction of business; provided, however, that the quorum for the transaction of business by the Executive Committee shall be all members thereof. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the certificate of incorporation of the Corporation, or Section 3.10(b) or any other provision of these Bylaws. 12 4.10 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the board of directors upon the request of the board of directors. The minutes of the proceedings of each committee shall be delivered to the Secretary of the Corporation for placement in the minute books of the Corporation. 4.11 Compensation. Committee members may, by resolution of the board of directors, be allowed a stated salary or a fixed sum and expenses of attendance, if any, for attending any committee meetings. 4.12 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the board of directors or any director of any responsibility imposed upon it or such director by law. ARTICLE FIVE: NOTICE 5.1 Method. Whenever by statute, the certificate of incorporation of the Corporation, or these Bylaws, notice is required to be given to any committee member, director, or stockholder and no provision is made as to how such notice shall be given, personal notice shall not be required and any such notice may be given (i) in writing, by mail, postage prepaid, addressed to such committee member, director, or stockholder at his or her address as it appears on the books or (in the case of a stockholder) the stock transfer records of the Corporation, or (ii) by any other method permitted by law (including but not limited to overnight courier service, telegram, telex, or telefax). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail as aforesaid. Any notice required or permitted to be given by overnight courier service shall be deemed to be delivered and given at the time delivered to such service with all charges prepaid and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex, or telefax shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. 5.2 Waiver. Whenever any notice is required to be given to any stockholder, director, or committee member of the Corporation by statute, the certificate of incorporation of the Corporation, or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a stockholder, director, or committee member at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 13 ARTICLE SIX: OFFICERS 6.1 Number; Titles; Term of Office. The officers of the Corporation shall be a Chairman of the Board, a President, a Secretary, and such other officers as the board of directors may from time to time elect or appoint, including one or more Vice Presidents (with each Vice President to have such descriptive title, if any, as the board of directors shall determine) and a Treasurer. The board of directors may also from time to time elect or appoint a Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, or Principal Accounting Officers, each with such powers and duties as may be assigned by the board of directors. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified, until his or her death, or until he or she shall resign or shall have been removed in the manner hereinafter provided. Any two or more offices may be held by the same person. None of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware, but the Chairman shall be a director. 6.2 Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 6.3 Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the board of directors. 6.4 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these Bylaws or as may be determined by resolution of the board of directors not inconsistent with these Bylaws. 6.5 Compensation. The compensation, if any, of officers and agents shall be fixed from time to time by the board of directors or a committee of directors appointed for such purpose by the board of directors: provided, however, that the board of directors may delegate the power to determine the compensation of any officer and agent (other than the officer to whom such power is delegated) to the Chairman of the Board or the President. 6.6 Chairman of the Board. The Chairman of the Board shall, subject to the supervision of the board of directors of the Corporation, have the general management and control of the Corporation. Such officer shall preside at all meetings of the stockholders and 14 of the board of directors and shall have such duties as may from time to time be assigned by the board of directors. 6.7 President. The President shall, subject to the supervision of the board of directors of the Corporation, have general charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. In the absence or inability to act of the Chairman of the Board, the President shall exercise all of the powers and discharge all of the duties of the Chairman of the Board. As between the Corporation and third parties, any action taken by the President in the performance of the duties of the Chairman of the Board shall be conclusive evidence that the Chairman of the Board is absent or unable to act. 6.8 Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him or her by the board of directors, the Chairman of the Board, or the President, and (in order of their seniority as determined by the board of directors or, in the absence of such determination, as determined by the length of time they have held the office of Vice President) shall exercise the powers of the President during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken. 6.9 Treasurer. The Treasurer shall have custody of the Corporation's funds and securities, shall keep full and accurate account of receipts and disbursements, shall deposit all monies and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designed by the board of directors, and shall perform such other duties as may be prescribed by the board of directors, the Chairman of the Board, or the President. 6.10 Assistant Treasurers. Each Assistant Treasurer shall have such powers and duties as may be assigned to him or her by the board of directors, the Chairman of Board or the President. The Assistant Treasurers (in the order of their seniority as determined by the board of directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Treasurer) shall exercise the powers of the Treasurer during that officer's absence or liability to act. 6.11 Secretary. Except as otherwise provided in these Bylaws, the Secretary shall keep the minutes of all meetings of the board of directors and of the stockholders in books provided for that purpose, and he or she shall attend to the giving and service of all notices. The Secretary may sign with the Chairman of the Board or the President or any other authorized officer of the Corporation, in the name of the Corporation, all contracts of the 15 Corporation and affix the seal of the Corporation thereto. The Secretary shall have charge of the certificate books, transfer books, and stock papers as the board of directors may direct, all of which shall at all reasonable times be open to inspection by any officer of the Corporation upon application at the office of the Corporation during business hours. The Secretary shall in general perform all duties incident to the office of the Secretary, subject to the control of the board of directors, the Chairman of the Board, and the President. 6.12 Assistant Secretaries. Each Assistant Secretary shall have such powers and duties as may be assigned to him or her by the board of directors, the Chairman of the Board, or the President. The Assistant Secretaries (in the order of their seniority as determined by the board of directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Secretary) shall exercise the powers of the Secretary during that officer's absence or inability to act. ARTICLE SEVEN: CERTIFICATES AND STOCKHOLDERS 7.1 Certificates for Shares. Certificates representing shares of stock of the Corporation shall be in such form as shall be approved by the board of directors. The certificates shall be signed by the Chairman of the Board or the President or a Vice President and also by the Secretary or as Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be a facsimile and may be sealed with the seal of the Corporation or a facsimile thereof. If any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed upon, a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and the number of shares. 7.2 Replacement of Lost or Destroyed Certificates. The board of directors may direct a new certificate or certificates to be issued in place of a certificate or certificates theretofore issued by the Corporation and alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares to be lost or destroyed. When authorizing such issue of a new certificate or certificates the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such a manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that be 16 made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed. 7.3 Transfer of Shares. Shares of stock of the Corporation shall be transferrable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 7.4 Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 7.5 Regulations. The board of directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer, registration and replacement of certificates for shares of stock of the Corporation. 7.6 Legends. The board of directors shall have the power and authority to provide that certificates representing shares of stock bear such legends as the board of directors deems appropriate to insure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.1 Reserves. There may be created by the board of directors out of funds of the Corporation legally available therefor such reserve or reserves as the directors from time to time, in their discretion, consider proper to provide for contingencies, to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the board of directors shall consider beneficial to the Corporation, and the board of directors may modify or abolish any such reserve in the manner in which it was created. 8.2 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders and board of directors and shall keep at its registered office or principal place of business, or at the 17 office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. 8.3 Fiscal Year. The fiscal year of the Corporation shall be fixed by the board of directors. 8.4 Seal. The seal of the Corporation shall be such as from time to time may be approved by the board of directors. 8.5 Resignations. Any director, committee member, or officer may resign by so stating at any meeting of the board of directors or by giving written notice to the board of directors, the Chairman of the Board, the President or the Secretary. Such resignation shall take effect at the time specified therein or, if no time is specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 8.6 Securities of Other Corporations. Except as otherwise provided in these Bylaws or resolution of the board of directors, the Chairman of the Board, the President, or any Vice President of the Corporation shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. 8.7 Telephone Meetings. Members of the board of directors and members of a committee of the board of directors may participate in and hold a meeting of the board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this section shall continue presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 8.8 Invalid Provisions. If any part of these Bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative. 8.9 Mortgages, etc. With respect to any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation of the Corporation unless the resolutions, if any, of the board of directors authorizing such execution expressly state that such attestation is necessary. 18 8.10 Headings. The headings used in these Bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation. 8.11 References. Whenever herein the singular number is used, the same shall include the plural here appropriate, and words of one gender should include the other gender where appropriate. 8.12 Amendments. These Bylaws may only be amended or repealed by the affirmative vote or consent of at least eleven directors of the Corporation or by the holders of a majority of the outstanding Common Stock. EX-10.6 6 AMENDED AND RESTATED STOCK OPTION PLAN EXHIBIT 10.6 NGC CORPORATION AMENDED AND RESTATED 1991 STOCK OPTION PLAN I. PURPOSES NGC Corporation, a Delaware corporation (the "Company"), desires to afford certain of its directors and key employees (herein, "Key Persons") and the Key Persons of any Related Entity (as defined below) who are responsible for the continued growth of the Company an opportunity to acquire a proprietary interest in the Company, and thus to create in such Key Persons an increased interest in and a greater concern for the welfare of the Company and its stockholders. From and after December 8, 1995, for all purposes under the Plan, the term "Related Entity" shall mean (i) Novagas Clearinghouse Ltd., (ii) Accord Energy Ltd., and (iii) any corporation, partnership, limited liability company or partnership, association, trust or other organization now existing or hereafter formed or acquired which, directly or indirectly, controls, is controlled by, or is under common control with, the Company; provided, however, that (1) for purposes of Articles V, VI, and VIII of the Plan and (2) with respect to Incentive Options (as defined below) granted prior to May 10, 1996, for purposes of Article XII of the Plan, the term "Related Entity" shall mean a subsidiary corporation or parent corporation of the Company now existing or hereafter formed or acquired. For purposes of the preceding sentence, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (A) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (B) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities or by contract or otherwise. As used in the Plan, the terms "subsidiary corporation" and "parent corporation" shall mean, respectively, a corporation coming within the definition of such terms contained in Sections 424(f) and 424(e) of the Internal Revenue Code of 1986, as amended (the "Code"). The stock options ("Options") offered pursuant to this Amended and Restated 1991 Stock Option Plan (the "Plan") are a matter of separate inducement and are not in lieu of any salary or other compensation for services of any Key Person. The Company, by means of the Plan, seeks to retain the services of persons now holding key positions and to secure the services of persons capable of filling such positions. The Options granted under the Plan are intended to be either incentive stock options ("Incentive Options") within the meaning of Section 422 of the Code, or options that do not meet the requirements for Incentive Options ("Non- Qualified Options"), but the Company makes no warranty as to the qualification of any Option as an Incentive Option. II. AMOUNT OF STOCK SUBJECT TO THE PLAN Subject to the adjustments provided in Article XIII hereof, the total number of shares of capital stock of the Company that may be purchased pursuant to the exercise of Options granted under the Plan shall not exceed, in the aggregate, 9,892,610 shares of authorized voting common stock, par value $0.01 per share, of the Company (the "Shares"); provided, however, that notwithstanding any provision in the Plan to the contrary, the Committee (as defined below) may not grant Options under the Plan that could result in more than 6,692,610 Shares (subject to adjustment in the same manner as provided in Article XIII hereof with respect to the maximum number of Shares subject to the Plan) being issued upon the exercise of such Options unless the proposed transaction with Chevron U.S.A. Inc. ("Chevron") to combine substantially all of Chevron's gas gathering, processing and marketing operations with the Company is consummated. As used herein, the authorized common stock of the Company shall be referred to as "Company Stock." Shares that may be acquired under the Plan may be authorized but unissued Shares, Shares of issued stock held in the Company's treasury, issued Shares reacquired by the Company, or a combination thereof, in each case as the Committee may determine from time to time at its sole option. If and to the extent that Options granted under the Plan expire or terminate without having been exercised, new Options may be granted with respect to the Shares covered by such expired or terminated Options, provided that the grant and the terms of such new Options shall in all respects comply with the provisions of the Plan; provided, however, that no Option shall be granted under the Plan after the Termination Date (as defined below). The Company may from time to time grant to certain Key Persons of the Company or a Related Entity Options under the terms hereinafter set forth; provided, however, that, except with respect to Options then outstanding, if not sooner terminated under the provisions of Article XX, the Plan shall terminate upon and no further Options shall be granted after May 9, 2006 (the "Termination Date"). Notwithstanding any provision in the Plan to the contrary, Incentive Options may be granted only to Key Persons who are employed by the Company or a Related Entity that is a subsidiary corporation or parent corporation of the Company on the date of grant of any such Option. III. ADMINISTRATION The Plan shall be administered by the Option committee, or any successor thereto, of the Board of Directors of the Company (the "Board of Directors"), or by any other committee appointed by the Board of Directors to administer this Plan (the "Committee"). The number of individuals that shall constitute the Committee shall be no less than two individuals. A majority of the Committee shall constitute a quorum (or if the Committee consists of only two members, then both members shall constitute a quorum), and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be the acts of the Committee. The Committee shall be comprised exclusively -2- of "outside directors", as such term is used pursuant to Section 162(m) of the Code and any rules and regulations promulgated thereunder. At any time that the Company shall have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) each member of the Committee shall be required to also be a "disinterested person" to administer the Plan within the meaning of Rule 16b-3, as amended (herein so called), or other applicable rules under Section 16(b) of the Exchange Act, and the Committee shall administer the Plan so as to comply at all times with the Exchange Act and (ii) no member of the Committee shall be eligible for grants or awards hereunder. The members of the Committee shall serve at the pleasure of the Board of Directors, which shall have the power, at any time and from time to time, to remove members from or add members to the Committee. Removal from the Committee may be with or without cause. Any individual serving as a member of the Committee shall have the right to resign from membership in the Committee by written notice to the Board of Directors. The Board of Directors, and not the remaining members of the Committee, shall have the power and authority to fill vacancies on the Committee, however caused. The Board of Directors shall promptly fill any vacancy that causes the number of members of the Committee to be below two or any other number that Rule 16b-3 or Section 162(m) of the Code (or other applicable rules or regulations) may require from time to time. Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine the Key Persons to whom Options shall be granted, the time when such Options shall be granted to Key Persons, the number of Shares which shall be subject to each Option, the purchase price of each Share which shall be subject to each Option, the period(s) during which such Options shall be exercisable (whether in whole or in part), and the other terms and provisions thereof. In determining the Key Persons to whom Options shall be granted and the number of Shares for which Options shall be granted to each Key Person, the Committee shall consider the length of service, the contributions to the Company, its parents and subsidiaries taken as a whole, and the responsibilities and duties of each Key Person. Subject to the express provisions of the Plan, the Committee also shall have authority to construe the Plan and Options granted thereunder, to amend, or in the case of material amendments to the Plan, to recommend to the Board of Directors and the stockholders of the Company the amendment of, the Plan, to amend Options granted thereunder, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective Options (which need not be identical) and to make all other determinations necessary or advisable for administering the Plan. The Committee also shall have the authority to require, in its discretion, as a condition of the granting of any such Option, that an employee recipient agree (i) not to sell or otherwise dispose of Shares acquired pursuant to the exercise of an Incentive Option for a period of two (2) years from the grant of such Incentive Option nor within one (1) year from the date of the acquisition of such Shares pursuant to the exercise of such Incentive Option and (ii) that in the event of termination of employment of such employee, other than as a result of dismissal without cause, such employee will not, for a period to be fixed at the -3- time of the grant of the Option, enter into any other employment or participate directly or indirectly in any other business or enterprise which is competitive with the business of the Company or any Related Entity, or enter into any employment in which such employee will be called upon to utilize special knowledge obtained through employment with the Company or any Related Entity. The Committee shall also have the authority to require, as a condition to the granting of any Option, that the person receiving such Option agree not to sell or otherwise dispose of such Option, any Company Stock acquired pursuant to such Option or any other "derivative security" (as defined by Rule 16a-l(c) under the Exchange Act) for a period of six (6) months following the later of (i) the date of the grant of such Option or (ii) the date when the exercise price of such Option is fixed if such exercise price is not fixed at the date of grant of such Option. Subject to and consistent with the express provisions of the Code and Rule 16b-3 promulgated under the Exchange Act, the Committee shall have plenary authority, in lieu of requiring a cash payment from the Key Person upon the exercise of an Option, to: (a) provide the establishment of procedures for a Key Person (1) to have withheld from the total number of Shares to be acquired upon the exercise of an Option that number of Shares having a fair market value (as defined herein) which, together with such cash as shall be paid in respect of fractional Shares, shall equal the Option exercise price, (2) to exercise an Option by delivering that number of Shares of Company Stock already owned by such Key Person having a fair market value which shall equal the Option exercise price, (3) to exercise a portion of an Option by delivering that number of Shares or Share of Company Stock already owned by such Key Person having a fair market value which shall equal the partial Option exercise price and to deliver the Shares thus acquired by such Key Person in payment of Shares to be received pursuant to the exercise of additional portions of such Option, the effect of which shall be that such Key Person can in sequence utilize such newly acquired Shares in payment of the exercise price of the entire Option, together with such cash as shall be paid in respect of fractional Shares, if any, or (4) to utilize a combination of the methods stated in clauses (1) and (3) above, or of cash and one or both of such methods, in payment of the exercise price of all or a portion of such Option; provided, however, that in the case of an Incentive Option, no Shares shall be used to pay the exercise price unless such Shares were not acquired through the exercise of an Incentive Option or, if so acquired, have been held for more than two years since the grant of such Option and for more than one year since the exercise of such Option; and (b) if appropriate, to provide an arrangement through registered broker-dealers whereby temporary financing may be made available by the broker-dealer to a Key Person who wishes to deliver Shares of the Company in partial or full payment of the exercise price of such Key Person's Option, under the rules and regulations of the Board of Governors of the Federal Reserve, for the purpose of assisting the Key Person in the -4- exercise of an Option, such authority to include the payment by the Company of the commissions of the broker-dealer. The determination of the Committee on matters referred to in this Article III shall be conclusive. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. No member or former member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted hereunder. IV. ELIGIBILITY Grants of Incentive Options and Non-Qualified Options may be made under the Plan, subject to and in accordance with the terms of the Plan, to Key Employees. As used herein, the term "Key Employee" shall mean any employee of the Company or any Related Entity, including officers and directors of the Company or any Related Entity who are also employees of the Company or any Related Entity, who are regularly employed on a salaried basis and who are so employed on the date of such grant, whom the Committee identifies as having a direct and significant effect on the performance of the Company or any Related Entity. Notwithstanding the preceding provisions of this Article IV, Incentive Options may be granted only to Key Employees who are employed by the Company or a Related Entity that is a subsidiary corporation or parent corporation of the Company on the date of grant of any such Option. Grants of Non-Qualified Options shall be made, subject to and in accordance with the terms hereof, to individuals not regularly employed by the Company who serve as directors of the Company ("Outside Director Participants"). The adoption of this Plan shall not be deemed to give any person a right to be granted any Options. Subject to the adjustment provisions contained in Article XIII, the aggregate number of Shares with respect to which Options granted to any Key Employee (which for purposes of this sentence shall include the Chairman of the Board, whether or not such person would otherwise be considered an Key Employee) are exercisable shall not exceed 1,063,083. V. LIMITATION ON EXERCISE OF INCENTIVE OPTIONS Except as otherwise provided under the Code, to the extent that the aggregate fair market value of stock with respect to which Incentive Options are exercisable for the first time by an employee during any calendar year (under all stock Option plans of the Company and any Related -5- Entity) exceeds $100,000, such Options shall be treated as Non-Qualified Options. For purposes of this limitation (i) the fair market value of stock is determined as of the time the Option is granted, and (ii) the limitation will be applied by taking into account Options in the order in which they were granted. VI. OPTION PRICE AND PAYMENT The price ("Exercise Price") for each Share purchasable under any Option granted hereunder shall be such amount as the Committee shall, in its best judgment made in good faith, determine on the basis of facts and circumstances and the requirements, if any, of Section 162(m) of the Code and any rules or regulations promulgated thereunder to be not less than one hundred percent (100%) of the fair market value per Share at the date such Option is granted; provided, however, that in the case of an Incentive Option granted to a person who, at the time such Incentive Option is granted, owns shares of the Company or any Related Entity which possesses more than ten percent (10%) of the total combined voting power of all classes of shares of the Company or of any Related Entity, the Exercise Price for each Share purchasable thereunder shall be such amount as the Committee, in its best judgment, shall determine to be not less than one hundred ten percent (110%) of the fair market value per Share at the date the Incentive Option is granted. In determining stock ownership of a Key Employee for any purposes under the Plan, the rules of Section 424(d) of the Code shall be applied, and the Committee may rely on representations of fact made to it by the Key Employee and believed by it to be true. If the Shares are listed on a national securities exchange in the United States on the date any Option is granted, the fair market value per share shall be deemed to be the average of the high and low quotations at which such Shares are sold on such national securities exchange on the date such Option is granted. If the Shares are listed on a national securities exchange in the United States on such date but the Shares are not traded on such date, or such national securities exchange is not open for business on such date, the fair market value per Share shall be determined as of the closest preceding date on which such exchange shall have been open for business and the Shares were traded. If the Shares are listed on more than one national securities exchange in the United States on the date any such Option is granted, the Committee shall determine which national securities exchange shall be used for the purpose of determining the fair market value per Share. If the Shares are not listed on a national securities exchange on such date, the last reported bid price in the over-the-counter market shall be the fair market value per share, or if the Shares are not traded on the over-the-counter market on such date, the fair market value per share shall be determined by the Committee in good faith. Notwithstanding the prior provisions of this paragraph, to the extent that Section 162(m) of the Code or any rule or regulation promulgated thereunder provides a different or inconsistent definition of "fair market value," such definition shall be applied in determining the fair market value per share of Options issued hereunder. For purposes of establishing the fair market value of Shares or underlying Options, the fair market value shall be determined without regard to any restriction on transfer thereof. -6- For purposes of this Plan, the determination by the Committee of the fair market value of a Share shall be conclusive. Upon the exercise of an Option granted hereunder, the Company shall cause the purchased Shares to be issued only when it shall have received the full purchase price for the Shares in cash or by certified check, except as otherwise provided in Article III hereof. VII. USE OF PROCEEDS The cash proceeds of the sale of Shares subject to the Options granted hereunder are to be added to the general funds of the Company and used for its general corporate purposes as the Board of Directors shall determine. VIII. TERMS OF OPTIONS AND LIMITATIONS ON THE RIGHT OF EXERCISE Subject to Article V, any Incentive Option granted hereunder shall be exercisable during a period of not more than ten (10) years from the date of grant of such Option at such times and in such amounts as the Committee shall determine at such date of grant; provided, however, that in the case of an Incentive Option granted to a person who, at the time the Incentive Option is granted, owns shares in the Company or in any Related Entity which possesses more than ten percent (10%) of the total combined voting power of all classes of shares of the Company or of any Related Entity, such Option shall expire not more than five (5) years from the date of grant. Any Non-Qualified Option granted hereunder shall be exercisable at such times, in such amounts and during such period or periods as the Committee shall determine at the date of the grant of such Option. The Committee shall have the right to accelerate, in whole or in part, from time to time, conditionally or unconditionally, rights to exercise any Option granted hereunder. To the extent that an Option is not exercised within the period of exercisability specified therein, it shall expire as to the then unexercised part. If any Option granted hereunder shall terminate prior to the Termination Date, the Committee shall have the right to use the Shares as to which such Option shall not have been exercised to grant one or more additional Options to any eligible Key Person, but any such grant of an additional Option shall be made prior to the close of business on the Termination Date. In no event shall an Option granted hereunder be exercised for a fraction of a share. IX. EXERCISE OF OPTIONS Options granted under the Plan shall be exercised by the optionee as to all or part of the Shares covered thereby by the giving of written notice of the exercise thereof to the Corporate -7- Secretary of the Company at the principal business office of the Company, specifying the number of Shares to be purchased and specifying a business day not more than fifteen (15) days from the date such notice is given, for the payment of the purchase price against delivery of the Shares being purchased. Subject to the terms of Articles III, XV, XVII and XVIII, the Company shall cause certificates for the Shares so purchased to be delivered to the Optionee at the principal business office of the Company, against payment of the full purchase price in cash or by certified check except as otherwise provided in Article III. X. STOCK APPRECIATION RIGHTS [DELETED] XI. NONTRANSFERABILITY OF OPTIONS An Option granted hereunder shall not be transferable, whether by operation of law or otherwise, other than by will or the laws of descent and distribution, and any Option granted hereunder shall be exercisable, during the lifetime of the holder, only by such holder. XII. TERMINATION OF EMPLOYMENT AND SERVICE Upon termination of a Key Person's service with the Company and all Related Entities, any Option previously granted hereunder, unless otherwise specified by the Committee in the Option, shall, to the extent not theretofore exercised, terminate and become null and void, provided that: (a) if the recipient shall die while in the service of the Company or a Related Entity or during either the three (3) month or one (1) year period, whichever is applicable, specified in clause (b) below and at a time when such recipient was entitled to exercise an Option as herein provided, the legal representative of such recipient, or such person who acquired such Option by bequest or inheritance or by reason of the death of the recipient, may, not later than one (1) year from the date of death, exercise such Option, to the extent not theretofore exercised, in respect of any or all of such number of Shares as specified by the Committee in such Option; and (b) if the service of any recipient to whom such Option shall have been granted shall terminate by reason of the recipient's retirement (at such age or upon such conditions as shall be specified by the Committee), disability (as described in Section 22(e)(3) of the Code) or dismissal by the Company or a Related Entity other than for cause (as defined below), and while such recipient is entitled to exercise such Option as herein provided, such recipient shall have the right to exercise such Option so granted, to the extent not theretofore exercised, in respect of any or all of such number of Shares as specified by the Committee in such Option, at any time up to and including (i) three (3) months after the date of such termination in the case of termination by reason of -8- retirement or dismissal other than for cause and (ii) one (1) year after the date of termination in the case of termination by reason of disability. If a recipient voluntarily terminates his or her employment or service as an Outside Director Participant, or is discharged for cause, any Option granted hereunder shall, unless otherwise specified by the Committee in the Option, forthwith terminate with respect to any unexercised portion thereof. Each Incentive Option by its terms shall require the recipient to remain in the continuous employ of the Company or any subsidiary corporation or parent corporation of the Company from the date of grant of the Incentive Option until no more than three (3) months prior to the date of exercise of the Incentive Option (except as otherwise provided herein in the event of death or disability). Notwithstanding the preceding paragraphs of this Article XII, if the service of any recipient with the Company and all Related Entities is terminated, whether voluntarily or involuntarily, within a one-year period following a change in control of the Company (as defined in Article XIII), other than a termination of such service for cause, such recipient shall have the right to exercise all or any portion of the Option, whether vested or unvested, at any time up and to and including three (3) months after the date of such termination, at which time such Option shall cease to be exercisable. Notwithstanding the immediately preceding paragraphs of this Article XII, no Option may be exercised after the expiration of the period of exercisability provided for in such Option. If an Option granted hereunder shall be exercised by the legal representative of a deceased recipient or former recipient, or by a person who acquired an Option granted hereunder by bequest or inheritance or by reason of the death of any recipient or former recipient, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Option. For the purposes of the Plan, the term "for cause" shall mean (i) with respect to an employee who is a party to a written agreement with, or alternatively, participates in a compensation or benefit plan of the Company or a Related Entity, which agreement or plan contains a definition of "for cause" or "cause" (or words of like import) for purposes of termination of employment thereunder by the Company or such Related Entity, "for cause" or "cause" as defined in the most recent of such agreements or plans, or (ii) in all other cases, as determined by the Committee, in its sole discretion, (a) the willful commission by an employee of a criminal or other act that causes or will probably cause substantial economic damage to the Company or a Related Entity or substantial injury to the business reputation of the Company or a Related Entity; (b) the continuing willful failure of an employee to perform the duties of such employee to the Company or a Related Entity (other than such failure resulting from the employee's incapacity due to physical or mental illness) after written notice thereof (specifying the -9- particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the employee by the Committee; (c) the order of a court of competent jurisdiction requiring the termination of the employee's employment; or (d) in the case of an Outside Director Participant, the failure of such Outside Director Participant to act in good faith or the taking of any action that constitutes a material breach of such person's fiduciary duty to the Company. For purposes of the Plan, no act, or failure to act, on the employee's part shall be considered "willful" unless done or omitted to be done by the employee not in good faith and without reasonable belief that the employee's action or omission was in the best interest of the Company or a Related Entity. For the purposes of the Plan, an employment relationship shall be deemed to exist between an individual and the Company or a Related Entity if, at the time of the determination, the individual was an "employee" of the Company or such Related Entity. If an individual is on military, sick leave or other bona fide leave of absence such individual shall be considered an "employee" for purposes of the exercise of an Option and shall be entitled to exercise such Option during such leave if the period of such leave does not exceed 90 days, or, if longer, so long as the individual s right to reemployment with the Company (or a Related Entity) is guaranteed either by statute or by contract. If the period of leave exceeds ninety (90) days, the employment relationship shall be deemed to have terminated on the ninety-first (91) day of such leave, unless the individuals right to reemployment is guaranteed by statute or contract. A termination of employment shall not be deemed to occur by reason of (i) the transfer of an employee from employment by the Company to employment by a Related Entity or (ii) the transfer of an employee from employment by a Related Entity to employment by the Company or by another Related Entity. XIII. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTION In the event of any change in the outstanding Shares through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or other like change in capital structure of the Company, an adjustment shall be made to each outstanding Option such that each such Option shall thereafter be exercisable for such securities, cash and/or other property as would have been received in respect of the Shares subject to such Option had such Option been exercised in full immediately prior to such change, and such an adjustment shall be made successively each time any such change shall occur. The term "Shares" shall after any such change refer to the securities, cash and/or property then receivable upon exercise of an Option. In addition, in the event of any such change, the Committee shall make any further adjustment as may be appropriate to the maximum number of Shares subject to the Plan, the maximum number of Shares of which Options may be granted to any one recipient, and the number of Shares and price per Share subject to outstanding Options as shall be equitable to prevent dilution or enlargement of rights under such Options, and the determination of the Committee as to these matters shall be conclusive. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Option shall -10- comply with the rules of Section 424(a) of the Code, and (ii) in no event shall any adjustment be made which would render any Incentive Option granted hereunder other than an incentive stock option for purposes of Section 422 of the Code. In the event of a change in control of the Company, all then outstanding vested Options shall immediately become exercisable. For purposes of the Plan, a "change in control" of the Company occurs if: (a) any "person" (defined as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act, as amended), other than a stockholder of the Company as of the date of the adoption of the Plan by the Board of Directors or any affiliate of any such stockholder, is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing fifty percent or more of the combined voting power of the Company's outstanding securities then entitled to vote for the election of directors; (b) the Board of Directors shall approve the sale of all or substantially all of the assets of the Company; or (c) the Board of Directors shall approve any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (a) above. The Committee in its discretion may determine that, upon the occurrence of a transaction described in the preceding paragraph, each Option outstanding hereunder shall terminate within a specified number of days after notice to the holder, and such holder shall receive, with respect to each Share subject to such Option, cash in an amount equal to the excess of the fair market value of such Share immediately prior to the occurrence of such transaction over the exercise price per Share of such Option immediately prior to the occurrence of such transaction. The provisions contained in the preceding sentence shall be inapplicable to an Option granted within six (6) months before the occurrence of a transaction described above if the holder of such Option is subject to the reporting requirements of Section 16(a) of the Exchange Act. XIV. RIGHT TO TERMINATE EMPLOYMENT The Plan shall not impose any obligation on the Company or on any Related Entity thereof to continue the employment of any holder of an Option; and it shall not impose any obligation on the part of any holder of an Option to remain in the employ of the Company or of any Related Entity. XV. PURCHASE FOR INVESTMENT Except as hereafter provided, the holder of an Option granted hereunder shall, upon any exercise thereof, execute and deliver to the Company a written statement, in form satisfactory to the Company, in which such holder represents and warrants that such holder is purchasing or acquiring the Shares acquired thereunder for such holder's own account, for investment only and not with a view to the resale or distribution thereof, and agrees that any subsequent offer for sale or sale or distribution of any of such Shares shall be made pursuant to either (a) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), which Registration Statement has become effective and is current with regard to the Shares -11- being offered or sold, or (b) a specific exemption from the registration requirements of the Securities Act and any applicable state securities law or regulation, but in claiming such exemption the holder shall, prior to any offer for sale or sale of such Shares, obtain a prior favorable written opinion, in form and substance satisfactory to the Company, from counsel for or approved by the Company, as to the applicability of such exemption thereto. Notwithstanding the prior sentence, no exercise of an Option shall be deemed to be effective if the Company, in its sole discretion, determines that a violation of any federal or state securities law, or rule or regulation promulgated thereunder, would result therefrom. The foregoing restrictions shall not apply to (i) issuances by the Company so long as the Shares being issued are registered under the Securities Act and a prospectus in respect thereof is current or (ii) reofferings of Shares by affiliates of the Company (as defined in Rule 405 or any successor rule or regulation promulgated under the Securities Act) if the Shares being reoffered are registered under the Securities Act and a prospectus in respect thereof is current. XVI. ISSUANCE OF CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES Subject to the provisions of Articles III, XV and XVIII hereof, upon any exercise of an Option which may be granted hereunder and payment of the purchase price in full in cash or by certified check, a certificate or certificates for the Shares as to which the Option has been exercised shall be issued by the Company in the name of the person exercising the Option and shall be delivered to or upon the order of such person. The Company may endorse such legend or legends upon the certificates for Shares issued upon exercise of an Option granted hereunder and may issue such "stop transfer" instructions to its transfer agent in respect of such Shares as, in its discretion, it determines to be necessary or appropriate to (i) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act or any state "blue sky" law or regulation, (ii) implement the provisions of the Plan and any agreement between the Company and the optionee or grantee with respect to such Shares, or (iii) permit the Company to determine the occurrence of a disqualifying disposition, as described in Section 421(b) of the Code, of Shares transferred upon exercise of an Incentive Option granted under the Plan. The Company shall pay all issue taxes with respect to the issuance of Shares to the person exercising the Option, as well as all fees and expenses necessarily incurred by the Company in connection with such issuance. All Shares issued as provided herein shall be fully paid and non- assessable to the extent permitted by law. XVII. WITHHOLDING TAXES The Company may require a Key Person exercising a Non-Qualified Option granted hereunder, or disposing of Shares acquired pursuant to the exercise of an Incentive Option in a -12- disqualifying disposition (within the meaning of Section 421(b) of the Code), to reimburse the Company or Related Entity, as appropriate, for any taxes required by any governmental authority to be withheld or otherwise deducted and paid by such corporation in respect of the issuance or disposition of Shares. In lieu thereof, the Company or Related Entity, as appropriate, shall have the right to withhold the amount of such taxes from any other sums due or to become due from such Corporation to the Key Person upon such terms and conditions as the Committee shall prescribe. At any time that the Company or a Related Entity becomes subject to a withholding obligation under applicable law with respect to the exercise of a Non-Qualified Option except as set forth below, a Key Person may elect to satisfy, in whole or in part, the Key Person's related personal tax liabilities (an "Election") by (i) the payment of cash, (ii) electing to have such amount withheld from sums otherwise due to the Key Person, (iii) subject to the other requirements of this Section XVII, directing the Company or the subsidiary to withhold from Shares issuable in the related exercise either a specified number of Shares or Shares having a specified value in each case with a value not in excess of such tax liabilities, (iv) subject to the requirements of Section 16(b) of the Exchange Act and the rules promulgated thereunder, tendering Shares previously issued pursuant to an exercise or other shares of the Company's common stock owned by the Key Person or (v) combining any or all of the foregoing options; provided, that the Company will not be required to redeem any Shares or shares of nonvoting or other common stock in violation of applicable laws. An Election shall be irrevocable. The withheld Shares and other shares tendered in payment should be valued at their fair market value on the date that the withholding obligation arises (the "Tax Date"). The Committee may disapprove of any Election, suspend, or terminate the right to make Elections or provide that the right to make Elections shall not apply to particular grants, Shares or exercises. If a Key Person is a person subject to Section 16 of the Exchange Act and such Key Person intends to satisfy all or any portion of such withholding obligation by directing the withholding of Shares issuable or tendering Shares, then (1) any Election by such Key Person must be made (i) at least six months prior to the relevant Tax Date or (ii) on or prior to the relevant Tax Date and during a period that begins on the third business day following the date of release for publication of the Company's quarterly or annual summary statements of sales and earnings and that ends on the twelfth business day following such date and (2) the Election may not be made with respect to an exercise, or the withholding obligation arising thereon, if the relevant Non-Qualified Option was granted six months or less prior to the date of Election. The Committee may impose any other conditions or restrictions on the right to make an Election as it shall deem appropriate. If the Key Person has informed the Company in writing that such withholding would subject such Key Person to liability under Section 16(b) of the Exchange Act, the Company shall not be authorized to effect any such withholding without the prior written consent of the Key Person. The Committee may prescribe such rules as it determines with respect to Key Persons subject to the reporting requirements of Section 16(a) of the Exchange Act to effect such tax withholding in compliance with the Rules established by the Securities and Exchange Commission (the "Commission") under Section 16 of the Exchange Act and the positions of the staff of the Commission thereunder expressed in no-action letters exempting such tax withholding from liability under Section 16(b) of the Exchange Act. XVIII. LISTING OF SHARES AND RELATED MATTERS -13- Upon the consummation of a public offering of voting common stock of the Company which is underwritten on a firm commitment basis by a nationally- recognized investment banking firm, (i) each granted but unexercised Option shall be deemed from the date thereof to be an option to purchase voting common stock of the Company instead of an option to purchase nonvoting common stock of the Company, and (ii) all Options granted after the date thereof shall be options to purchase voting common stock of the Company and not nonvoting common stock of the Company. If at any time the Board of Directors shall determine in its discretion that the listing, registration or qualification of the Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the sale or purchase of Shares under the Plan, no Shares shall be issued unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board of Directors. During such suspension of the issuance of Shares, neither the Company nor its parents or subsidiaries shall be liable for any payment of interest or fees of any kind on Shares not yet issued. Under no circumstances shall the Company be required to effect any registration or qualification of any Shares under any federal or state securities laws. XIX. AMENDMENT OF THE PLAN The Board of Directors or the Committee, as the case may be, may, from time to time, amend the Plan, provided that no amendment shall be made, without the approval of the stockholders of the Company, that will (i) increase the total number of Shares reserved for Options under the Plan (other than an increase resulting from an adjustment provided for in Article XIII), (ii) reduce the exercise price of any Option granted hereunder below the price required by Article VI, (iii) modify the provisions of the Plan relating to eligibility, (iv) materially increase the benefits accruing to participants under the Plan, (v) increase the number of Shares which may be granted to an individual Key Employee under the Plan, (vi) adversely affect the Plan's qualification under Section 162(m)(4)(C) of the Code, (vii) adversely affect the qualification of Incentive Options under Section 422 of the Code or (viii) otherwise materially modify the Plan. The Committee shall be authorized to amend the Plan and the Options granted thereunder to permit the Incentive Options granted thereunder to qualify as incentive stock Options within the meaning of Section 422 of the Code and to qualify the Plan under Section 162(m)(4)(C) of the Code. The rights and obligations under any Option granted before amendment of the Plan or any unexercised portion of such Option shall not be adversely affected by amendment of the Plan or the Option without the consent of the holder of the Option. XX. TERMINATION OR SUSPENSION OF THE PLAN The Board of Directors may at any time suspend or terminate the Plan. The Plan, unless sooner terminated by action of the Board of Directors, shall terminate at the close of business on -14- the Termination Date. An Option may not be granted while the Plan is suspended or after it is terminated. Rights and obligations under any Option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except upon the consent of the person to whom the Option was granted. The power of the Committee to construe and administer any Options granted prior to the termination or suspension of the Plan under Article III nevertheless shall continue after such termination or during such suspension. XXI. SAVINGS PROVISION With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. XXII. GOVERNING LAW The Plan, such Options as may be granted thereunder and all related matters shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware from time to time obtaining. XXIII. PARTIAL INVALIDITY The invalidity or illegality of any provision herein shall not be deemed to affect the validity of any other provision. XXIV. EFFECTIVE DATE OF AMENDMENT AND RESTATEMENT OF THE PLAN The Plan as set forth herein constitutes an amendment and restatement of the Trident NGL Holding, Inc. Amended and Restated 1991 Stock Option Plan, as previously adopted by Trident NGL Holding, Inc. (a predecessor to the Company). This amendment and restatement of the Plan shall be effective as of May 10, 1996, provided this amendment and restatement of the Plan is approved by the stockholders of the Company on such date at the Company's 1996 Annual Meeting of Stockholders. -15- EX-10.47 7 EMPLOYMENT AGREEMENT EXHIBIT 10.47 November 15, 1996 Mr. Thomas Matthews 17402 Ridge Top Drive Houston, Texas 77090 Dear Tom: Subject to the ratification of this Agreement by the Compensation, Corporate Governance and Human Resources Committee ("Compensation Committee") of the Board of Directors of NGC Corporation, set forth below are the terms of your employment by NGC Corporation (hereinafter referred to collectively as "NGC" or the "Company"). 1. Title and Duties Your title shall be President of NGC Corporation. Your duties will include the oversight of NGC, together with its Chairman and Chief Executive Officer. Your initial responsibilities will include direction of NGC's Warren division, Global Energy Services, Legal, Regulatory and Legislative Affairs, and Information Technology departments. Prior to a change in control of the Company as described in Paragraph 2(c), these assignments may be modified, and any such modification made prior to a change in control shall not constitute a constructive termination for purposes of Paragraph 2(c) of this Agreement. Following such a change in control, no such modification may be made in your duties except to the extent that no constructive termination would occur under Paragraph 2(c) as a result of such modification. You shall devote your full time, energy and skill to the performance of your duties for NGC, and will exercise due diligence and reasonable care in the performance of such duties. 2. Term (a) Unless earlier terminated as provided for herein, the term of this Agreement will be for five years, beginning on December 1, 1996 (the "Term"). (b) If your employment with NGC is terminated due to your voluntary resignation or by the Company for "cause", this Agreement shall terminate immediately (except for the confidentiality, non-competition and non- solicitation provisions of Paragraph 4), and the Company shall have no further obligation to you except for the payment of amounts due before the date of such termination. You further agree that the benefits which you have received from the execution of this Agreement through the date of such termination constitute sufficient consideration for your obligations pursuant to Paragraph 4, notwithstanding the fact that the Company has no further obligation to you except for the payment of amounts due before the date Mr. Thomas Matthews Page 2 November 15, 1996 of such termination. For purposes of this Agreement, you may be terminated for "cause" by the Board of Directors of NGC as a result of (i) refusal to implement or adhere to policies or directives of the Board of Directors of NGC; (ii) serious misconduct, dishonesty or disloyalty, directly related to the performance of duties for the Company, which results from a willful act or omission or from gross negligence, and which is materially or potentially materially injurious to the operations, financial condition or business reputation of the Company or any significant subsidiary thereof; (iii) your being convicted (or entering into a plea bargain admitting criminal guilt) in any criminal proceeding that may have an adverse impact on the Company's reputation and standing in the community; (iv) drug or alcohol abuse; (v) willful and continued failure to perform your duties under this Agreement; or (vi) any other material breach of this Agreement by you that is not cured within thirty days after written notice of such breach is delivered to you from the Company. For these purposes, no act or failure to act shall be considered "willful" unless it is done, or omitted to be done, in bad faith without reasonable belief that the action or omission was in the best interest of the Company. (c) If your employment is terminated during the Term of this Agreement due to resignation following "constructive termination" (as defined below) or for any other reason other than your voluntary resignation, death, disability, or discharge for cause, you shall receive as your sole compensation (i) your Base Salary as described in Paragraph 3(a), guaranteed bonus as described in Paragraph 3(b) and company medical and life insurance coverage for the remainder of the Term, or for two years from the date of actual termination of employment, whichever provides the longer period of payment and coverage, and (ii) any employee stock options granted to you during the Term of this Agreement shall become vested as of the date of resignation due to such constructive termination or discharge not for cause, but only up to the percentage that would have been vested had you remained in regular employment to the end of the Term of this Agreement. For purposes of this Agreement a "constructive termination" shall be deemed to have occurred in the event that (i) your Base Salary as defined in Paragraph 3(a), bonus compensation under Paragraph 3(b), option grants under Paragraph 3(d) or other compensation as described in Paragraph 3(e) and 3(f) is reduced; (ii) except as provided in Paragraph 1 as in effect before a change in control of the Company, or after the occurrence of change in control of the Company, a significant diminution in your responsibilities, authority or scope of duties is effected by the Board of Directors or as the result of the change in control of the Company, and such diminution is made without your written consent (without regard to whether or not any change is made to your title); or (iii) the Company materially breaches this Agreement. For purposes of this Agreement, a "change in control of the Company" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting stock of the Company; (b) the Company is merged with or into or consolidated with another person and, immediately after giving effect to Mr. Thomas Matthews Page 3 November 15, 1996 the merger or consolidation, (A) less than 50% of the total voting power of the outstanding voting stock of the surviving or resulting person is then "beneficially owned" (within the meaning of Rule l3d-3 under the Exchange Act) in the aggregate by (x) the stockholders of the Company immediately prior to such merger or consolidation, or (y) if a record date has been set to determine the stockholders of the Company entitled to vote with respect to such merger or consolidation, the stockholders of the Company as of such record date and (B) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act) of more than 50% of the voting power of the voting stock of the surviving or resulting person; (c) the Company, either individually or in conjunction with one or more of its subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the properties and assets of the Company and the subsidiaries, taken as a whole (either in one transaction or a series of related transactions), to any person (other than the Company or a wholly owned subsidiary); or (d) the liquidation or dissolution of the Company. Any resignation by you as a result of assertion of a constructive termination shall be communicated by delivery to the Board of Directors of the Company thirty days' advance written notice of such constructive termination and the grounds therefor, during which period the Company shall be entitled to cure or remedy the matters set forth in such notice to your reasonable satisfaction. Unless you withdraw such notice prior to the expiration of such thirty day period, such resignation shall take effect upon the expiration of thirty days from the date of the delivery of such notice. Any other resignation by you shall be communicated by thirty days' advance written notice. (d) If you die, or become disabled and cannot perform your duties, you (or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3 (a)) payable to you hereunder for three months following the month in which you die or become disabled, plus the amount of any guaranteed bonus as described in Paragraph 3(b) guaranteed pursuant to Paragraph 3(b) for the year of death or disability, prorated through the date of death or disability. For purposes of this Agreement, you shall be disabled as of the first date on which you become eligible to receive disability benefits under the Company's long-term disability plan (or Social Security disability benefits at a time when the Company does not maintain a long-term disability plan or such plan is not available to you). 3. Compensation (a) Each year during the Term hereof, you will be paid a base salary of $600,000 per annum ("Base Salary"), payable in accordance with the Company's payroll guidelines. Increases may be made to your Base Salary at the discretion of the Board of Directors based upon your individual performance. Mr. Thomas Matthews Page 4 November 15, 1996 (b) You shall be a participant in the Company's Incentive Compensation Plan. You shall receive a guaranteed bonus of at least $300,000 per annum during the five year Term. As part of NGC's incentive compensation program, you will have the opportunity to earn up to 200% of your Base Salary, dependent upon NGC's financial performance and other personal strategic objectives, determined in accordance with such program. (c) On December 1, 1996, you will receive an initial amount of discounted stock options under NGC's Employee Equity Option Plan (EEOP) with an immediate in-the-money value of $1,000,000. The options are subject to the vesting, forfeiture and other terms and conditions of the EEOP. "In-the-money" for this purpose shall mean fair market value, if such stock could be sold on the date of grant, in excess of the stated exercise price, regardless of whether such options are then exercisable. (d) Each year during the Term of this Agreement, commencing December 1, 1996 you will receive stock option grants, with an exercise price equal to market price on date of grant, under the NGC Corporation Amended & Restated 1991 Stock Option Plan, with a five year projected value of $1,000,000. You recognize that the projected value is subject to the future market performance of the Company stock and that there is no guarantee that the actual value of such options will achieve that value. "Projected value" means that at the end of five years from date of grant, assuming increase in market price of 15% per annum during the five years, the stock option may be exercised to obtain stock having a market price of $1,000,000 over the exercise price. These options are subject to the vesting, forfeiture and other terms and conditions of the NGC Corporation Amended & Restated 1991 Stock Option Plan. (e) You will be entitled to participate in NGC's benefits programs for senior management executives, including, without limitation, NGC's deferred compensation plan for executives, and NGC's Alternative Benefits for Senior Executives Plan. (f) The Company will pay an additional $5,000 on your behalf to provide you with additional life insurance and disability coverage in excess of the death benefit or disability coverage under NGC's standard executive employee and benefit plans. You shall select such coverage and shall own the insurance policies providing such coverage. You will be responsible for coverage and effectiveness of the policies, the Company's only obligation being to pay such amounts. (g) You will be eligible for five weeks of vacation in 1997. After 1997 you shall be eligible for vacation in line with the vacation plan of the Company but not less than five weeks in any year. Mr. Thomas Matthews Page 5 November 15, 1996 4. Confidentiality You recognize and acknowledge that: (a) You will have access to certain information concerning the Company that is confidential and proprietary and constitutes valuable and unique property of the Company. You agree that you will not at any time, either during or after your employment, disclose to others, use, copy or permit to be copied, except pursuant to your duties on behalf of the Company or its successors, assigns or nominees, any secret or confidential information of the Company (whether or not developed by you) without the prior written consent of the Board of Directors of the Company. The term "secret or confidential information of the Company" (sometimes referred to herein as "Confidential Information") shall include, without limitation, the Company's plans, strategies, potential acquisitions, costs, prices, systems for buying, selling, and/or trading natural gas, natural gas liquids, crude oil, coal, and electricity, client lists, pricing policies, financial information, the names of and pertinent information regarding suppliers, computer programs, policy or procedure manuals, training and recruiting procedures, accounting procedures, the status and content of the Company's contracts with its suppliers or clients, or servicing methods and techniques at any time used, developed, or investigated by the Company, before or during your tenure of employment to the extent any of the foregoing are (i) not generally available to the public and (ii) maintained as confidential by the Company. You further agree to maintain in confidence any confidential information of third parties received as a result of your employment and duties with the Company. (b) At the termination of your employment you will deliver to the Company, as determined appropriate by the Company, all correspondence, memoranda, notes, records, client lists, computer systems, programs, or other documents and all copies thereof made, composed or received by you, solely or jointly with others, and which are in your possession, custody, or control at such date and which are related in any manner to the past, present, or anticipated business of the Company. (c) To protect and safeguard the Company's trade secrets and Confidential Information and also the Company's goodwill with its suppliers and clients, for a period of twenty-four months following the termination of your employment for any reason you will not, within a 50 mile radius of any location where the Company had an office at any time during the Term hereof or any location where a client or supplier of the Company (which is a material client or supplier at any time during the Term hereof) had an office at any time during the Term hereof, without the prior written consent of the Board of Directors of the Company, directly or indirectly, engage in or be interested in (as owner, partner, shareholder, employee, director, agent, consultant or otherwise), any business which is a competitor of the Company, as hereinafter defined. For purposes of this Agreement, a "competitor of the Company" is any entity, including without limitation a corporation, sole proprietorship, partnership, joint venture, syndicate, trust or any other form of organization or a parent, subsidiary or division of any of the Mr. Thomas Matthews Page 6 November 15, 1996 foregoing, which, during such period or the immediately preceding fiscal year of such entity, was engaged in the unregulated marketing, gathering, transportation or processing of natural gas or derivatives of natural gas or other hydrocarbons or electricity. For purposes of this paragraph, the following entities shall not be deemed to be competitors of the Company: (i) a Local Distribution Company ("LDC") to the extent that any purchases or sales by such LDC are only for consumption on its system; (ii) a natural gas producer to the extent that such producer sells only its own production or production of other working interest owners in wells in which it owns an interest; (iii) a natural gas pipeline company in the jurisdictional aspects of its business, i.e., other than a nonjurisdictional marketing affiliate or production affiliate (except as to such production affiliates own production as described in clause (ii) of this Paragraph 4(c)). The terms of this Section 4.3(c) shall not apply to your present or future investments in the securities of companies listed on a national securities exchange or traded on the over-the-counter market to the extent such investments do not exceed one percent (1%) of the total outstanding shares of the Company. (d) For a period of twenty-four months after the expiration or termination of your employment for whatever reason, you shall not induce or otherwise entice any employee of the Company to leave the Company, nor shall you attempt to hire any of the Company's employees. (e) You agree that the foregoing restrictions contain reasonable limitations as to the time, geographical area, and scope of activity to be restrained and that these restrictions do not impose any greater restraint than is necessary to protect the goodwill and other legitimate business interests of the Company, including but not limited to the protection of Confidential Information. You agree that, in the event of a breach or threatened breach by you of any of the provisions of this Paragraph 4, the Company shall be entitled to injunctive relief restraining and preventing you from any violation thereof, as any such breach or threatened breach would cause irreparable injury to the Company for which it would have no adequate remedy at law. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available for any such breach or threatened breach, including the recovery of damages from you. You also agree that the general public shall not be harmed by enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be held unreasonably broad with respect to the restrictions as to time, geographical area, or scope of activity to be restrained, any such restriction shall be construed by limiting and reducing it to the extent necessary to render it reasonable, and as so construed, such provision shall be enforced. 5. Indemnification If, at any time during or after the Term of this Agreement, you are made a party to, or are threatened to be made a party in, any civil, criminal or administrative action, suit or proceeding by reason of the fact that you are or were a director, officer, employee, or agent of the Company, or of any other corporation or any partnership, joint venture, trust or other Mr. Thomas Matthews Page 7 November 15, 1996 enterprise for which you served as such at the request of the Company, then you shall be indemnified by the Company against expenses actually and reasonably incurred by you or imposed on you in connection with, or resulting from, the defense of such action, suit or proceeding, or in connection with, or resulting from, any appeal therein if you acted in good faith and in a manner you reasonably believed to be in or not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe your conduct was unlawful, except with respect to matters as to which it is adjudged that you are liable to the Company or to such other corporation, partnership, joint venture, trust or other enterprise for gross negligence or willful misconduct in the performance of your duties. As used herein, the term "expenses" shall include all obligations actually and reasonably incurred by you for the payment of money, including, without limitation, attorney's fees, judgments, awards, fines, penalties and amounts paid in satisfaction of a judgment or in settlement of any such action, suit or proceeding, except amounts paid to the Company or such other corporation, partnership, joint venture, trust or other enterprise by you. 6. Arbitration Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall, except as provided in Paragraph 4, be adjusted only by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the City of Houston, Texas, or such other place as may be agreed upon at the time by the parties to the arbitration. The arbitrator(s) shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees of the parties, as well as the arbitrators' fees and expenses, in such proportions as the arbitrator(s) deem just. Notwithstanding the foregoing, you shall be entitled to seek specific performance in a court of competent jurisdiction of your right to be paid your full compensation until your separation from employment, during the pendency or dispute of any controversy arising under or in connection with this Agreement. 7. Other Provisions (a) This Agreement will be governed by, construed and enforced in accordance with the laws of the state of Texas, excluding any conflicts of law, rule or principle that might otherwise refer to the substantive law of another jurisdiction. (b) Except as otherwise indicated, this Agreement is not assignable without the written authorization of both parties; provided that the Company may assign this Agreement to any entity to which the Company transfers substantially all of its assets or to any entity which is a successor to the Company by reorganization, incorporation, merger or similar business Mr. Thomas Matthews Page 8 November 15, 1996 combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4 and 5 of this Agreement shall survive the termination of this Agreement. (d) This Agreement supersedes all previous employment agreements, written or oral, between the Company and you. This Agreement may be amended only by written amendment duly executed by both parties or their legal representatives and authorized by action of the Board. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. (e) Any notice or other communication required or permitted pursuant to the terms of this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States mail, first class, postage prepaid and registered with return receipt requested, addressed to the intended recipient at his or its address set forth below and, in the case of a notice or other communication to the Company, directed to the attention of the Board of Directors with a copy to the Secretary of the Company, or to such other address as the intended recipient may have theretofore furnished to the sender in writing in accordance herewith, except that until any notice of change of address is received, notices shall be sent to the following addresses: If to you: If to the Company --------- ----------------- T. M. Matthews C. L. Watson 17402 Ridgetop Drive 13430 N.W. Freeway, Suite 1200 Houston, Texas 77090 Houston, Texas 77040 (f) If any one or more of the provisions or parts of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision or part of a provision of this Agreement, but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provisions or part thereof shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted by law. (g) You shall not be required to mitigate damages (or the amount of any Mr. Thomas Matthews Page 9 November 15, 1996 compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. If the foregoing reflects your understanding of the terms of your employment with the Company, please execute each copy of this letter in the space provided below. NGC CORPORATION By: /s/ C. L. Watson ------------------------------ C. L. Watson AGREED AND ACCEPTED this 17th day of November, 1996, and effective as of December 1, 1996 /s/ Thomas Matthews - ------------------------ Thomas Matthews EX-13 8 ANNUAL REPORT INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Report of Independent Public Accountants 39 Management's Responsibility for Financial Statements 39 Consolidated Balance Sheets 40 Consolidated Statements of Operations 41 Consolidated Statements of Cash Flows 42 Consolidated Statements of Changes in Stockholders' Equity 43 Notes to Consolidated Financial Statements 44 Financial Summary 63 Corporate Information 64 Officers and Directors Inside Back Cover KEY TERMS AND DEFINITIONS Defined below are some of the industry terms used in this report. VOLUMETRIC ABBREVIATIONS Bbl .................................................................... barrel Bpd ........................................................... barrels per day Mbpd ................................................. thousand barrels per day Mgals .................................................... thousands of gallons MMgals .................................................... millions of gallons Mcf ....................................................... thousand cubic feet Bcf ........................................................ billion cubic feet Bcf/d .............................................. billion cubic feet per day INDUSTRY TERMS FEEDSTOCK. Material introduced into a plant for processing another product. FIELD PLANT. A gas processing plant, typically situated adjacent to a gas field, that provides services such as gathering, compression, transportation and processing to the producers in the field. FRACTIONATION. The process of separating propane, butane, ethane, etc. from the hydrocarbon stream. GROSS NGL PRODUCTION. The total volume of natural gas liquids extracted from a natural gas stream by a gas processing plant, adjusted for the Company's ownership percentage in the plant. MARKET HUB. A strategic location where several pipelines interconnect. It is used by shippers for gaining access to multiple natural gas markets. MEGAWATT HOUR. A unit of measurement that represents one million watt-hours, or the amount of electricity needed to light 10,000 100-watt light bulbs for one hour. NATURAL GAS LIQUIDS (NGL). The liquid hydrocarbons ethane, propane, normal butane, isobutane and natural gasoline typically contained in a natural gas production stream and used principally as feedstocks for the petrochemical and the petroleum refining industries, and as heating and engine fuel. NET NGL PRODUCTION. Gross NGL production less volumes taken in-kind. OPEN ACCESS. Transportation services on pipelines or electric transmission systems that are available to all shippers on a nondiscriminatory basis. REVERSE TOLLING. Supplying electric power to a generation facility and taking the fuel in exchange. STRADDLE PLANT. A gas processing plant situated on a third-party natural gas pipeline. TOLLING. Supplying fuel to a power generation facility to generate electric power for a fee. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading North American marketer of natural gas, natural gas liquids (NGL), crude oil and power, and is engaged in natural gas gathering, processing and transportation through ownership and operation of natural gas processing and fractionation plants; NGL storage, barge and terminaling facilities; and natural gas, NGL and crude oil pipelines. Acting in the role of a large-scale aggregator, processor, marketer and reliable supplier of multiple energy products and services, NGC has evolved into a reliable energy commodity and service provider. Through joint ventures in both Canada and the United Kingdom, the Company has expanded geographically its vision of providing customers with multiple energy commodity needs combined with cost-effective products and value-added services. From inception of operations in 1984 until 1990, Natural Gas Clearinghouse (Clearinghouse) limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances with certain of its stockholders. In 1994, Clearinghouse initiated gas gathering, processing and marketing operations in Canada through Novagas Clearinghouse, Ltd. (NCL), a joint venture with NOVA Corporation (NOVA). Also in 1994, the Company began energy marketing operations in the United Kingdom through Accord Energy Limited (Accord). Effective March 1, 1995, Clearinghouse and Trident NGL Holding, Inc., a fully integrated natural gas liquids company, merged, and the combined entity was renamed NGC Corporation (Trident Combination). On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively Chevron) whereby substantially all of Chevron's midstream assets were merged with NGC (Chevron Combination). By virtue of the growth of NGC's core businesses combined with the synergies derived from the aforementioned transactions, NGC has established itself as an industry leader, providing reliable, competitively priced energy products and services to customers throughout North America and the United Kingdom. RECENT DEVELOPMENTS On February 18, 1997, NGC announced that it had signed a merger agreement to acquire Destec Energy, Inc. (Destec), a leading independent power producer (IPP), in a deal valued at $1.27 billion, or $21.65 per share of Destec common stock. Simultaneous with this acquisition, NGC will sell Destec's international facilities and operations to The AES Corporation for $407 million, inclusive of cash and monetizable assets. Closing of this transaction is expected to occur by the end of the second quarter of this year. NGC intends to finance the transaction with interim financing provided by commercial banks from its existing bank-credit group and existing cash. The balance of the interim financing is expected to be retired from a combination of sales of nonstrategic Destec assets within six to 12 months of closing of the merger, long-term debt and a common and/or preferred stock issuance. Destec currently operates 20 power generation facilities in key energy markets across the United States, as well as five international projects. On January 1, 1997, the Company divested itself of the Mont Belvieu I fractionator in accordance with an agreement reached with the Federal Trade Commission (FTC) related to the Chevron Combination. The Company realized a small after-tax gain in 1997 related to the sale. In October 1996, the Company and NOVA announced their intention to restructure the companies' Canadian natural gas operations. Under the agreement, NGC will assume full control of NCL's gas and gas liquids marketing businesses. NGC and NOVA will pursue separate midstream asset businesses in Canada. This restructuring may also result in amendments to, or termination of, various agreements between NCL and the Company or NOVA, including their respective affiliates. NOVA will also own 100 percent of Pan-Alberta, which is currently a subsidiary of NCL. NGC will operate its Canadian operations under the name of NGC Canada, Inc. The transaction is expected to close by April 30, 1997. In early 1997, British Gas completed a restructuring with Centrica plc (Centrica) being demerged from British Gas and British Gas being renamed BG plc. Centrica became the Company's joint venture partner in Accord, while BG now holds the approximate 26-percent stake in NGC's common stock formerly held by British Gas. 26 Effective March 2, 1997, Centrica and the Company signed an agreement in which they stated their intent to restructure Accord by converting certain common stock interests in Accord to participating preferred stock interests. After closing, which is expected to occur in the second quarter of 1997, Centrica and the Company will own 75 percent and 25 percent, respectively, of the participating preferred stock of Accord. The participating preferred stock will have (a) the right to receive cumulative dividends on a priority to other corporate distributions by Accord, and (b) limited voting rights. In addition, Centrica will have the option to purchase the Company's participating preferred stock interest at any time after July 1, 2000, and the Company will have the right to acquire Centrica's participating preferred interest during the period from January 1, 2001, through March 1, 2001, at formula-based prices as defined in the agreement. As part of the reorganization, NGC UK will assume control of Accord's existing crude oil marketing business. The restructuring is contingent upon certain U.K. regulatory approvals. BUSINESS SEGMENTS NGC's operations are reported in two segments: the Natural Gas and Power Marketing Segment (Marketing) and the Natural Gas Liquids, Crude Oil and Gas Transmission Segment (Liquids). Marketing consists of subsidiaries engaged in the business of: contracting to purchase specific volumes of natural gas from suppliers at various points of receipt to be supplied over a specific period of time; aggregating natural gas supplies and arranging for the transportation of these gas supplies through proprietary and third-party transmission systems; negotiating the sale of specific volumes of natural gas over a specific period of time to local distribution companies, utilities, power plants and other end-users; and matching natural gas receipts and deliveries based on volumes required by customers. Marketing also includes the operations of Electric Clearinghouse, Inc. (ECI), a provider of electric power products and services in the United States. Liquids consists of subsidiaries engaged in the following businesses: natural gas gathering, processing and fractionation; NGL marketing; natural gas transmission; and crude oil marketing. The Liquids segment also includes the operations of NGC Global Energy, Inc. UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION This Annual Report contains various forward-looking statements and information that are based on management's beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, words such as "anticipate," "estimate," "project," and "expect" are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key factors that may have a direct bearing on NGC's results of operations and financial condition are: (i) competitive practices in the industries in which NGC competes, (ii) fluctuations in energy commodity prices, which have not been fully hedged or which are inconsistent with NGC's open position in its energy marketing activities, (iii) environmental liabilities to which NGC may become subject in the future which are not covered by indemnity or insurance, and (iv) the impact of current and future laws and governmental regulations (particularly environmental regulations) affecting the energy industry in general and NGC's operations in particular. IMPACT OF PRICE FLUCTUATIONS Marketing's operating margin, exclusive of risk-management activities, is relatively insensitive to commodity price fluctuations since most of this segment's purchase and sales contracts do not contain fixed-price provisions. Generally, the prices contained in these contracts are tied to a current spot or index price and, therefore, adjust directionally with changes in overall market conditions. Commodity price fluctuations can, however, have a significant impact on the operating margin 27 derived from the segment's risk-management activities. NGC generally attempts to balance its fixed-price physical and financial purchase and sales contracts in terms of contract volumes, and the timing of performance and delivery obligations. However, to the extent a net open position exists, NGC is exposed to the risk that fluctuating market prices may adversely impact its financial position or results of operations. The net open position is actively managed, and the impact of a change in price on the Company's financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year. At December 31, 1996, a $0.10 increase or decrease in the price of natural gas would have impacted net income by approximately $2.3 million either favorably or unfavorably. The impact of the $0.10 price movements referred to above is before application of market reserves, which would likely reduce the after-tax earnings impact of these price movements. Operating margins associated with the Liquids segment's natural gas gathering, processing and fractionation activities are sensitive to changes in NGL prices principally as a result of the contractual terms under which products are sold by these businesses. However, the Liquids segment's operating margin is relatively insensitive to fluctuations in natural gas prices as a result of the mitigating impact of fuel costs and residue gas sales. In order to manage its exposure to price risks in the marketing of NGL and crude oil, the Company, from time to time, will enter into financial instrument contracts to hedge purchase and sale commitments and/or inventories. SEASONALITY NGC's revenue and operating margin are subject to fluctuations during the year primarily due to the impact certain seasonal factors have on sales volumes and the prices of natural gas, NGL and crude oil. Marketing's sales volumes and operating margin are typically higher in the winter months than in the summer months, reflecting increased demand due to greater heating requirements and, typically, higher natural gas prices. The Liquids segment is also subject to seasonal factors; however, such factors typically have a greater impact on sales prices than on sales volumes. NGL prices typically increase during the winter season due to greater heating requirements. The Company's wholesale propane business typically experiences higher volumes and prices in the fall and winter months due to greater demand for crop-drying and space-heating requirements. EFFECT OF INFLATION Although NGC's operations are affected by general economic trends, management does not believe inflation has had a material effect on the Company's results of operations. RESULTS OF OPERATIONS [GRAPH APPEARS HERE] 28 The following discussion of NGC's financial position, results of operations and cash flows as of and for each of the years ended December 31, 1996, 1995 and 1994, respectively, is impacted by the strategic combinations previously discussed. Specifically, the comparability of results between periods is materially impacted as a result of both the Chevron and Trident Combinations (collectively Combinations). The Combinations were each accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed in each transaction based on their estimated fair values as of the effective dates of each merger. The results of operations and cash flows presented in the consolidated financial statements contained elsewhere herein include the results of the acquired operations as of the effective dates of each merger. The Chevron Combination was effective September 1, 1996, and the Trident Combination was effective March 1, 1995. The consolidated statements of operations and of cash flows for the year ended December 31, 1994, reflect the operating results and cash flows of Clearinghouse. Year Ended December 31, 1996, Compared with Year Ended December 31, 1995 Normalized net income for the year ended December 31, 1996, totaled $115.8 million, or $0.85 per share, reflecting a $67.7 million improvement over 1995's normalized results of $48.1 million, or $0.43 per share. Normalized results for 1996 are exclusive of a $2.5 million, $0.02 per share, charge associated with the Company's relocation to its new downtown headquarters while 1995's normalized results are exclusive of a $45.7 million, $0.40 per share, income tax benefit related to the Trident Combination and a $1.1 million, $0.01 per share, charge associated with tornado damage at a gas processing facility. The significant enhancement in normalized earnings is generally reflective of across-the-board improvement in all of NGC's businesses, as well as the incremental impact of the Combinations. NGC's reported net income for the year ended December 31, 1996, increased to $113.3 million, or $0.83 per share, compared with $92.7 million, or $0.82 per share, for the comparable 1995 period. Operating Margin Years Ended December 31, ------------------------ ($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Natural Gas and Power Marketing Segment $ 103.6 $ 63.8 $ 78.4 Natural Gas Liquids, Crude Oil and Gas Transmission Segment: Natural Gas Processing - Field Plants 122.8 48.9 12.1 Straddle Plants 42.2 26.9 1.4 Fractionation (1) 20.2 15.2 - NGL Marketing 48.4 21.7 3.0 Crude Oil Marketing 11.6 3.5 2.4 Natural Gas Transmission 18.1 11.9 1.8 Other 2.6 2.8 - ------- ------ ------ 265.9 130.9 20.7 ------- ------ ------ Total Operating Margin $ 369.5 $194.7 $ 99.1 ================================================================================ (1) Excludes earnings from Gulf Coast Fractionators accounted for by the equity method. Consolidated operating margin totaled $369.5 million for the year ended December 31, 1996, compared with $194.7 million during the comparable 1995 period. Marketing's operating margin increased $39.8 million to $103.6 million principally as a result of higher margins earned during the first quarter of 1996 as a result of the extreme cold weather during that period. Liquids' operating margin of $265.9 million in 1996 exceeded 1995's operating margin by $135.0 million principally as a result of improved commodity prices period to period, and increased volumes resulting principally from the incremental impact of the assets acquired in the Combinations. Consolidated operating income totaled $197.8 million in 1996, compared with $81.7 million for the equivalent 1995 period, reflecting an increase of $116.1 million. The aforementioned increase in consolidated operating margin of $174.8 million was partially offset by increases in both depreciation and amortization, and general and administrative expenses. Depreciation and amortization expense increased $26.8 million period to period, reflecting the incremental asset inv estment by the Company occurring principally as a result of the 29 Combinations. The $32.0 million increase in general and administrative expenses period to period is reflective of the expansion of the Company's operations principally as a result of the Combinations. The Company's equity in the earnings of its unconsolidated affiliates totaled $28.1 million for the year ended December 31, 1996, compared with $21.1 million reported in 1995. The $7.0 million increase in equity earnings reflects increased earnings accruing to the Company's interest in Gulf Coast Fractionators (GCF) period to period, combined with incremental equity earnings arising from the Company's 1996 investments in the West Texas LPG Pipeline Partnership and the Venice Gas Processing Company, respectively, two partnership affiliations between NGC and Chevron. NCL and Accord contributed an aggregate $20.7 million to pre-tax earnings in 1996, as compared with $19.2 million in the comparable 1995 period. Aggregate sales volumes for NCL and Accord averaged 3.7 Bcf/d for the year ended December 31, 1996, compared with 2.6 Bcf/d during 1995. Interest expense increased to $46.2 million in 1996, as compared with $32.4 million in the comparable 1995 period. The increase is reflective of higher outstanding debt balances period to period, resulting primarily from debt assumed in conjunction with the Combinations, and long-term borrowings for capital expenditures and investments in unconsolidated affiliates. Other income and expenses, net, of $10.0 million reported for the year ended December 31, 1996, includes a $4.0 million charge associated with the Company's relocation to its new downtown headquarters, $0.7 million in minority interests in certain majority-owned subsidiaries and other miscellaneous nonrecurring costs and expenses. Other income and expenses, net, of $5.1 million reported for the year ended December 31, 1995, includes a $1.8 million pre-tax charge for tornado damage at a gas processing plant, $2.4 million in minority interests in certain majority-owned subsidiaries and other miscellaneous nonrecurring costs and expenses. The Company reported an income tax provision of $56.3 million on pre-tax earnings of $169.6 million, resulting in an effective income tax rate for the year ended December 31, 1996, of approximately 33 percent. Differences between a statutory rate of 35 percent and the 1996 effective rate are primarily attributed to permanent differences associated with certain foreign equity investments and state income taxes. For the year ended December 31, 1995, the Company reported an income tax benefit of $27.5 million on pre-tax income of $65.2 million. During the first quarter of 1995, the Company recognized a $45.7 million income tax benefit in connection with the Trident Combination. The income tax benefit, which can be used to reduce NGC's future income tax liabilities, was a result of the recognition of the excess tax basis held by certain Clearinghouse partners. After giving effect to the one-time benefit, the 1995 income tax provision totaled $18.2 million, resulting in an effective rate of 28 percent. The difference between the effective rate and the statutory rate is primarily attributed to precombination earnings of Clearinghouse that were predominantly taxed as partnership income, permanent differences associated with certain foreign equity investments and state income taxes. Natural Gas and Power Marketing Segment Years Ended December 31, --------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Natural Gas Marketing Average sales volume (Bcf/d): U.S.(1) 4.3 3.5 3.5 Canada(2) 3.1 2.3 0.5 U.K.(3) 0.6 0.3 - ------- ------ ------ 8.0 6.1 4.0 ======= ====== ====== Power Marketing Million megawatt hours sold 14.9 3.5 ================================================================================ (1) Includes 0.1 Bcf/d in intercompany gas sales for the years ended December 31, 1996 and 1995, respectively. (2) Represents volumes marketed through NGC's Canadian affiliate, NCL. (3) Represents volumes marketed through NGC's U.K. affiliate, Accord. Marketing reported an operating margin of $103.6 million for the year ended December 31, 1996, compared with $63.8 million for the comparable 1995 period. Domestic natural gas marketing volumes increased to 4.3 Bcf/d during 1996, an increase of 0.8 Bcf/d over the gas marketing volumes sold in 1995. Further, domestic gas marketing volumes sold during 30 the fourth quarter of 1996 totaled 6.1 Bcf/d, a 2.4 Bcf/d increase over the comparable 1995 period, reflecting incremental market share attained principally as a result of the Chevron Combination. In addition to the increase in marketed volumes period to period, improvement in both physical and risk-management margins in 1996, as compared with 1995, enhanced overall segment operating results. The improved physical and risk-management margins period to period principally reflect a combination of high margins realized during the first quarter of 1996 as a result of extremely cold weather which geographically reduced available gas supplies. In addition, lower margins were realized during the first half of 1995 as a result of lower demand and increased competition, which more than offset the strong margins realized by the segment in the fourth quarter of 1995. Included in 1995's operating margin is $6.8 million related to a service agreement between NGC Futures, Inc. (NGCF), a wholly owned subsidiary of NGC and NCL, whereby NGCF provided NCL and its affiliates with natural gas marketing and risk-management services. As a result of this service agreement, NGC and its subsidiaries shared disproportionately in NCL's economic returns resulting from the services provided. There were no amounts reflected in Marketing's margin in 1996 relating to this agreement. ECI improved its sales volumes dramatically during 1996, selling 14.9 million megawatt hours during the period, compared with 3.5 million megawatt hours sold in 1995. ECI also improved its per unit margins period to period principally as a result of an improved operating environment resulting from the continued deregulation of the electric power industry. Natural Gas Liquids, Crude Oil and Gas Transmission Segment Years Ended December 31, ---------------------------- (Mbpd) 1996 1995 1994 - -------------------------------------------------------------------------------- Natural Gas Processing (Gross Volumes) Field Plants 57.4 38.7 10.9 Straddle Plants 36.9 34.1 5.5 ------ ------ ------ Total 94.3 72.8 16.4 ====== ====== ====== Fractionation(1) 169.1 95.0 - NGL Marketing 245.0 120.6 23.7 Crude Oil Marketing 106.0 60.9 47.4 ================================================================================ (1) Excludes volumes from Gulf Coast Fractionators. Reported operating margin for the Liquids segment of $265.9 million for the year ended December 31, 1996, compares with $130.9 million for the equivalent 1995 period, reflecting an increase of $135.0 million. The two-fold growth in the segment's results is reflective of improvement in all business lines, and is particularly reflective of improved gas processing margins, growth in the NGL and crude oil marketing businesses, and the substantial volume increase effect and synergies realized as a result of the Combinations. Gas processing's operating margin improved in excess of 117 percent period to period, reflecting a combination of an overall improvement in 1996 of the commodity price environment combined with a 30 percent increase in volumes processed per day during the year. Fourth quarter 1996 volumes processed per day of 140.9 thousand barrels increased 87 percent over the comparable 1995 period's production principally reflecting the impact of the Chevron Combination. Eighty-two percent of the NGL volumes processed at the Company's field plants during 1996 were processed under percentage-of-proceeds contracts whereby NGC and the producer share in the proceeds from the sale of NGL extracted from the gas stream and the residue gas. The balance was processed under keep-whole contracts. Eighty-seven percent of the NGL volumes processed during 1996 at the Company's straddle plant were processed under keep-whole contracts, where NGC compensates the natural gas supplier for the energy content removed from the gas stream, and the balance was processed under percentage-of-proceeds contracts. Due to the integrated nature of NGC's operations, from time to time the Company may reduce volumes processed at its straddle plants in order to make additional sales of natural gas. In addition, the Company maintains an active hedging program intended to protect the Company from commodity-price risk. The segment's fractionation operations improved its operating margin by 33 percent principally as a result of the acquisition of a fractionator as part of the Chevron Combination. As discussed previously, on January 1, 1997, 31 the Company divested itself of the Mont Belvieu I fractionator as part of the agreement reached with the FTC. Volumes sold by the segment's NGL marketing operations increased 103 percent in 1996, as compared to volumes sold in 1995. During the fourth quarter of 1996, the Company sold approximately 432 Mbpd of NGL, a 184 percent increase over the comparable 1995 period, reflecting the incremental impact of the Chevron Combination. In addition to the significant volume increases discussed previously, commodity prices were also a factor in achieving the more than 120 percent improvement in NGL marketing's operating margin. Crude oil marketing's operating margin improved 231 percent period to period, reflecting a 74 percent increase in volumes sold, as well as a significant improvement in per unit sales margins. Natural gas gathering and transmission improved its operating margin by 52 percent in 1996, as compared with 1995, principally as a result of the inclusion of a full year's operations of the Ozark Gas Transmission System, which was acquired at mid-year 1995, improved operations on other pipelines period to period and the addition of pipeline facilities acquired in 1996. YEAR ENDED DECEMBER 31, 1995, COMPARED WITH YEAR ENDED DECEMBER 31, 1994 NGC's net income for the year ended December 31, 1995, increased to $92.7 million, or $0.82 per share, compared with $42.1 million for Clearinghouse in the comparable 1994 period. Net income for the 1995 period includes a nonrecurring income tax benefit of $45.7 million, or $0.40 per share, related to the Trident Combination and an after-tax charge of $1.1 million, or $0.01 per share, related to tornado damage at a gas processing plant. Income before income taxes totaled $65.2 million for the year ended December 31, 1995, a $21.1 million increase over the comparable 1994 period. Operating margin was $194.7 million in 1995, compared with $99.1 million in 1994, an increase of $95.6 million. The increase reflects improvement in the Liquids operating margin of $110.2 million, offset by a $14.6 million decline in Marketing's operating margin. Operating income was $81.7 million in 1995, compared with $42.9 million for the equivalent 1994 period, an increase of $38.8 million. Increases in both operating margin and operating income are generally attributable to the Trident Combination. The Company's equity in the earnings of its unconsolidated affiliates totaled $21.1 million for the year ended December 31, 1995, more than five times the earnings recognized in the comparable 1994 period. NCL and Accord, which both began significant operations during the latter half of 1994, contributed an aggregate $19.2 million to pre-tax earnings in 1995, as compared with $3.2 million in 1994. Aggregate sales volumes for NCL and Accord, which averaged 2.6 Bcf/d for the year and 3.6 Bcf/d for the quarter ended December 31, 1995, respectively, reflect NGC's growing international market share. The remaining $1.9 million of equity earnings for the year ended December 31, 1995, was primarily attributable to the Company's 38.75 percent ownership interest in GCF. Interest expense increased to $32.4 million in 1995, as compared with $2.4 million in the comparable 1994 period. The increase is reflective of higher outstanding debt balances resulting primarily from debt assumed in conjunction with the Trident Combination and long-term borrowings for capital expenditures and investments in unconsolidated affiliates made during 1995. Other income and expenses, net, of $5.1 million reported for the year ended December 31, 1995, includes a $1.8 million pre-tax charge for tornado damage at a gas processing plant, $2.4 million in minority interests in certain majority-owned subsidiaries and other miscellaneous nonrecurring costs and expenses. Amounts reported in the comparable 1994 period were immaterial. The Company reported an income tax benefit of $27.5 million on pre-tax income of $65.2 million for the year ended December 31, 1995, which compares with an income tax provision of $2.0 million on pre-tax income of $44.1 million for the comparable 1994 period. Reported results for 1994 do not include a provision for federal income tax, other than minimal amounts on taxable income of Clearinghouse's corporate subsidiaries, as the majority of Clearinghouse's earnings for the period were taxed as partnership income. During the first quarter of 1995, the Company recognized a $45.7 million income tax benefit in connection with the Trident Combination. The income tax benefit that can be used to reduce NGC's future income tax liabilities was a result of the recognition of the excess tax basis held by certain Clearinghouse partners. After giving effect to the one-time benefit, the 1995 income tax provision totaled $18.2 million, an effective rate of 28 percent. The difference between the effective rate and the statutory rate is primarily attributed to precombination earnings of Clearinghouse that were predominantly taxed as partnership income, permanent differences associated with certain foreign equity investments and state income taxes. 32 NATURAL GAS AND POWER MARKETING Marketing reported an operating margin of $63.8 million for the year ended December 31, 1995, compared with $78.4 million for the comparable 1994 period. Although domestic natural gas marketing volumes were essentially constant between the two periods, gas marketing margins were lower in 1995, as compared with 1994, principally due to strong risk-management margins and exceptionally strong physical gas marketing margins achieved in the first quarter of 1994 as a result of strong demand created by significantly colder weather in that period. Also, physical gas marketing margins were lower during the first half of 1995, resulting from decreased demand due to moderate temperatures and increased competition. Marketing's strong fourth quarter 1995 operating margin of $27.4 million, which was $9.7 million higher than the comparable 1994 period, was not enough to offset the lower operating margin realized in the first half of 1995. Included in 1995's operating margin is $6.8 million related to a service agreement between NGCF and NCL, whereby NGCF provided NCL and its affiliates with natural gas marketing and risk-management services. NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION Liquids reported an operating margin of $130.9 million for the year ended December 31, 1995, compared with $20.7 million for the equivalent 1994 period. Financial results for 1995 were positively impacted by the Trident Combination and the synergies realized from that acquisition, the acquisition and efficient operation of the Ozark Gas Transmission System and improved liquids processing margins. Natural gas processing volumes and NGL marketing sales volumes increased substantially in 1995, compared with 1994, principally as a result of the Trident Combination. The Company also acquired all of its fractionation capacity in the Trident Combination. FIRST QUARTER 1997 EXPECTED RESULTS NGC anticipates that first quarter 1997 results will be substantially below the $0.26 per share reported in the first quarter of 1996. The lower earnings expectation results principally from the precipitous drop in natural gas liquids prices during the quarter that significantly decreased operating margins in the Company's natural gas liquids marketing and gas processing businesses. Further, the Company expects to record a lower-of-cost-or-market write-down of its natural gas liquids inventory at March 31, 1997, also as a result of the drop in natural gas liquids prices during the period. PRO FORMA FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 The pro forma information provided on the next page gives effect to the Trident Combination as if it had occurred on January 1, 1994, and, accordingly, combines the activities of both Clearinghouse and Trident for each period. These pro forma results do not give effect to any cost savings expected as a result of the Trident Combination. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of what the actual results of operations would have been had the Trident Combination occurred at the beginning of the periods presented, nor does it purport to indicate the future results of the Company. 33 Natural Gas and Power Marketing Segment Years Ended December 31, ------------------------------ 1995 1994 - -------------------------------------------------------------------------------- Natural Gas Marketing Average sales volume (Bcf/d): U.S.(1) 3.5 3.5 Canada(2) 2.3 0.5 U.K.(3) 0.3 - ------ ------ Total 6.1 4.0 ------ ------ Power Marketing Million megawatt hours sold 3.5 - ================================================================================ (1) Includes 0.1 Bcf/d in intercompany gas sales for the year ended December 31, 1995. (2) Represents volumes marketed through NGC's Canadian affiliate, NCL. (3) Represents volumes marketed through NGC's U.K. affiliate, Accord. Natural Gas Liquids, Crude Oil and Gas Transmission Segment Years Ended December 31, ------------------------------ (Mbpd) 1995 1994 - -------------------------------------------------------------------------------- Natural Gas Processing (Gross Volumes) Field Plants 44.0 45.7 Straddle Plants 40.0 36.2 Fractionation (1) 134.5 135.1 NGL Marketing 136.1 119.3 Crude Oil Marketing 60.9 47.4 ================================================================================ (1) Excludes volumes from Gulf Coast Fractionators. Operating Margin Years Ended December 31, ------------------------------ 1995 1994 - -------------------------------------------------------------------------------- Natural Gas and Power Marketing $ 63.8 $ 78.4 Natural Gas Liquids, Crude Oil and Gas Transmission: Natural Gas Processing Field Plants 55.3 57.4 Straddle Plants 30.9 16.5 Fractionation (1) 17.0 19.5 NGL Marketing 24.0 18.6 Crude Oil Marketing 3.5 2.4 Natural Gas Transmission 12.5 4.3 Other 1.4 (9.7) ------ ------ 144.6 109.0 ------ ------ Total Operating Margin $208.4 $187.4 ================================================================================ (1) Excludes earnings from Gulf Coast Fractionators accounted for by the equity method. 34 On a pro forma basis, net income for the year ended December 31, 1995, was $46.1 million, or $0.39 per share, compared with $25.1 million, or $0.21 per share, for the same period in 1994. Pro forma 1995 net income excludes the nonrecurring income tax benefit of $45.7 million. Pro forma operating margin increased $21.0 million to $208.4 million, compared with $187.4 million in the equivalent 1994 period. The increase in pro forma operating margin reflects a higher Liquids operating margin as a result of increased volumes in natural gas processing, and NGL and crude oil marketing, and improved Liquids' margins in 1995, as compared with 1994. The improved Liquids operating margin was offset by a lower Marketing operating margin due principally to lower physical gas marketing margins in 1995, as compared with 1994, generally as a result of the same factors that affected the actual results for the years ended December 31, 1995 and 1994, discussed previously. LIQUIDITY AND CAPITAL RESOURCES NGC has historically relied upon operating cash flow and borrowings under its credit facilities for its liquidity and capital resource requirements. Operating Cash Flow Cash flow from operating activities (before working capital changes) of $202.0 million in 1996 showed significant improvement over 1995 and 1994 amounts, respectively, increasing 107 percent over the $97.5 million reflected in 1995, and 373 percent over the $42.7 million reflected in 1994. The positive trend is reflective of the significant growth in consolidated earnings during the three-year period ended December 31, 1996, which resulted from the impact of the Combinations, the synergies realized therefrom and the general growth of the Company's core businesses. Net cash flow from operating activities, as reported in the Consolidated Statements of Cash Flows, reflected a net use of cash in 1996 of approximately $31.0 million, compared with sources of cash of $90.6 million and $17.2 million during the years ended December 31, 1995 and 1994, respectively. The net use of cash from operations in 1996 is attributed to working capital changes. The approximate $116 million consolidated inventory investment made during 1996 partially reflects the increased inventory volume requirements needed to operate the Liquids segment's businesses which have grown significantly period to period principally as a result of the Chevron Combination, and partially reflect the rising commodity market price environment during which the Company invested in such inventory. Investments in natural gas, NGL and crude oil inventories during the fourth quarter of 1996 were principally made in order to meet anticipated market demands during the first quarter of 1997. In addition, the Company's 1996 cash flow from operating activities was impacted by the timing of cash receipts and disbursements primarily associated with its marketing sales activities. The net cash outflow during the fourth quarter of 1996, attributed to the relationship of accounts receivable to accounts payable, has substantially reversed itself during the first quarter of 1997. Management does not anticipate that the timing of cash inflows and outflows will have a recurring negative impact on operating cash flow. The Company funded the consolidated 1996 short-term working capital investment through funds borrowed under the NGC Corporation Credit Agreement (Credit Agreement). The increase in cash flows from operations in 1995, as compared with 1994, was largely a result of the positive financial effect of the Trident Combination. Capitalization and Liquidity CHEVRON COMBINATION. On August 31, 1996, NGC completed the Chevron Combination pursuant to which Chevron contributed substantially all of its midstream assets (Contribution), including substantially all of the assets comprising Warren Petroleum Company and Chevron's Natural Gas Business Unit, and an undivided interest in those assets that constitute the West Texas LPG Pipeline, into Midstream Combination Corp. (Midstream), a Delaware corporation formed for purposes of the transaction. NGC, which was formed effective March 1, 1995, pursuant to the Trident Combination, was merged with and into Midstream immediately following the Contribution, and Midstream was renamed NGC Corporation. In exchange for the Contribution, Chevron received approximately 38.6 million shares of NGC common stock and approximately 7.8 million shares of NGC's Series A Participating Preferred Stock, and NGC assumed approximately $283 million 35 of indebtedness. Immediately following closing of the Chevron Combination, NGC paid approximately $128 million to Chevron and funded such payment under the Credit Agreement. NGC CORPORATION CREDIT AGREEMENT. On March 14, 1995, the Company entered into the Credit Agreement, which established a five-year $550 million revolving credit facility. The Credit Agreement provides for letters of credit and borrowings for working capital, capital expenditures and general corporate purposes of up to $550 million in the aggregate. The $550 million commitment under the Credit Agreement reduces by $22.5 million each quarter beginning in March 1998 and continuing through maturity. Certain amendments were made to the Credit Agreement to accommodate the Chevron Combination. At December 31, 1996, the Company had $136.2 million of capacity remaining under the Credit Agreement. LETTER OF CREDIT AGREEMENT. On September 1, 1996, the Company entered into a new credit agreement (Letter of Credit Agreement), which established a 364-day, $300 million letter of credit facility. The Letter of Credit Agreement provides for the issuance of letters of credit in support of the Company's obligation to purchase substantially all of the natural gas produced or controlled by Chevron in the United States (except Alaska). The Company incurs a fee, which is determined based on the Company's unsecured senior debt rating, on all issued and outstanding letters of credit under the Letter of Credit Agreement. SENIOR NOTES. In October 1996, NGC sold $175 million of 7.625% 30-year Senior Debentures (Senior Debentures). The Senior Debentures were issued at a price of 99.522 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $173 million. The net proceeds from the sale of such Senior Debentures were also used to repay a portion of the outstanding indebtedness under the Credit Agreement. Interest on the Notes is payable semiannually on April 15 and October 15 of each year, commencing April 15, 1997. The Senior Debentures are redeemable, at the option of the Company, in whole or in part from time to time, at a formula based redemption price as defined in the associated indenture. On December 15, 1995, the Company sold $150 million of 6.75% Senior Notes due December 15, 2005 (Notes). The Notes were issued at a price of 99.984 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $149 million. Proceeds from the sale of the Notes were used to repay a portion of the outstanding indebtedness under the Credit Agreement. Interest on the Notes is payable semiannually on June 15 and December 15 of each year, beginning June 15, 1996. At December 31, 1996, the Company had $175 million of available debt securities remaining under its $350 million shelf registration. The Notes and Senior Debentures represent general unsecured obligations of the Company, and are fully and unconditionally guaranteed, on a joint and several basis, by certain of the Company's wholly owned subsidiaries (collectively the Guarantors), as defined in the associated indentures. The wholly owned subsidiaries, which have fully and unconditionally guaranteed, on a joint and several basis, the Notes, are predominantly the same wholly owned subsidiaries which have fully and unconditionally guaranteed, on a joint and several basis, the Senior Debentures. Separate financial statements of each of the Guarantors have not been provided because management has determined that such information would not be material to investors as the aggregate assets, liabilities, earnings and equity of the Guarantors are substantially equivalent to the Company's consolidated assets, liabilities, earnings and equity. The Company also has certain direct and indirect subsidiaries that are not guarantors of the Notes or the Senior Debentures (collectively Non-guarantor Subsidiaries). These Non-guarantor Subsidiaries, both individually and in the aggregate, are inconsequential to NGC (and its accounting predecessor, Clearinghouse) as of and for each of the three years in the period ended December 31, 1996. CHEVRON NOTE. As part of the Chevron Combination, NGC assumed approximately $155 million payable to Chevron upon demand on or after August 31, 1998 (the Chevron Note). NGC has the right, at any time on or after August 31, 1998, to prepay in whole or in part the principal and accrued interest under the Chevron Note. The Chevron Note bears interest at 7.95 percent per annum, payable semiannually in arrears each February and August. Should Chevron choose not to demand payment of the Chevron Note, then principal plus accrued interest is payable in full on August 14, 2004. There are no financial covenants associated with the Chevron Note. An unamortized premium balance of $3.9 million 36 associated with the Chevron Note is being amortized using the interest method, resulting in an effective interest rate of 6.54 percent per annum. WARREN NGL, INC. (WARREN, FORMERLY TRIDENT NGL, INC.) NOTES. At December 31, 1996, Warren had outstanding $105 million principal amount of 10.25% Subordinated Notes due 2003 (interest payable semiannually in arrears each April and October) and $65 million principal amount of 14% Senior Subordinated Notes due 2001 (interest payable semi-annually in arrears each February and August). Beginning in 1998, corresponding with the first call dates, the Company may repurchase the Subordinated Notes and Senior Subordinated Notes at 104.5 percent and 107 percent of the principal amount, respectively, with such reacquisition prices reducing as the notes mature. The indentures covering the Subordinated Notes and Senior Subordinated Notes contain covenants that, among other things, require Warren to meet certain financial tests; limit the amount of capital expenditures, dividends and asset sales that can be made by Warren; and restrict the ability of Warren and its subsidiaries to incur additional indebtedness, create or permit liens and engage in certain transactions. Although Warren's net assets at December 31, 1996, approximated $386 million, management does not believe that the terms of the indentures materially restrict the ability of Warren to transfer funds to the Company given that Warren is one of the Guarantors combined with the level of advances made by NGC to Warren. The unamortized premium balance associated with each of the Subordinated Notes and Senior Subordinated Notes represents a fair value adjustment to the aggregate principal balance of the notes recognized as part of the Trident Combination. The unamortized premium balance of $14.8 million at December 31, 1996, is being amortized using the interest method, and results in effective interest rates of 9.02 percent and 9.6 percent on the Subordinated Notes and Senior Subordinated Notes, respectively. Capital Expenditures, Commitments and Dividend Requirements The Company's business strategy has been to grow horizontally across all sectors of the midstream energy business segment through strategic acquisitions or construction of core operating facilities in order to capture the significant synergies, which management believes exist among these types of assets and NGC's natural gas, NGL and electric power marketing businesses. For 1997, the Company has budgeted to spend approximately $650 million in connection with these and other capital projects. Included in the 1997 capital budget are projects in the Company's liquids business totaling $250 million, including maintenance capital, plant consolidations, amounts committed to the Venice Gas Processing Company (Venice), and amounts required to construct a new fractionation facility. The remaining 1997 capital budget was intended to take advantage of strategic energy acquisitions and construction opportunities that complement the Company's businesses. As a result of the estimated $400 million committed to the Destec acquisition, the Company will likely revise its capital expenditure budget as other opportunities arise. During 1996, the Company spent a net $111 million in acquisition, capital projects and asset maintenance activities. These funds were expended principally for maintenance of existing assets, the acquisition of processing plants, gathering lines, pipelines and on other capital projects. In addition, during 1996, the Company completed the acquisitions of LPG Services Group, Inc., a propane gas marketing and distribution company, and Wilmar Energy Marketing, a Calgary-based crude oil marketer. Investments in unconsolidated affiliates included contributions of $18.6 million to the Venice Gas Processing Company. During 1995, the Company spent approximately $310 million in acquisition and asset maintenance activities. The most significant component of cash used in investing activities during the 1995 period related to the acquisition cost and related expenses associated with the Trident Combination. Approximately $166.9 million, exclusive of transaction related costs, was required to consummate the tender offer related to the Trident Combination. These funds were provided by British Gas, NOVA and Clearinghouse. Specifically, British Gas and NOVA each contributed $67.5 million to their respective subsidiaries that participated in the Trident Combination, and Clearinghouse provided $31.9 million to fund the balance. Clearinghouse funded the $31.9 million and certain other costs associated with the Combination through a combination of cash on hand and $25.0 million in borrowings under its then existing credit agreement. In addition to the Trident Combination, the Company expended an additional $145 million for the acquisition of other assets, the most significant of which were the Ozark Gas Transmission System, the Kerr-McGee pipeline and Pan-Alberta Gas, through a contribution 37 to NCL, as well as capital improvements at existing facilities and investments in other unconsolidated affiliates. During 1994, the Company spent $38.4 million on investing activities. Such capital expenditures were used to maintain existing assets and to acquire additional midstream natural gas assets, namely gas processing plants and gathering systems. A subsidiary of NGC is committed to contribute approximately $62 million to Venice during 1997. A subsidiary of NGC is committed to expend its respective share of the construction costs related to the Avoca Natural Gas Storage construction project. Current cost estimates commit the Company to approximately $10 million of expenditures. NGC and NGC Holding Company, Inc. have guaranteed the commitment by the subsidiary. A subsidiary of the Company is committed to contribute approximately $10 million to Indeck, which is engaged in the acquisition of electric power generating facilities. The contribution represents the Company's pro rata share of funds to be used for selected acquisitions. At December 31, 1996, the Company had paid $3.9 million of this commitment. A subsidiary of NGC has guaranteed its pro rata share of the unfunded debt service reserve account of GCF. The obligation under the guarantee at December 31, 1996, assuming the subsidiary had to fund such obligation as of that date, approximated $2.5 million. NGC currently declares an annual dividend of $0.05 per common and preferred share payable in quarterly installments. During 1996 and 1995, NGC paid a net $6.7 million and $9.3 million, respectively, in dividends and distributions, principally to the holders of record of the Company's outstanding shares of common stock and to the Clearinghouse partners. Prior to the Trident Combination, Clearinghouse made distributions primarily to enable Clearinghouse's partners to pay tax liabilities incurred as a result of Clearinghouse generated income which was taken into account by the Clearinghouse partners in computing their personal income tax liabilities. Amounts distributed in 1994 under this arrangement totaled $14.0 million. Environmental Matters NGC's operations are subject to extensive federal, state and local statutes, rules and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Compliance with these statutes, rules and regulations requires capital and operating expenditures, including those related to monitoring and permitting at various operating facilities, and the cost of remediation obligations. The Company's environmental expenditures have not been prohibitive in the past, but are anticipated to increase in the future with the trend toward stricter standards, greater regulation, more extensive permitting requirements, and an increase in the number of assets operated by the Company subject to environmental regulation. To the Company's knowledge, it is in substantial compliance with, and is expected to continue to comply in all material respects with, applicable environmental laws, regulations, orders and rules. Further, to the best of the Company's knowledge, there are no existing, pending or threatened actions, suits, investigations, inquiries, proceedings or clean-up obligations by any governmental authority or third party relating to any violations of any environmental laws with respect to the Company's assets that would have a material adverse effect on the Company's operations and financial condition. NGC's aggregate expenditures for compliance with laws and regulations related to the discharge of materials into the environment or otherwise related to the protection of the environment totaled $3.7 million in 1996. Total environmental expenditures for both capital and operating maintenance and administrative costs are not expected to exceed $15.6 million in 1997. The increase in environmental expenditures period to period results principally from the Company's increased investment in processing, fractionation, storage and transportation assets. Summary The Company believes that cash flows from operating activities, combined with the liquidity and flexibility provided by available funds under its existing credit facilities and additional facilities from its groups of commercial banks and the issuance of debt and/or capital stock securities, will allow it to meet all foreseeable cash requirements, including working capital, capital expenditures, debt service, dividends and costs associated with the Destec acquisition. 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of NGC Corporation: We have audited the accompanying consolidated balance sheets of NGC 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 the years ended December 31, 1996, 1995 and 1994. These 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 financial statements referred to above present fairly, in all material respects, the financial position of NGC Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 14, 1997 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The consolidated financial statements have been prepared by management in conformity with generally accepted accounting principles. Management is responsible for the fairness and reliability of the financial statements and other financial data included in this report. In the preparation of the financial statements, it is necessary to make informed estimates and judgments of the effects of certain events and transactions based on currently available information. NGC maintains accounting and other controls that management believes provide reasonable assurance that financial records are reliable, assets are safeguarded, and that transactions are properly recorded in accordance with management's authorizations. However, limitations exist in any system of internal control based upon the recognition that the cost of the system should not exceed the benefits derived. NGC's independent public accountants, Arthur Andersen LLP, are engaged to audit the financial statements and to express an opinion thereon. Their audit is conducted in accordance with generally accepted auditing standards to enable them to report that the financial statements present fairly, in all material respects, the financial position and results of operations of the Company in conformity with generally accepted accounting principles. The Audit Committee of the Board of Directors, composed of two directors who are not employees of NGC, meet regularly with the independent public accountants and management. The independent public accountants have full and free access to the Audit Committee and meet with them, with and without management being present, to discuss the results of their audit and the quality of financial reporting. 39 CONSOLIDATED BALANCE SHEETS December 31, ----------------------- ($ in thousands, except share data) 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents (Note 1) $ 50,209 $ 16,266 Accounts receivable, net (Note 1) 1,373,560 560,574 Accounts receivable, affiliates 144,825 3,328 Inventories (Note 1) 257,005 74,263 Assets from risk-management activities (Notes 1 and 3) 98,433 88,093 Prepayments and other assets 12,689 20,415 - -------------------------------------------------------------------------------- 1,936,721 762,939 - -------------------------------------------------------------------------------- Property, Plant and Equipment (Note 5) 1,819,811 1,013,354 Less: accumulated depreciation (128,432) (64,843) - -------------------------------------------------------------------------------- 1,691,379 948,511 - -------------------------------------------------------------------------------- Other Assets Investments in unconsolidated affiliates (Note 6) 181,688 62,370 Assets from risk-management activities (Notes 1 and 3) 171,528 26,380 Other assets 205,494 75,052 - -------------------------------------------------------------------------------- 558,710 163,802 - -------------------------------------------------------------------------------- $4,186,810 $1,875,252 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $1,305,726 $ 542,228 Accounts payable, affiliates 39,070 23,427 Accrued liabilities 117,777 58,736 Liabilities from risk-management activities (Notes 1 and 3) 86,414 81,283 - -------------------------------------------------------------------------------- 1,548,987 705,674 - -------------------------------------------------------------------------------- Long-Term Debt (Note 7) 988,597 522,764 - -------------------------------------------------------------------------------- Other Liabilities Liabilities from risk-management activities (Notes 1 and 3) 127,725 22,570 Deferred income taxes (Note 8) 328,280 43,227 Other long-term liabilities 76,488 28,637 - -------------------------------------------------------------------------------- 532,493 94,434 - -------------------------------------------------------------------------------- Commitments and Contingencies (Note 9) Stockholders' Equity (Note 10) Preferred stock, $.01 par value, 50,000,000 shares authorized: 8,000,000 shares designated as Series A Participating Preferred Stock, 7,815,363 shares issued and outstanding at December 31, 1996 75,418 - Common stock, $.01 par value, 400,000,000 shares authorized: 149,846,503 shares issued and outstanding at December 31, 1996, and 110,493,411 shares issued and 105,031,874 shares outstanding at December 31, 1995 1,498 1,105 Additional paid-in capital 896,432 515,785 Retained earnings 143,385 35,490 - -------------------------------------------------------------------------------- 1,116,733 552,380 - -------------------------------------------------------------------------------- $4,186,810 $1,875,252 ================================================================================ See notes to consolidated financial statements. 40 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, ------------------------------- (In thousands, except per share data) 1996 1995 1994 - -------------------------------------------------------------------------------- Revenues (Note 1) $7,260,202 $3,665,946 $3,237,843 Cost of sales 6,890,702 3,471,286 3,138,717 - -------------------------------------------------------------------------------- Operating margin 369,500 194,660 99,126 Depreciation and amortization (Note 1) 71,676 44,913 8,378 General and administrative expenses 100,032 68,057 47,817 - -------------------------------------------------------------------------------- Operating income 197,792 81,690 42,931 Equity in earnings of unconsolidated affiliates (Note 6) 28,075 21,060 3,803 Interest expense (46,202) (32,391) (2,381) Other income and (deductions), net (10,020) (5,125) (248) - -------------------------------------------------------------------------------- Income before income taxes 169,645 65,234 44,105 Income tax provision (benefit) (Note 8) 56,323 (27,471) 2,004 - -------------------------------------------------------------------------------- NET INCOME $ 113,322 $ 92,705 $ 42,101 ================================================================================ Net Income Per Share (Note 1) Pro Forma Pro Forma ----------- ----------- Income before income taxes $ 169,645 $ 65,234 $ 44,105 Provision for income taxes 56,323 20,438 16,319 - -------------------------------------------------------------------------------- Net income 113,322 44,796 27,786 Less: preferred stock dividends 132 - - - -------------------------------------------------------------------------------- Net income applicable to common stockholders $ 113,190 $ 44,796 $ 27,786 ================================================================================ Net income per common and common equivalent share $ 0.83 $ 0.40 $ 0.28 ================================================================================ Weighted average number of common and common equivalent shares 136,099 113,176 97,804 ================================================================================ See notes to consolidated financial statements. 41 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, -------------------------------- ($ in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 113,322 $ 92,705 $ 42,101 Items not affecting cash flows from operating activities: Depreciation and amortization 73,176 44,913 8,378 Equity in earnings of affiliates, net of cash distributions (21,729) (9,169) (3,803) Risk-management activities (Notes 1 and 3) (11,220) (2,951) (6,529) Deferred income taxes (Note 8) 45,896 (28,281) 1,014 Amortization of bond premium (4,892) (3,214) - Other 7,466 3,484 1,528 Change in assets and liabilities resulting from operating activities: Accounts receivable (Note 1) (954,418) (152,557) 28,440 Inventories (Note 1) (116,353) (23,403) (20,693) Prepayments and other assets 7,726 (16,518) 5,660 Accounts payable 778,767 185,215 (37,831) Accrued liabilities 47,148 11,611 (154) Other, net 4,157 (11,187) (941) - -------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (30,954) 90,648 17,170 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (97,651) (128,871) (36,452) Business acquisitions, net of cash acquired (Notes 2 and 4) (714) (165,267) - Investment in unconsolidated affiliates (Note 6) (30,875) (15,457) (10,562) Investment in marketable securities, net - - 8,100 Proceeds from asset sales 3,600 - - Other 14,500 (1,028) 538 - -------------------------------------------------------------------------------- Net cash used in investing activities (111,140) (310,623) (38,376) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings (Note 7) 1,542,000 1,237,589 33,000 Repayments of long-term borrowings (Note 7) (1,360,081) (1,143,039) - Proceeds from sale of capital stock, options and warrants 858 725 - Capital contributions - 135,000 - Dividends and other distributions, net (6,740) (9,253) (14,041) - -------------------------------------------------------------------------------- Net cash provided by financing activities 176,037 221,022 18,959 - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 33,943 1,047 (2,247) Cash and cash equivalents, beginning of year 16,266 15,219 17,466 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 50,209 $ 16,266 $ 15,219 ================================================================================ See notes to consolidated financial statements. 42 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------- Clearinghouse NGC Corporation -------------------------------- ----------------------------------------------------- Series A Preferred Common Stock Additional Contributed Undistributed ------------------ ------------------ Paid-In Retained (In thousands) Capital Earnings Shares Amount Shares Amount Capital Earnings - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1993 $ 24,824 $ 95,865 -- $ -- -- $ -- $ -- $ -- Net income -- 42,101 -- -- -- -- -- -- Options granted -- 1,528 -- -- -- -- -- -- Partnership distributions -- (12,105) -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 24,824 127,389 -- -- -- -- -- -- Net income -- 52,930 -- -- -- -- -- 39,775 Capital contribution 135,000 -- -- -- -- -- -- -- Partnership distributions -- (5,227) -- -- -- -- -- -- Options granted -- 323 -- -- -- -- 1,692 -- Trident Combination (159,824) (175,415) -- -- 109,886 1,098 510,918 -- Dividends and other distributions -- -- -- -- -- -- -- (4,285) 401(k) plan stock issuances -- -- -- -- 199 3 1,873 -- Stock options exercised -- -- -- -- 408 4 1,302 ------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 -- -- -- -- 110,493 1,105 515,785 35,490 Chevron Combination -- -- 7,815 75,418 38,623 386 372,328 -- Net income -- -- -- -- -- -- -- 113,322 Options exercised -- -- -- -- 374 3 1,320 -- Dividends and other distributions -- -- -- -- -- -- -- (5,427) 401(k) plan and profit sharing stock issuances -- -- -- -- 309 4 4,175 -- Options granted -- -- -- -- -- -- 2,824 -- Other -- -- -- -- 48 -- -- ------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 $ -- $ -- 7,815 $75,418 149,847 $ 1,498 $ 896,432 $ 143,385 ====================================================================================================================================
See notes to consolidated financial statements. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ACCOUNTING POLICIES NGC Corporation (NGC or the Company) is a holding company that principally conducts all of its business through its subsidiaries. The Company is a leading aggregator, processor, transporter and marketer of energy products and services in North America. NGC also markets natural gas and crude oil in the United Kingdom. The accounting policies of NGC reflect industry practices and conform to generally accepted accounting principles. The more significant of such accounting policies are described below. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to develop estimates and make assumptions that affect reported financial position and results of operations, and that impact the nature and extent of disclosure, if any, of contingent assets and liabilities. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. Investments in affiliates in which the Company has a significant ownership interest, generally 20 percent to 50 percent, are accounted for by the equity method. Other investments are carried at cost. Certain reclassifications have been made to prior-period amounts to conform with current period financial statement classifications. CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of all demand deposits and funds invested in short-term investments with original maturities of three months or less. CONCENTRATION OF CREDIT RISK. NGC provides multiple energy commodity needs principally to customers in the electric and gas distribution industries, and to entities engaged in industrial and petrochemical businesses. These industry concentrations have the potential to impact the Company's overall exposure to credit risk, either positively or negatively, in that the customer base may be similarly affected by changes in economic, industry or other conditions. Receivables are generally not collateralized; however, NGC believes the credit risk posed by industry concentration is offset by the diversification and creditworthiness of the Company's customer base. INVENTORIES. Inventories consisting primarily of natural gas in storage of $30.6 million and $15.3 million, natural gas liquids of $194.5 million and $37.0 million, and crude oil of $16.6 million and $9.5 million at December 31, 1996 and 1995, respectively, are valued at the lower of weighted average cost or market. Materials and supplies inventory of $12.1 million and $12.5 million at December 31, 1996 and 1995, respectively, is carried at the lower of cost or market using the specific identification method. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment, consisting principally of gas gathering, processing and fractionation facilities, natural gas transmission lines, NGL and crude oil pipelines, and supporting infrastructure is recorded at cost. Expenditures for major replacem ents and renewals are capitalized while expenditures for maintenance, repairs and minor renewals to maintain facilities in operating condition are expensed. Depreciation is provided using the straight-line method over the estimated economic service lives of the assets ranging from three years to 25 years. Composite depreciation rates are applied to functional groups of property having similar economic characteristics. Gains and losses are not recognized for retirements of property, plant and equipment subject to composite depreciation rates (composite rate) until the asset group subject to the composite rate is retired. ENVIRONMENTAL COSTS. Environmental costs relating to current operations are expensed or capitalized, as appropriate, depending on whether such costs provide future economic benefit. Liabilities are recorded when environmental assessment indicates that remedial efforts are probable, and the costs can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and undiscounted, site-specific costs. Environmental liabilities, in connection with assets that are sold or closed, are realized upon such sale or closure, to the extent that they are probable, can be estimated and have not previously been reserved. In assessing environmental liabilities, no offset is made for potential insurance recoveries. Recognition of any joint and several liability is based upon the Company's best estimate of its final pro rata share of such liability. 44 INTANGIBLE ASSETS. Intangible assets are generally amortized by the straight-line method over an estimated useful life of 20 years. REVENUE RECOGNITION. Revenues for product sales, and gas processing and marketing services are recognized when title passes to the customer, or when the service is performed. Fractionation and transportation revenues are recognized based on volumes received in accordance with contractual terms. The Company accounts for its fixed-price natural gas activities using the mark-to-market method of accounting. Under such method, all fixed-price natural gas contracts are recorded at fair value, net of future servicing costs and reserves. Changes in the market value of contracts are recognized as gain or loss in the period of change. The resulting unrealized gains and losses are recorded as assets and liabilities from risk-management activities. The Company enters into financial instrument contracts to hedge purchase and sale commitments and inventories of natural gas liquids and crude oil in order to minimize the risk of market fluctuations. NGC also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates, and may execute swaps, forward-exchange contracts or other financial instruments to manage these exposures. Gains and losses from hedging transactions are recognized in income and are reflected as cash flows from operating activities in the periods in which the underlying commodity, interest rate or foreign currency transaction is recognized. If the necessary correlation to the commodity, interest rate or foreign currency transaction being hedged ceases to exist, the gains or losses associated with such contract(s) are no longer deferred, and are recognized currently. INCOME TAXES. The Company files a consolidated United States federal income tax return and, for financial reporting purposes, provides income taxes for the difference in the tax and financial reporting bases of its assets and liabilities in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Prior to March 1, 1995, the effective date of the merger between Natural Gas Clearinghouse (Clearinghouse) and Trident NGL Holding, Inc. (Holding) (the Trident Combination), the operations of Clearinghouse, a Colorado partnership, were generally not subject to corporate federal income tax, and Clearinghouse's earnings were generally allocated to and taken into account in computing the taxable income of its partners. EARNINGS PER SHARE. Net income per share is based on the weighted average number of shares of common stock outstanding plus the common stock equivalents that would arise from the exercise of outstanding options or warrants, when dilutive. Primary and fully diluted earnings per share are the same for all periods presented. For the year ended December 31, 1994, a pro forma amount of 97.8 million shares outstanding was used to compute the pro forma earnings per share. Such amount represents the equivalent number of shares obtained in the Trident Combination by the owners of the partners of Clearinghouse, plus the equivalent number of shares that would arise from the excercise of outstanding options existing as of the effective date of the Trident Combination, assuming a market value of $12 per share. Pro forma net income used to compute pro forma earnings per share for the years ended December 31, 1995 and 1994, reflect incremental statutory federal and state income tax provisions applied to Clearinghouse's partnership income for the periods prior to the effective date of the Trident Combination. The incremental tax provision represents an estimate of the aggregate federal and state income taxes that would have been provided had Clearinghouse been a taxpaying entity during the respective accounting periods. 45 NOTE 2 - BUSINESS COMBINATIONS THE CHEVRON COMBINATION. On August 31, 1996, NGC completed a strategic combination (the Chevron Combination) with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively Chevron), pursuant to which, Chevron contributed substantially all of its midstream assets (the Contribution), including substantially all of the assets comprising Warren Petroleum Company and Chevron's Natural Gas Business Unit, and an undivided interest in those assets that constitute the West Texas LPG Pipeline, into Midstream Combination Corp. (Midstream), a Delaware corporation formed for purposes of the transaction. NGC, which was formed effective March 1, 1995, pursuant to the Trident Combination, was merged with and into Midstream immediately following the Contribution, and Midstream was renamed NGC Corporation. In exchange for the Contribution, Chevron received approximately 38.6 million shares of NGC common stock and approximately 7.8 million shares of NGC's Series A Participating Preferred Stock (Series A Preferred), and NGC assumed approximately $283 million of indebtedness. Immediately following closing of the Chevron Combination, NGC paid approximately $128 million to Chevron, and funded such payment under the NGC Corporation Credit Agreement (Credit Agreement). In connection with the Chevron Combination, NGC and Chevron also entered into certain ancillary supply, sales and service agreements with respect to natural gas, natural gas liquids and electricity. Pursuant to these ancillary agreements, NGC has the right to, among other things, purchase and/or market substantially all of the natural gas and natural gas liquids produced or controlled by Chevron in the United States (except Alaska), to process substantially all of Chevron's processable natural gas in those geographic areas where it is economically feasible for NGC to provide such service, to supply natural gas feedstocks to Chevron refineries and chemical plants in the United States, and to participate in existing and future opportunities to provide electricity to Chevron's United States facilities, as well as to purchase or market excess electricity generated by those facilities. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting, and the results of operations of NGC for the year ended December 31, 1996, include the results of the acquired assets effective September 1, 1996. The purchase price of approximately $740 million, inclusive of assumed indebtedness and transaction costs, was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of September 1, 1996. NGC is assessing its exposure to contingencies assumed in the Chevron Combination which include, among other things, litigation and certain environmental issues related to the acquired facilities. Additionally, the Company is in the process of analyzing certain strategic options to maximize plant synergies occurring as a result of the Chevron Combination. Consequently, the purchase price allocation, as presented herein, is considered preliminary. Management believes resolution of these items will not materially impact the aforementioned purchase price allocation. THE TRIDENT COMBINATION. On March 14, 1995, Clearinghouse consummated the combination with Holding, a fully integrated natural gas liquids company. The purchase price of approximately $350 million, excluding transaction costs and liabilities assumed, was allocated to the assets acquired and liabilities assumed, based on their estimated fair values as of March 1, 1995, the effective date of the Trident Combination for accounting purposes. The Trident Combination was accounted for under the purchase method of accounting, and the results of operations of Holding are included in the accompanying financial statements effective March 1, 1995. The following table reflects certain unaudited pro forma information for the periods presented as if the Trident Combination had occurred on January 1, 1994: Years Ended December 31, -------------------------- ($ in thousands, except per share amounts) 1995 1994 - -------------------------------------------------------------------------------- Pro forma revenues $ 3,744,870 $ 3,804,213 - -------------------------------------------------------------------------------- Pro forma net income $ 46,067 $ 25,085 - -------------------------------------------------------------------------------- Pro forma net income per share $ 0.39 $ 0.21 46 NOTE 3 - PRICE RISK MANAGEMENT AND FINANCIAL INSTRUMENTS PRICE RISK-MANAGEMENT ACTIVITIES. NGC utilizes fixed-price forward purchase and sales contracts, futures and options contracts traded on the New York Mercantile Exchange (NYMEX), and swaps and options traded in the over-the-counter financial markets to manage and hedge its fixed-price purchase and sales commitments; to provide fixed-price commitments as a service to its customers and suppliers; to reduce its exposure relative to the volatility of cash market prices; and to protect its investment in storage inventories. The Company may, at times, take a bias in the market, within established guidelines, resulting from the management of its portfolio. In addition, by utilizing exchange for physical transactions allowed by the NYMEX, which enables entities to take delivery of, or sell, a physical quantity of natural gas in exchange for a futures position, NGC is able to secure additional sources of physical natural gas supply, or create additional markets for existing supply, through the use of natural gas futures contracts. These fixed-price activities are referred to herein as risk-management activities. ACCOUNTING FOR PRICE RISK-MANAGEMENT ACTIVITIES - NATURAL GAS. The Company uses the mark-to-market method of accounting for fixed-price natural gas transactions. Under mark-to-market accounting, fixed-price forwards, swaps, options, futures and other financial instruments with third parties are reflected at market value, net of future servicing costs and reserves, with resulting unrealized gains and losses recorded as assets and liabilities from risk-management activities in the Consolidated Balance Sheets. These assets and liabilities are affected by the actual timing of settlements related to these contracts and current-period changes resulting primarily from newly originated transactions and the impact of price movements. These changes are recognized as revenues in the consolidated statements of operations in the period in which the change occurs. Market prices used to value outstanding financial instruments reflect management's consideration of, among other things, closing exchange and over-the-counter quotations, the time value of money and volatility factors underlying the commitments. These market prices are adjusted to reflect the potential impact of liquidating NGC's position in an orderly manner over a reasonable period of time under present market conditions. MARKET RISK. NGC generally attempts to balance its fixed-price physical and financial purchase and sales contracts in terms of contract volumes and the timing of performance and delivery obligations. However, net open positions often exist, or are established due to the origination of new transactions, and the Company's assessment of, and response to, changing market conditions. NGC will take advantage of its bias in the market when it believes, based on competitive information gained from its energy marketing activities, that future price movements will be consistent with its net open position. To the extent a net open position exists, NGC is exposed to the risk that fluctuating market prices may adversely impact its financial position or results of operations. The net open position is actively managed, and the impact of a change in price on the Company's financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year. At December 31, 1996, a $0.10 increase or decrease in the price of natural gas would have impacted net income by approximately $2.3 million either favorably or unfavorably. The impact of the $0.10 price movements referred to above are before application of market reserves which would likely reduce the after-tax earnings impact of these price movements. MARKET RESERVES. In connection with the market valuation of its fixed-price contracts, the Company maintains certain reserves for a number of risks and costs associated with these future commitments. Among others, these include reserves for credit risks based on the financial condition of counterparties, reserves for product location (basis) differentials and consideration of the time value of money for long-term contracts. Counterparties in NGC's trading portfolio consist principally of financial institutions, major oil and gas companies and local distribution companies. The creditworthiness of these counterparties may impact its overall exposure to credit risk, either positively or negatively; however, with regard to its counterparties, NGC maintains credit policies that management believes minimize overall credit risk. Determination of the credit quality of its counterparties is based upon a number of factors, including credit ratings, financial condition, project economics and collateral requirements. When applicable, the Company employs standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Based on these policies, its current exposures and its credit reserves, NGC does not anticipate a material adverse effect on the financial position or results of operations as a result of counterparty nonperformance. 47 The following table displays the mark-to-market results of NGC's natural gas fixed-price transactions at December 31, 1996:
Below Investment Investment Grade Grade Credit Credit ($ in thousands) Quality Quality Total - ----------------------------------------------------------------------------------------------------------------------------------- Utilities and power generators $ 29,703 $ (1,160) $ 28,543 Financial institutions 12,587 7,023 19,610 Oil and gas producers 34,850 17,680 52,530 Industrial companies 8,577 12,311 20,888 Other 8,855 3,328 12,183 - ----------------------------------------------------------------------------------------------------------------------------------- Value of fixed-price transactions before reserves $ 94,572 $ 39,182 133,754 ======================================================================================================================= Reserves (40,302) ---------- Net value of fixed-price transactions $ 93,452 ==========
At December 31, 1996, the term of NGC's portfolio extends to 2007, and the average remaining life of an individual transaction was 5.3 months. The above table includes approximately $130 million and $92 million, respectively, in unrealized gains and losses, which are reflected in accounts receivable and accounts payable in the Consolidated Balance Sheets. FAIR VALUE OF FINANCIAL INSTRUMENTS. The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair-value amounts have been determined by the Company using available market information and selected valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair-value amounts. The carrying values of current assets and liabilities approximate fair values due to the short-term maturities of these instruments. The carrying amounts and fair values of the Company's other financial instruments were:
December 31, ------------------------------------------------------------- 1996 1995 ------------------------------------------------------------- Carrying Fair Carrying Fair ($ in thousands) Amount Value Amount Value - -------------------------------------------------------------------------------------------------------------------------------- Credit Agreement $ 319,000 $ 319,000 $ 183,000 $ 183,000 6.75% Senior Notes, due 2005 150,000 148,000 150,000 151,500 7.625% Senior Notes, due 2026 175,000 180,000 --- --- Chevron Note 155,373 160,000 --- --- 14% Senior Subordinated Notes, due 2001 65,000 75,000 65,000 78,000 10.25% Subordinated Notes, due 2003 105,000 114,000 105,000 116,000 Risk-Management Contracts --- 8,285 --- (7,700) ================================================================================================================================
The carrying amount of the Credit Agreement in the Consolidated Financial Statements was assumed to approximate fair value. The fair values of the Senior Notes, Senior Subordinated Notes and the Subordinated Notes were based on quoted market prices by financial institutions that actively trade these debt securities. The fair value of the Chevron Note was determined by a comparison to publicly traded debt securities having similar terms and conditions. The fair value of the Company's cost-basis investments was not estimated as the investments were considered immaterial. The fair value of commodity price and basis swaps and options was based upon the estimated consideration that would be received to terminate those swaps or options in a gain position, and the estimated cost that would be incurred to terminate those swaps or options in a loss position. Such transactions are referred to in the above table as "Risk-Management 48 Contracts." The commodity swap and option agreements extend for a period of up to 11 years. At December 31, 1996, and 1995, financial instruments related to natural gas had an absolute notional contract quantity of 1.5 trillion cubic feet and 881 billion cubic feet, respectively. In addition, financial instruments related to crude oil and natural gas liquids had absolute notional contract quantities of 2.0 million barrels and 3.3 million barrels at December 31, 1996, and 0.2 million barrels and 2.5 million barrels at December 31, 1995. The estimated fair value and cash flow requirements for these commodity swaps and options were based upon the market prices in effect at the financial statement date, and do not necessarily reflect NGC's entire trading portfolio. Cash flow requirements related to these commodity price swaps and options at December 31, 1996, were as follows: December 31, ----------- ($ in thousands) 1996 - ------------------------------------------------------------------------------ Net premiums received to date $ 6,190 Net future cash inflows 2,095 ------------ Net cash inflows $ 8,285 =============================================================================== Note 4 - Cash Flow Information Detail of supplemental disclosures of cash flow and non-cash investing and financing information was:
Years Ended December 31, ------------------------------------------------ ($ in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Interest paid (net of amounts capitalized) $ 22,647 $ 32,909 $ 3,575 ======================================================================================================================= Taxes paid (net of refunds) $ 1,467 $ (150) $ 1,068 ======================================================================================================================= Detail of business acquired: Current assets and other $ 76,465 $ 87,416 $ --- Fair value of non-current assets 966,530 832,384 --- Liabilities assumed, including deferred taxes (594,863) (572,680) --- Capital stock issued and options exercised (448,132) (180,220) --- Cash balance acquired --- (1,633) --- - ------------------------------------------------------------------------------------------------------------------------ Cash paid, net of cash acquired $ --- $ 165,267 $ --- ========================================================================================================================
In 1995, the Company recognized a one-time tax benefit of $45.7 million, which occurred in conjunction with the Trident Combination. The deferred income tax benefit, which can be used to reduce NGC's future income tax liabilities, resulted from the recognition of the excess tax basis held by certain Clearinghouse partners. Also in 1995, the Company assumed a liability of $2.5 million related to the purchase of a crude oil pipeline. 49 Note 5 - PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment by segment and sub-segment consisted of:
December 31, ---------------------------- ($ in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Natural gas and power marketing $ 15,869 $ 15,128 Natural gas liquids, crude oil and gas transmission: Natural gas processing 1,105,637 663,971 Fractionation 303,608 188,199 Liquids marketing 237,102 25,000 Natural gas gathering and transmission 128,159 107,627 Crude oil 21,220 11,719 Other 8,216 1,710 - ------------------------------------------------------------------------------------------------------------------------------ 1,819,811 1,013,354 Less: accumulated depreciation 128,432 64,843 - ------------------------------------------------------------------------------------------------------------------------------ $ 1,691,379 $ 948,511 ==============================================================================================================================
Interest capitalized related to costs of projects in process of development totaled $1.2 million and $1.0 million during the years ended December 31, 1996 and 1995, respectively. No interest was capitalized during the year ended December 31, 1994. Note 6 - UNCONSOLIDATED AFFILIATES The equity method of accounting is used for investments in certain partnerships and for investments in companies in which NGC has a voting interest of between 20 percent and 50 percent. Such investments include: NOVAGAS CLEARINGHOUSE, LTD. (NCL). NCL is an Alberta, Canada, limited partnership formed in 1994 and based in Calgary, Canada. NGC owns an aggregate 49.9 percent interest in the partnership. NCL offers natural gas supply services to customers across Canada, and provides gas gathering, processing, storage and marketing services to Canadian natural gas producers. The Company shares disproportionately in the economic returns of NCL, as compared with its ownership interest, resulting primarily from stipulations contained in a service agreement entered into by a subsidiary of NGC with NCL in 1995. ACCORD ENERGY LIMITED (ACCORD). Accord is a limited partnership based in London, England. It was formed in 1994 to market energy resources in the United Kingdom and Europe. NGC owns 49 percent of the limited partnership. GULF COAST FRACTIONATORS (GCF). GCF is a Texas Limited Partnership that owns a natural gas liquids fractionation facility located in Mont Belvieu, Texas. NGC acquired its 38.75 percent limited partner interest in GCF through the Trident Combination. Effective December 1, 1996, the Company relinquished its role as operator of GCF, pursuant to an agreement reached with the Federal Trade Commission (FTC) related to the Chevron Combination. At December 31, 1996, the unamortized excess of the Company's investments in GCF over its equity in the underlying net assets of the affiliate approximated $17.3 million. This amount is being amortized on the straight-line method over the economic service life of the GCF assets. WEST TEXAS LPG PIPELINE PARTNERSHIP (WEST TEXAS PARTNERSHIP). The West Texas Partnership, a Texas Limited Partnership, holds all of the assets comprising the West Texas Pipeline, an interstate natural gas liquids pipeline. NGC owns a 49 percent interest in the West Texas Partnership acquired as part of the Chevron Combination. VENICE GAS PROCESSING COMPANY (VENICE). Venice is a Texas Limited Partnership that owns and operates a natural gas processing, extraction, fractionation and storage facility located in Plaquemines Parish, Louisiana. NGC acquired its 37 percent interest in Venice effective November 1, 1996. BARGE CO. Barge Co., a Delaware limited liability company, owns pressurized LPG barges used in transporting LPG principally in the Gulf of Mexico. NGC owns a 25 percent interest in Barge Co., acquired as part of the Chevron Combination. 50 AVOCA NATURAL GAS STORAGE (AVOCA). Avoca is a New York general partnership engaged in the construction and operation of an underground, salt-bed gas storage facility in Avoca, New York. The Company owns an approximate 28 percent interest in the partnership. QUICKTRADE L.L.C. (QUICKTRADE). Quicktrade, a Delaware limited liability company, was formed to develop, implement and operate an electronic trading system. The Company indirectly owns an approximate 26 percent interest in Quicktrade. NATGAS JOINT VENTURE (NATGAS). NATGAS was a joint venture with Pan-Alberta Gas Ltd., based in Calgary, Canada, engaged in the natural gas marketing business. The joint venture ceased operations in July 1994. Aggregate equity method investment at December 31, 1996, 1995 and 1994, was $177.8 million, $58.7 million and $14.4 million, respectively. Dividends received on these investments in 1996 and 1995 totaled $7.3 million and $11.9 million, respectively. There were no dividends received in 1994. NCL and Accord both utilize the accrual method of accounting for their risk-management activities. Summarized aggregate financial information for these investments, and NGC's equity share thereof was:
December 31, ------------------------------------------------------------------------------------------- 1996 1995 1994 ------------------------------------------------------------------------------------------- Equity Equity Equity ($ in thousands) Total Share Total Share Total Share - --------------------------------------------------------------------------------------------------------------------------------- Current assets $ 502,381 $ 238,078 $ 276,700 $ 135,400 $ 124,200 $ 61,700 Non-current assets 462,756 192,152 179,100 75,700 20,200 10,100 Current liabilities 455,967 223,200 280,000 135,300 106,100 52,700 Non-current liabilities 100,807 45,088 86,500 36,200 9,800 4,900 Operating margin 133,826 62,145 85,800 41,000 13,900 6,900 Net income 61,154 28,075 34,200 21,100 7,700 3,800 =================================================================================================================================
The cost method of accounting is used to account for investment in partnerships or companies in which NGC has a voting interest of less than 20 percent. At December 31, 1996, the Company had two cost-basis investments: Indeck North American Power Fund, L.P. and Indeck North American Power Partners, L.P. (collectively Indeck). Indeck was formed in 1995, and is engaged in the acquisition and operation of power-generating facilities. NGC's aggregate investment in these entities totaled $3.9 million and $3.7 million at December 31, 1996 and 1995, respectively, and NGC received an aggregate of $0.6 and $0.5 million in dividends from Indeck during each of those years. NOTE 7 - LONG-TERM DEBT Long-term debt consisted of the following:
December 31, --------------------------------- ($ in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Credit Agreement $ 319,000 $ 183,000 6.75% Senior Notes, due 2005 150,000 150,000 7.625% Senior Notes, due 2026 175,000 --- Chevron Note 155,373 --- 14% Senior Subordinated Notes, due 2001 65,000 65,000 10.25% Subordinated Notes, due 2003 105,000 105,000 Other, non-interest bearing 825 1,125 Unamortized premium 18,674 18,939 - ------------------------------------------------------------------------------------------------------------------ 988,872 523,064 Less: long-term debt due within one year 275 300 - ------------------------------------------------------------------------------------------------------------------ $ 988,597 $ 522,764 ==================================================================================================================
51 CREDIT AGREEMENT. On March 14, 1995, the Company entered into the Credit Agreement, which established a five-year $550 million revolving credit facility. The Credit Agreement provides for letters of credit and borrowings for working capital, capital expenditures and general corporate purposes. The $550 million commitment under the Credit Agreement reduces by $22.5 million each quarter beginning in March 1998, and continuing through maturity. Generally, borrowings under the Credit Agreement bear interest at a Eurodollar rate plus a margin that is determined based on the Company's unsecured senior debt rating. At December 31, 1996, such margin was 0.3 percent, and the average interest rate applicable to borrowings under the Credit Agreement approximated 6.8 percent. During the first quarter of 1995, NGC entered into arrangements with financial institutions that effectively capped the base Eurodollar rate on $100 million of borrowings at certain rates through January 1998. The Credit Agreement contains certain financial covenants that require the Company to meet certain financial position and performance tests. Certain amendments were made to the Credit Agreement to accommodate the Chevron Combination. At December 31, 1996, letters of credit and borrowings under the Credit Agreement aggregated approximately $413.8 million, and the Company had $136.2 million of available capacity under the Credit Agreement. LETTER OF CREDIT AGREEMENT. On September 1, 1996, the Company entered into a new credit agreement (the Letter of Credit Agreement) which established a 364-day, $300 million letter of credit facility. The Letter of Credit Agreement provides for the issuance of letters of credit in support of the Company's obligation to purchase substantially all of the natural gas produced or controlled by Chevron in the United States (except Alaska). The Company incurs a fee that is determined based on the Company's unsecured senior debt rating on all issued and outstanding letters of credit under the Letter of Credit Agreement. At December 31, 1996, such fee was 0.3 percent, and letters of credit outstanding totaled $300 million, resulting in no unused capacity under the terms of the Letter of Credit Agreement. The Company also incurs a commitment fee on the unused portion of the commitment under the Letter of Credit Agreement. The commitment fee is determined based on the Company's unsecured debt rating, and at December 31, 1996, such fee was 0.06 percent per annum. The Letter of Credit Agreement contains certain financial covenants that require the Company to meet certain financial position and performance tests. In general, these financial covenants are identical to those contained in the Credit Agreement. 6.75% SENIOR NOTES, DUE 2005. On December 15, 1995, the Company sold $150 million of 6.75% Senior Notes, due December 15, 2005 (Notes). The Notes were issued at a price of 99.984 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $149 million. Proceeds from the sale of the Notes were used to repay a portion of the outstanding indebtedness under the Credit Agreement. Interest on the Notes is payable semiannually on June 15 and December 15 of each year. The Notes represent general unsecured obligations of the Company, and are fully and unconditionally guaranteed on a joint and several basis by certain of the Company's wholly owned subsidiaries (collectively the Notes Guarantors), as defined in the associated indenture. Upon issuance, the Notes were priced based on the then existing yield for 10-year U.S. Treasury Notes (10-Year Base Treasury Rate) plus a spread based principally on the Company's credit rating. Prior to issuing the Notes, the Company entered into two separate transactions with two separate financial institutions, the effect of which was to lock in the 10-Year Base Treasury Rate at approximately 6.2 percent on the full $150 million face value of the Notes. 7.625% SENIOR NOTES, DUE 2026. In October 1996, NGC sold $175 million of 7.625% Senior Notes (Senior Debentures). The Senior Debentures were issued at a price of 99.522 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $173 million. The net proceeds from the sale of such Senior Debentures were used to repay a portion of the outstanding indebtedness under the Credit Agreement. Interest on the Notes is payable semiannually on April 15 and October 15 of each year, commencing April 15, 1997. The Senior Debentures are redeemable, at the option of the Company, in whole or in part from time to time, at a formula-based redemption price as defined in the associated indenture. The Senior Debentures represent general unsecured obligations of the Company and are fully and unconditionally guaranteed, on a joint and several basis, by certain of the Company's wholly owned subsidiaries (collectively the Senior Debenture Guarantors), also as defined in the associated indenture. Upon issuance, the Senior Debentures were priced based on the then existing yield for 30-year U.S. Treasury Notes (30-Year Base Treasury Rate) plus a spread based principally on the Company's credit rating. Prior to issuing the Senior Debentures, the Company entered into a transaction, the effect of which was to lock in the 30-Year Base Treasury Rate at approximately 7.0 percent on $150 million of the $175 million face value of the Senior Debentures. 52 The wholly owned subsidiaries that have fully and unconditionally guaranteed, on a joint and several basis, the Notes are predominantly the same wholly owned subsidiaries that have fully and unconditionally guaranteed, on a joint and several basis, the Senior Debentures. Separate financial statements of each of the Notes Guarantors and Senior Debenture Guarantors have not been provided because management has determined that such information would not be material to investors as the aggregate assets, liabilities, earnings and equity of the Notes Guarantors, and the aggregate assets, liabilities, earnings and equity of the Senior Debenture Guarantors are each separately substantially equivalent to the Company's consolidated assets, liabilities, earnings and equity. The Company also has certain direct and indirect subsidiaries that are not guarantors of the Notes or the Senior Debentures (collectively Non-guarantor Subsidiaries). These Non-guarantor Subsidiaries, both individually and in the aggregate, are inconsequential to NGC (and its accounting predecessor, Clearinghouse) as of and for each of the three years in the period ended December 31, 1996. CHEVRON NOTE. As part of the Chevron Combination, NGC assumed approximately $283 million of indebtedness attributed to the assets acquired from Chevron. Approximately $128 million was paid to Chevron immediately following closing of the Chevron Combination. The remaining principal balance of approximately $155 million is payable to Chevron upon demand on or after August 31, 1998, and is referred to herein as the Chevron Note. The Chevron Note bears interest at 7.95 percent per annum, payable semiannually in arrears each February and August. Should Chevron choose not to demand payment of the Chevron Note, then principal plus accrued interest is payable in full on August 14, 2004. NGC has the right, at any time on or after August 31, 1998, to prepay in whole or in part the principal and accrued interest outstanding under the Chevron Note. There are no financial covenants associated with the Chevron Note. An unamortized premium balance of $3.9 million associated with the Chevron Note is being amortized using the interest method, resulting in an effective interest rate of 6.54 percent per annum. 14% SENIOR SUBORDINATED NOTES, DUE 2001. The Senior Subordinated Notes represent Warren NGL, Inc.'s (Warren - formerly Trident NGL, Inc.) unsecured general obligations that mature on August 30, 2001, and bear interest at 14 percent per annum, payable semiannually in arrears each February and August. The indenture governing the Senior Subordinated Notes contains certain covenants that, among other things, require Warren to meet certain financial tests; limit the amount of capital expenditures, dividend payments and asset sales that can be made by Warren; and restrict the ability of Warren and its subsidiaries to incur additional indebtedness, create or permit liens and engage in certain transactions. Although Warren's net assets at December 31, 1996, approximated $386 million, management does not believe that the terms of the indenture materially restrict the ability of Warren to transfer funds to the Company given that Warren is both a Notes Guarantor and a Senior Debenture Guarantor, combined with the level of advances made by NGC to Warren. An unamortized premium balance of $8.2 million associated with the Senior Subordinated Notes is being amortized using the interest method, resulting in an effective interest rate of 9.6 percent per annum. Beginning in 1998, corresponding with the first call date, the Senior Subordinated Notes may be repurchased by the Company at an initial price of 107 percent of the principal amount, with such reacquisition price reducing as the notes mature. 10.25% SUBORDINATED NOTES, DUE 2003. The Subordinated Notes represent Warren's unsecured general obligations that mature on April 15, 2003, and bear interest at the rate of 10.25 percent per annum, payable semiannually in arrears each April and October. The Subordinated Notes indenture contains similar covenants to those contained in the Senior Subordinated Notes indenture. An unamortized premium balance of $6.6 million associated with the Subordinated Notes is being amortized using the interest method, resulting in an effective interest rate of 9.02 percent per annum. Beginning in 1998, corresponding with the first call date, the Subordinated Notes may be repurchased by the Company at an initial price of 104.5 percent of the principal amount, with such reacquisition price reducing as the notes mature. Aggregate maturities of all long-term indebtedness are as follows: 1997-$0.3 million; 1998-$159.5 million; 1999-$0.3 million; 2000-$319.0 million; and 2001 and beyond-$509.8 million. 53 NOTE 8 - INCOME TAXES The Company is subject to federal, foreign and state income taxes on its operations. Components of income tax provision (benefit) were:
Years Ended December 31, -------------------------------------- ($ in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Current tax expense $ 10,427 $ --- $ 990 Deferred tax expense (benefit) 45,896 (27,471) 1,014 - -------------------------------------------------------------------------------------------------------------------------------- Income tax provision (benefit) $ 56,323 $ (27,471) $ 2,004 ===============================================================================================================================
Included in the above table is a $45.7 million deferred tax benefit in 1995, resulting from book and tax bases differences associated with the technical termination of the Clearinghouse partnership resulting from the Trident Combination. Deferred income taxes are provided for the temporary differences between the tax basis of NGC's assets and liabilities and their reported financial statement amounts. Significant components of deferred tax liabilities and assets were:
December 31, ----------------------------------- ($ in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Clearinghouse partnership basis differential $ 9,700 $ 38,747 Loss carryforward 78,456 87,690 Tax credits 13,627 5,400 Other 9,383 4,450 - ------------------------------------------------------------------------------------------------------------------------------------ 111,166 136,287 Valuation allowance --- --- - ------------------------------------------------------------------------------------------------------------------------------------ 111,166 136,287 Deferred tax liabilities: Items associated with capitalized costs 439,446 179,514 - ----------------------------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 328,280 $ 43,227 ===================================================================================================================================
Realization of the aggregate deferred tax asset is dependent on the Company's ability to generate taxable earnings in the future. No valuation allowance was established at December 31, 1996 and 1995, as management believes the aggregate deferred asset will be fully realized in the future. The income tax provision (benefit) for the years ended December 31, 1996, 1995 and 1994, was equivalent to effective rates of 33 percent, (42) percent and 5 percent, respectively. Differences between taxes computed at the U.S. federal statutory rate and the Company's reported income tax provision (benefit) were:
Years Ended December 31, ----------------------------------------------- ($ in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Expected tax at U.S. statutory rate $ 59,376 $ 22,832 $ 15,437 State taxes 3,393 1,305 --- Foreign tax benefit (6,621) (3,846) --- Clearinghouse partnership basis differential --- (45,736) --- Partnership income --- (2,174) (13,433) Other 175 148 --- - ------------------------------------------------------------------------------------------------------------------------------- Income tax provision (benefit) $ 56,323 $ (27,471) $ 2,004 ===============================================================================================================================
54 At December 31, 1996, the Company had approximately $212 million of regular tax net operating loss carryforwards. The net operating loss carryforwards expire from 2006 through 2012. Certain provisions of the Internal Revenue Code place an annual limitation on the Company's ability to utilize tax carryforwards existing as of the date of the Trident Combination. Management believes such carryforwards will be fully realized prior to expiration. NOTE 9 - COMMITMENTS AND CONTINGENCIES LITIGATION. On February 26, 1996, Apache Corporation (Apache) requested arbitration to resolve issues arising under a gas marketing contract (Contract) with Clearinghouse, pursuant to the arbitration provisions of such Contract. On February 26, 1996, Clearinghouse responded by denying Apache's claims, and by alleging several counterclaims of its own with respect to Apache's performance under the Contract. In connection with the arbitration proceedings, on April 9, 1996, Apache filed a lawsuit against Clearinghouse in the 55th Judicial District Court of Harris County, Texas (Court). In that lawsuit, Apache alleges that Clearinghouse is intentionally delaying the progress of the arbitration, and it requests relief, pursuant to the Texas General Arbitration Act, in the form of an order appointing a third arbitrator, compelling discovery and requiring Clearinghouse to assign certain contracts allegedly belonging to Apache. Clearinghouse filed a response to the lawsuit on May 6, 1996, asking that the Court dismiss Apache's application for relief or abate the suit pending resolution of all matters by the arbitration panel according to the terms of the Contract. Clearinghouse also requested payment of all attorneys' fees and other litigation expenses incurred in responding to and defending the lawsuit. On September 18, 1996, the arbitration panel granted a revised discovery schedule which moved the hearing previously scheduled for December 1996, to April 7, 1997. On February 6, 1997, the arbitration hearing was further postponed until September 15, 1997. In the arbitration, and again in the lawsuit, Apache claims that it is entitled to actual damages in an undetermined amount in excess of $8 million, and punitive damages calculated by tripling the actual damages. Clearinghouse intends to vigorously defend the Apache suit and arbitration. Based on review of the facts and through consultation with outside counsel, NGC management believes the ultimate resolution of the Apache suit will not have a material adverse impact on the Company's financial position or results of operations, and that any payments eventually made in connection with the arbitration and/or lawsuit will be substantially less than the amount claimed. The Company assumed liability for various claims and litigation in connection with the Chevron Combination, the Trident Combination and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. NGC believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items, individually or in the aggregate, will not have a material adverse impact on the Company's financial position or results of operations. Further, the Company is subject to various legal proceedings and claims which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position of the Company. COMMITMENTS. A wholly owned subsidiary of NGC is committed to expend its respective share of the construction costs related to the Avoca storage project. Current cost estimates commit the Company to approximately $10 million of expenditures. NGC and NGC Holding Company, Inc. have guaranteed the commitment by the wholly owned subsidiary. A subsidiary of the Company is committed to contribute approximately $62 million to Venice during 1997. A subsidiary of the Company is committed to contribute a total of $10 million to Indeck as its respective share of funds to be used for the acquisition of selected electric power generating facilities. At December 31, 1996, the Company had paid $3.9 million of this commitment. A subsidiary has guaranteed its pro rata share of the unfunded debt service reserve account of GCF. The obligation under the guarantee at December 31, 1996, assuming the subsidiary had to fund such obligation as of that date, approximated $2.5 million. OTHER COMMITMENTS. Minimum commitments in connection with office space, equipment, reservation charges under gas purchase and firm transportation contracts, and other leased assets by the Company are: 1997-$16.7 million; 1998-$10.5 million; 1999-$11.6 million; 2000-$11.1 million; and 2001 and beyond-$47.5 million. Rental payments made during 1996, 1995 and 1994 totaled $45.2 million, $24.9 million and $11.1 million, respectively. 55 NOTE 10 - CAPITAL STOCK The Company has authorized capital stock consisting of 450,000,000 shares, of which 50,000,000 shares, $0.01 par value per share, are designated preferred stock, and 400,000,000 shares, $0.01 par value per share, are designated common stock. PREFERRED STOCK. The Company's preferred stock may be issued from time to time in one or more series, the shares of each series to have such designations and powers, preferences, rights, qualifications, limitations and restrictions, thereof as described in the Company's Certificate of Incorporation. In order to provide for issuance of preferred shares, pursuant to the terms of the Chevron Combination, 8,000,000 shares of preferred stock were designated during 1996 as Series A Preferred, of which 7,815,363 shares were issued effective September 1, 1996. Except as provided by law, the holders of the Series A Preferred have no voting rights, and such shares are not redeemable. At the holder's option, each share of the Series A Preferred may be converted, subject to certain adjustments and certain defined conditions precedent, into one share of common stock. Such shares have certain preferences, as defined, in the event of liquidation or dissolution of NGC, over all stock having a junior ranking. Subject to certain anti-dilutive adjustments, as defined, the holders of the Series A Preferred are entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of the Company's common stock, when and as the same are declared by the Company's Board of Directors out of funds legally available therefor and paid to the holders of the Company's common stock. Beginning in the third quarter of 1996, the Company has paid quarterly cash dividends on the Series A Preferred of $0.0125 per share, or $0.05 per share on an annual basis. COMMON STOCK. At December 31, 1996, there were 149,846,503 shares of common stock issued and outstanding. NGC pays quarterly cash dividends on common stock of $0.0125 per share, or $0.05 per share on an annual basis. Effective September 1, 1996, the Company issued 38,623,210 shares of common stock to Chevron pursuant to terms of the Chevron Combination. On February 29, 1996, a determination was made with regard to the 5,461,538 contingent shares distributable to the former owners of the partners of Clearinghouse (Clearinghouse Owners) and the former shareholders of Holding (Trident Shareholders), pursuant to the terms of the Trident Combination. Such shares were allocated in a ratio of 17 percent to the Trident Shareholders and 83 percent to the Clearinghouse Owners. STOCK WARRANTS. At December 31, 1996, the Company had warrants outstanding that entitle the holder thereof to purchase an aggregate 6,228 shares of common stock at an exercise price of $8.13 per share. The warrants expire in October 2003. STOCK OPTIONS. Each option granted is valued at an option price that ranges from $2.03 per share to the fair market value per share at date of grant. The difference between the option price and the fair market value, if any, of each option on the date of grant is recorded as compensation expense over a vesting period. Options granted at prices below fair market value do not become exercisable until the fifth anniversary date of the date of grant, at which time they became fully exercisable. Options granted at market value vest and become exercisable ratably over a three-year period. Compensation expense related to options granted totaled $2.8 million, $1.6 million and $1.5 million for the years ended December 31, 1996, 1995 and 1994, respectively. Stock option transactions for 1996 and 1995 were: 56
Years Ended December 31, -------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Option Option Shares Price Shares Price -------------------------------------------------------------- Outstanding at beginning of year 12,614,515 $ 2.13 -- $ 9.38 11,918,090 $ 2.13 -- $ 5.95 Options arising from Trident Combination --- --- 1,467,500 6.40 -- 8.64 Granted 1,841,851 2.03 -- 18.75 1,644,578 5.95 -- 9.38 Exercised (736,520) 2.03 -- 9.38 (1,451,633) 2.13 -- 8.64 Canceled or expired (312,636) 2.03 -- 9.38 (964,020) 2.13 -- 5.95 Other, contingent share issuance 512,638 2.03 -- 8.13 --- --- - ------------------------------------------------------------------------------------------------------------------------ Outstanding at end of year 13,919,848 $ 2.03 -- $18.75 12,614,515 $ 2.13 -- $ 9.38 - ------------------------------------------------------------------------------------------------------------------------ Exercisable at end of year 469,208 $ 2.03 -- $ 9.38 271,969 $ 6.40 -- $8.81 - ------------------------------------------------------------------------------------------------------------------------ Weighted average fair value of options granted during the year at market $15.30 $18.00 Weighted average fair value of options granted during the year below market $21.38 $19.50 ========================================================================================================================
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in both 1996 and 1995: dividends of $0.05 per year; expected volatility of 43.3 percent; risk-free interest rate of 5.9 percent and an expected life of 10 years. The Company accounts for its stock option plan in accordance with Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation cost been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share (EPS) would have approximated the following pro forma amounts for the years ended December 31, 1996 and 1995, respectively:
Years Ended December 31, -------------------------------------------------------------- ($ in thousands, except per share data) 1996 1995(1) - ---------------------------------------------------------------------------------------------------------------------- Net Earnings Net Earnings Income Per Share Income Per Share -------------------------------------------------------------- Pro forma amounts $ 107,580 $ 0.79 $ 43,570 $ 0.39 ====================================================================================================================== (1) 1995 pro forma net income and per-share data exclude the effect of a tax benefit of $45.7 million related to the Trident Combination and includes an incremental statutory federal and state income tax provision applied to Clearinghouse's partnership income for the period prior to the effective date of the Trident Combination.
As allowed by the transitional disclosure requirements of SFAS No. 123, the preceding pro forma net income and pro forma EPS amounts do not include the impact, if any, of applying the accounting methodology of SFAS No. 123 to options granted prior to January 1, 1995. As a result, the impact of compensation cost included in the pro forma net income and EPS amounts for the years ended December 31, 1996 and 1995, respectively, may not be indicative of amounts to be expected in future periods. NOTE 11 - EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS ABOVE BASE INCENTIVE COMPENSATION PLAN. NGC has an Above Base Incentive Compensation Plan (ABICP) to reward employees based on NGC's annual operating income, as defined in the ABICP. Specific awards are at the discretion of the Compensation Committee of the Board of Directors (Compensation Committee). The ABICP was amended January 1, 1994, to provide for payment of no less than 10 percent, but not greater than 15 percent, of operating income, as defined. PROFIT-SHARING/401(K) SAVINGS PLAN. Effective May 1, 1989, the Company established the NGC Profit-Sharing/401(k) Savings Plan (Plan). The Plan meets the requirements of Section 401(k) of the Internal Revenue Code, and is a defined 57 contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974. The Plan and related trust fund are established and maintained for the exclusive benefit of participating employees of NGC. All eligible employees may participate in the Plan, and employee contributions are matched dollar-for-dollar for the first 5 percent of compensation, subject to Company performance. Employees vest in the Company's contributions ratably over four years. The Company also makes profit-sharing contributions to employees' accounts, regardless of their participation in the Plan, in an amount equal to 5 percent of the employees' annual base salary. At the discretion of the Compensation Committee, an additional profit-sharing contribution of 5 percent may be awarded (referred to as Discretionary Profit-Sharing Contribution). Company matching contributions to the Plan and Discretionary Profit-Sharing Contributions are made in Company common stock. During the years ended December 31, 1996, 1995 and 1994, NGC (or its accounting predecessor, Clearinghouse) recognized aggregate costs related to the Plan and the profit-sharing contributions of $5.3 million, $4.4 million and $3.8 million, respectively. PENSION PLAN. Prior to the Trident Combination, Holding had adopted a noncontributory defined benefit pension plan, and such plan remains in existence at December 31, 1996. The Trident NGL, Inc. Retirement Plan (Retirement Plan) is a qualified plan under the Internal Revenue Service regulations, and all full-time hourly employees of Trident were eligible for participation in the Retirement Plan. Benefits are based on years of service and final average pay, as defined in the Retirement Plan document. Contributions to the Retirement Plan in 1996 and 1995 totaled $1.1 million and $1.1 million, respectively, representing the minimum amount required by federal law and regulation. The Retirement Plan's funded status and amount recognized in NGC's balance sheet at December 31, 1996 and 1995, were:
December 31, ------------------------------- ($ in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation, including vested benefits of $4.8 million and $3.9 million in 1996 and 1995, respectively $ 5,320 $ 4,381 =============================================================================================================================== Projected benefit obligation $ 8,908 $ 7,773 Plan assets (6,031) (4,395) - ------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 2,877 3,378 Unrecognized net gain from past experience different from that assumed 3,090 2,825 - ------------------------------------------------------------------------------------------------------------------------------- Pension liability $ 5,967 $ 6,203 ===============================================================================================================================
Current-year pension expense is based on measurements of the projected benefit obligation and the market-related value of the Retirement Plan assets as of the end of the year. The projected benefit obligation at December 31, 1996, was based on a discount rate of 7.75 percent and an average long-term rate of compensation growth of 3.5 percent. The expected long-term rate of return on the Retirement Plan assets was estimated at 8.0 percent. The components of net pension expense for the Retirement Plan were:
Years Ended December 31, ---------------------------------------- ($ in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Service cost benefits earned during period $ 660 $ 712 Interest cost on projected benefit obligation 602 523 Expected return on plan assets (376) (144) Termination benefits --- 433 Amortization of unrecognized gain (110) (55) - ------------------------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 776 $ 1,469 ===============================================================================================================================
58 NOTE 12 - RELATED PARTY TRANSACTIONS The Company is a leading North American marketer of natural gas, natural gas liquids, crude oil and electric power. NGC is also engaged in natural gas gathering, processing and transportation activities, and has joint ventures in Canada and the United Kingdom which expand NGC's operations geographically. The Company routinely transacts business directly or indirectly with three of its significant stockholders: Chevron; Nova Corporation (NOVA), an Alberta, Canada company; and British Gas plc (British Gas), a United Kingdom company, each of which own approximately 26 percent of the outstanding shares of the Company's common stock. Chevron holds all of the outstanding shares of the Series A Preferred. Transactions between the Company and Chevron result principally from the ancillary agreements described previously in Note 2. Transactions between NGC and NOVA, primarily result from purchases and sales of natural gas between NGC, NOVA and NCL. Transactions between NGC and British Gas are limited to the operations of Accord which transacts business with subsidiaries of British Gas for the purchase and sale of natural gas and crude oil. It is management's opinion that these transactions are executed at prevailing market rates. During the years ended December 31, 1996, 1995 and 1994, the Company recognized in revenues and cost of aggregate sales to, and aggregate purchases from, these significant stockholders of $286.7 million and $1.1 billion; $2.3 million and $152.6 million; and $20.9 million and $218.9 million, respectively, resulting from the direct or indirect relationships. Effective June 1, 1995, NGC entered into a service agreement with NCL whereby NGC Futures, Inc. (NGCF), a wholly owned subsidiary of NGC, provides NCL and its affiliates natural gas marketing and risk-management services. As a result, NGC shares disproportionately in NCL's economic returns resulting from the services provided. For the year ended December 31, 1995, NGC, in addition to its share of equity in the earnings of NCL, recognized $6.8 million of pre-tax earnings related to services rendered NCL by NGCF. No amounts were recognized in 1996 related to services rendered by NGCF to NCL. During 1994, Clearinghouse received notes from several employees totaling $1.5 million. At December 31, 1994, $0.3 million of the original notes issued remained outstanding. The notes were paid in full during 1995. 59 NOTE 13 - SEGMENT INFORMATION Operating segment information for 1996, 1995 and 1994 is presented below. NGC's activities outside the United States are limited to the operations of NCL and Accord, which are discussed in Note 6 - Unconsolidated Affiliates.
----------------------------------------------------------------------- Natural Natural Gas Liquids, Gas and Crude Oil Corporate Power and Gas and ($ in thousands) Marketing Transmission Eliminations Total - -------------------------------------------------------------------------------------------------------------------------------- 1996 Summary Data: Unaffiliated revenues $ 4,422,838 $ 2,837,353 $ 11 $ 7,260,202 Intersegment revenues 80,954 242,297 (323,251) --- - -------------------------------------------------------------------------------------------------------------------------------- Total revenues 4,503,792 3,079,650 (323,240) 7,260,202 - -------------------------------------------------------------------------------------------------------------------------------- Operating margin 103,624 265,876 --- 369,500 Depreciation and amortization 3,667 67,513 496 71,676 Equity in earnings of unconsolidated affiliates 20,696 7,379 --- 28,075 Identifiable assets 2,117,136 3,272,014 (1,202,340) 4,186,810 Capital expenditures(1) 2,860 818,384 6,928 828,172 ================================================================================================================================ (1) Amounts include the value assigned assets acquired in the Chevron Combination. ----------------------------------------------------------------------- Natural Natural Gas Liquids, Gas and Crude Oil Corporate Power and Gas and ($ in thousands) Marketing Transmission Eliminations Total - -------------------------------------------------------------------------------------------------------------------------------- 1995 Summary Data: Unaffiliated revenues $ 2,423,136 $ 1,242,810 $ --- $ 3,665,946 Intersegment revenues 36,629 81,472 (118,101) --- - -------------------------------------------------------------------------------------------------------------------------------- Total revenues 2,459,765 1,324,282 (118,101) 3,665,946 - -------------------------------------------------------------------------------------------------------------------------------- Operating margin 63,746 130,914 --- 194,660 Depreciation and amortization 2,092 42,625 196 44,913 Equity in earnings of unconsolidated affiliates 19,164 1,896 --- 21,060 Identifiable assets 915,972 1,460,204 (500,924) 1,875,252 Capital expenditures(2) 5,070 956,110 2,966 964,146 ================================================================================================================================ (2) Amounts include the value assigned assets acquired in the Trident Combination. ----------------------------------------------------------------------- Natural Natural Gas Liquids, Gas and Crude Oil Corporate Power and Gas and ($ in thousands) Marketing Transmission Eliminations Total - -------------------------------------------------------------------------------------------------------------------------------- 1994 Summary Data: Unaffiliated revenues $ 3,231,343 $ 6,500 $ --- $ 3,237,843 Intersegment revenues 3,502 80,284 (83,786) --- - -------------------------------------------------------------------------------------------------------------------------------- Total revenues 3,234,845 86,784 (83,786) 3,237,843 - -------------------------------------------------------------------------------------------------------------------------------- Operating margin 78,410 20,716 --- 99,126 Depreciation and amortization 2,570 5,808 --- 8,378 Equity in earnings of unconsolidated affiliates 3,803 --- --- 3,803 Identifiable assets 527,353 118,118 --- 645,471 Capital expenditures 4,055 32,397 --- 36,452 ================================================================================================================================
60 NOTE 14 - SUBSEQUENT EVENTS On February 18, 1997, NGC announced that it had signed a merger agreement to acquire Destec Energy, Inc. (Destec), a leading independent power producer (IPP), in a deal valued at $1.27 billion, or $21.65 per share of Destec common stock. Simultaneous with this acquisition, NGC will sell Destec's international facilities and operations to The AES Corporation for $407 million, inclusive of cash and monetizable assets. NGC intends to finance the transaction with interim financing provided by commercial banks from its existing bank-credit group and existing cash. The balance of the interim financing is expected to be retired from a combination of sales of nonstrategic Destec assets within six to 12 months of closing the merger, long-term debt and a common and/or preferred stock issuance. Destec currently operates 20 power generation facilities in key energy markets across the United States, as well as five international projects. On January 1, 1997, the Company divested itself of the Mont Belvieu I fractionator in accordance with an agreement reached with the FTC related to the Chevron Combination. The Company realized a small after-tax gain in 1997 relating to the sale. In October 1996, the Company and NOVA announced their intention to restructure the companies' Canadian natural gas operations. Under the agreement, NGC will assume full control of NCL's gas and gas liquids marketing businesses. NGC and NOVA will pursue separate midstream asset businesses in Canada, with NOVA assuming full ownership of NCL's existing gathering and processing businesses. This restructuring may also result in amendments to, or termination of, various agreements between NCL and the Company or NOVA, including their respective affiliates. NOVA will also own 100 percent of Pan-Alberta, which is currently a subsidiary of NCL. NGC will operate its Canadian operations under the name of NGC Canada, Inc. The transaction is expected to close by April 30, 1997. In early 1997, British Gas completed a restructuring with Centrica plc (Centrica) being demerged from British Gas and British Gas being renamed BG plc (BG). Centrica became the Company's joint venture partner in Accord, while BG now holds the approximate 26 percent interest in NGC's common stock formerly held by British Gas. Effective March 2, 1997, Centrica and the Company signed an agreement in which they stated their intent to restructure Accord by converting certain common stock interests in Accord to participating preferred stock interests. After closing, which is expected to occur in the second quarter of 1997, Centrica and the Company will own 75 percent and 25 percent, respectively, of the participating preferred stock of Accord. The participating preferred stock will have (a) the right to receive cumulative dividends on a priority to other corporate distributions by Accord, and (b) limited voting rights. In addition, Centrica will have the option to purchase the Company's participating preferred stock interest at any time after July 1, 2001, and the Company will have the right to acquire Centrica's participating preferred interest during the period from January 1, 2001, through March 1, 2001, at formula-based prices as defined in the agreement. As part of the reorganization, NGC UK will assume control of Accord's existing crude oil marketing business. The restructuring is contingent upon certain U.K. regulatory approvals. 61 NOTE 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the Company's unaudited quarterly financial information for the years ended December 31, 1996 and 1995.
Quarters Ended --------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, ($ in thousands, except per share data) 1996 1996 1996 1996 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $ 1,647,123 $ 1,163,151 $ 1,495,482 $ 2,954,446 Operating margin 90,082 51,995 82,311 145,112 Income before income taxes 46,621 17,224 31,854 73,946 Net income 30,328 13,838 21,452 47,704 Net income per share 0.26 0.12 0.16 0.28 ============================================================================================================================= Quarters Ended --------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, ($ in thousands, except per share data) 1995 1995 1995 1995 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $ 802,944 $ 841,028 $ 944,229 $ 1,077,745 Operating margin 31,486 43,399 56,963 62,812 Income before income taxes 11,747 6,162 22,386 24,939 Net income 55,274 4,873 14,608 17,950 Net income per share (1) 0.07 0.04 0.13 0.15 =============================================================================================================================== (1) Net income used to compute pro forma earnings per share for the first quarter of 1995 reflects incremental statutory federal and state income tax provisions applied to Clearinghouse's partnership income. The incremental tax provision represents an estimate of the aggregate federal and state income taxes that would have been provided had Clearinghouse been a taxpaying entity during the respective accounting period.
62 EX-21 9 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF NGC CORPORATION STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------------- Accord Energy Limited United Kingdom Bradshaw Gathering System Joint Venture Texas Caney River Transmission Company Delaware Clearinghouse Holdings, Inc. Delaware ECI Capital Corporation Texas Electric Clearinghouse, Inc. Texas Ellisburg Leidy N.E. Hub (general partnership) Pennsylvania Enerchange LLC (limited liability company) Delaware Gulf Coast Fractionators (general partnership) Texas Hub Services, Inc. Delaware Kansas Gas Supply Corporation Delaware LPG Services Group, Inc. Missouri Natural Gas Clearinghouse (general partnership) Colorado Natural Gas Clearinghouse, Inc. Delaware Natural Gas Clearinghouse of Argentina, Inc. Delaware Natural Gas Clearinghouse of Mexico, Inc. Delaware NGC Anadarko Gathering Systems, Inc. Texas NGC Avoca, Inc. Delaware NGC Great Britain Ltd. United Kingdom STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------------- NGC Canada, Inc. Alberta, Canada NGC Cayuta, Inc. Delaware NGC Futures, Inc. Texas NGC GP, Inc. Delaware NGC Global Energy, Inc. Delaware NGC Global Liquids, Inc. Delaware NGC Holding Company, Inc. Delaware NGC Mexico, S.A. de C.V. Mexico NGC Oil Trading and Transportation, Inc. Texas NGC Regulated Holdings, Inc. Delaware NGC Steuben, Inc. Delaware NGC Storage, Inc. Delaware NGC Transportation, Inc. Delaware NGC UK Limited United Kingdom NIPC, Inc. Texas NOTTI Gathering Company, Inc. Delaware NOTTI Pipeline Company Delaware Novagas Clearinghouse Limited Partnership Alberta, Canada (limited partnership) O'Keene Gas Gathering Company Oklahoma Ozark Pipeline, Inc. Delaware 2 STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------------- Phantex Pipeline Company Delaware QuickTrade LLC (limited liability company) Delaware Warren Arkansas Gathering, Inc. Arkansas Warren Energy, Inc. Texas Warren Energy Resources, Limited Partnership Delaware (limited partnership) Warren Gas Liquids, Inc. Delaware Warren Gas Marketing, Inc. Delaware Warren Intrastate Gas Supply, Inc. Delaware Warren NGL, Inc. Delaware Warren NGL Pipeline Company Delaware Warren Petroleum Company, Limited Partnership Delaware Warren Petroleum G.P., Inc. Delaware Warren Transportation, Inc. Delaware WPC LP, Inc. Delaware WTLPS, Inc. Delaware Waskom Gas Processing Company (general partnership) Texas 701289 Alberta Ltd. Alberta, Canada 3 EX-23.1 10 ARTHUR ANDERSEN CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 14, 1997, incorporated by reference in this Form 10-K, into NGC Corporation's previously filed registration statements on Form S-8 (File Nos. 33-75044, 33-96394 and 333-20773) and on Form S-3 (File Nos. 33- 89546 and 33-97368). ARTHUR ANDERSEN LLP Houston, Texas March 31, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996 ANNUAL REPORT TO STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 50,209 16,266 0 0 1,518,385 563,902 0 0 257,005 74,263 1,936,721 762,939 1,819,811 1,013,354 (128,432) (64,843) 4,186,810 1,875,252 1,548,987 705,674 0 0 0 0 75,418 0 1,498 1,105 1,039,817 551,275 4,186,810 1,875,252 7,260,202 3,665,946 7,260,202 3,665,946 (6,890,702) (3,471,286) (171,708) (112,970) (10,020) (5,125) 0 0 (46,202) (32,391) 169,645 65,234 (56,323) 27,471 113,322 92,705 0 0 0 0 0 0 113,322 92,705 0.83 0.40 0.83 0.40
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